Financial sector development - Sida

poor, micro-enterprises and others who operate outside of the formal sector have access
to financial services (not only credits but also savings deposits and payment services).
Recent studies on poverty reduction have highlighted the need to ensure better access of
the poor to essential factors of production such as land and credits. Private sector
assessment studies show that micro-enterprises are a major source of income and
employment in a number of Sweden’s recipient countries and that the possibilities for
these enterprises to improve the productivity and to expand is linked to the question of
financial services. Microenterprise development is especially important for women, who
often find themselves without access to jobs in the formal sector due to lack of training
and/or competing demands of household duties.
Most international donor agencies have a poor track record when its comes to microfinance.
Assistance has often been provided in the form of project-centred interventions
paying little attention to the need to develop sustainable financial intermediaries geared
to mobilise local funds and to satisfy the demands of the end users. Furthermore financial
assistance has often been provided on very soft terms, which in turn has made it difficult
to establish norms for good repayment behaviour and has led to support of noneconomic
project activities.
Structural adjustment including the liberalisation of the financial sector in developing
countries has improved the possibilities for donors to support more sustainable and
market oriented institutions in the field of microfinance. At the same time there is now an
improved knowledge about the characteristics of such institutions which have succeeded
in achieving operational efficiency (defined as covering with client revenues all
administrative costs and loan losses) as well as financial self sufficiency (defined as
operational efficiency and capability of mobilising finance on market terms). Examples of
the latter type of institutions are found in Asia and Latin America. They have frequently
adopted the model, which the Grameen Bank in Bangladesh has established. In recent
years a number of new initiatives have been taken by the donor community to step up
microfinance assistance. One example is the World Bank-initiated CGAP (Consultancy
Group to Assist the Poorest) and another is the IDB-initiated MICRO 2001 Program. A
third is UNDP´s MicroStart Program. A Plan of Action was endorsed recently by a
Microcredit Summit, which calls for a comprehensive approach towards eradication of
poverty where microcredits will play a pivotal role.
In line with the Action Plan from the Microcredit Summit, Sida should prepare and
submit an action plan on microfinance by 28 February 1998.
9.4 Investments in equity
It has been conceived to be a disadvantage that Sida is not in a position to take up equity
positions in commercial operations, be they venture capital companies, leasing
companies, commercial banks or any other kind of financial institution. Equity is defined as
owner capital in a formal sense - quasi-equity and unsecured loans may carry almost the
same risk as equity, but in a formal sense they do not entitle the investor to participate at
shareholders meetings to elect the Board of Directors and to exercise other rights of a
shareholder. This section discusses some of the advantages and disadvantages for a
donor agency to provide equity capital.
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