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Community-Managed Loan Funds--Which Ones Work?   Image

Promoting Inclusive Markets and Financial Systems

Community-Managed Loan Funds--Which Ones Work?

Community-Managed Loan Funds--Which Ones Work?

Summary

This Focus Note presents conclusions from a performance review of dozens of CMLF projects established or supported by donors and international nongovernment organizations (NGOs) over the past 15 years. It turns out that success is strongly linked to the source of funding for the loans group members receive.
 
  • Externally funded groups. When loans are financed by an early injection of external funds from donors or governments, CMLF projects appear to fail so consistently that this model of microfinance support is never a prudent gamble.
  • Savings-based groups. CMLFs are often successful when loans are financed by members’ own savings, and there is either no external funding, or such funding arrives in modest amounts after the group has a solid track record of lending and recovering its own savings.
  • Self-help groups (SHGs). When groups start by collecting and then lending members’ own savings, but subsequently receive large loans from a bank that is serious about collection, performance has been mixed so far.
Of the three models, only the savings-based and the SHG models appear to be viable.
 
In addition to the funding source, the other factor that seems to be a strong predictor of success is the quality of external support community groups receive. Such support is important on a continuing basis, not just at the inception of the groups.


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