Achieving Results in the Financial Sector

USAID and other donors have long been active in the financial sector. Experience has been rich, with a mix of success and failure. Much has been learned, based not only on monitoring and evaluation but also through applied research and advances in theory.

When trying to help one worthy group or another, a natural inclination is to direct credit (loans) towards the group in question, often at subsidized interest rates and through specialized public institutions.

USAID learned early on that this didn’t work. First, institutions lending at subsidized rates proved unsustainable, because they could not cover costs. Second, cheap credit proved to be too attractive a deal, and often never reached the intended beneficiaries.

Similarly, when donors observe the absence of a particular financial instrument (e.g. long term lending), they have often tried to set up special institutions to fill the void (e.g. development finance institutions.)

These tended to be unsuccessful because repayment experience was unsatisfactory; they did not charge interest rates that covered costs; and because they relied on donor resources rather than mobilizing savings.

Similar lessons apply to microenterprise finance. A USAID study concluded that financial self-sufficiency was both feasible for microfinance institutions, and essential to the rapid growth in lending needed to make their efforts successful. Successful institutions charged interest rates that covered costs and enabled them to expand their capital base.

More general USAID studies of capital market interventions indicate that governments and donors should avoid focusing on creating specialized institutions or financial instruments that direct resources to one or another favored group.

Instead, donors and governments should concentrate on strengthening the policy and institutional framework within which financial institutions operate.

Finally, financial market interventions are likely to be successful only when the broader economic policy and institutional framework is at least "decent". In an unstable, poorly managed economy capital market interventions are not likely to yield results.