Author: Louise Schneider-Moretto and Greta Greathouse

This paper contains strategies and suggestions which will help MFI managers optimize access to commercial debt as a step in financial integration.

Financial integration is a key step in the evolution of the microfinance sector and a topic of current concern and interest for all sector participants. The development of financially sustainable microfinance institutions (MFIs) requires that these institutions place particular emphasis on integration into the local financial service sector. Although financial integration has several dimensions, including accessing debt, mobilizing savings, and utilizing capital markets instruments, the primary impetus for such integration is access to capital to fund growth. Having access to capital, whether from local or international sources, is a critical determinant of the ability of these institutions to continue expanding client outreach and deepening services, at a pace which will permit them to meet the demand for their services and to fulfill their potential for poverty alleviation. Vol. 1, No. 1, Copyright © July 2004.

This paper is intended primarily for managers of microfinance institutions. The note includes several appendices that will help MFI managers develop their bank relationships and improve their negotiating skills. The note incorporates two tools for microfinance institutions to use in working with commercial banks:

• a checklist for financial managers in preparing themselves for a productive dialogue with commercial banks, and
• an outline of a methodology which banks can use in analyzing microfinance institutions.

This paper begins with an examination of financial integration, and the progress made to date by MFIs in developing sustainable access to commercial funding. In addition, the paper identifies the challenges in accessing commercial funding, from the perspectives of the lender and the microfinance institution - and provides advice on how to improve this access. A continuing gap between what MFIs need and want, and what lenders are ready to provide exists. That gap can be reduced by building a shared understanding of key risk elements and key performance indicators in evaluating MFIs, and by helping lending and borrowing institutions find the win-wins.