Apex Microfinance Institutions: A Review of Their Record

This paper examines the factors behind the underperformance of apexes, noting that three main reasons are:

• Lack of a large microfinance market and few sustainable MFIs to work with;
• Insufficient capacity to go beyond their role of financial intermediary and assist in the institutional development of MFIs;
• Governing structures that are dominated by public officials or clients who tend to pressure apexes to misallocate funds.

The paper summarizes the advantages and disadvantages of apex arrangements and looks at cases from Bangladesh, Benin, Bolivia, Colombia, Kenya, the Dominican Republic, Honduras, and Uganda. The report finds that:

• Several apex institutions have had difficulty overcoming challenges to become effective channels for donors and governments to channel their resources;
• Few apexes can handle the dual responsibilities of financial intermediary and market developer;
• For apex institutions to have some degree of success, a large and sustainable microfinance market should already exist;
• Apexes with governance structures dominated by clients, governments, or donors potentially face political interference and conflict of interests;
• Many local MFIs or NGO partners do not have the capacity to effectively manage credit programs, and apex institutions can be limited in their ability to determine which organizations have the capacity to do so;
• In countries lacking sufficient human capital, infrastructure, and financial resources, governments and donors should concentrate on the development of potentially sustainable MFIs, instead of on the creation of apex institutions;
• Apex institutions should avoid portfolio concentration in one or two client organizations;
• Potential widespread problem is donor competition over the provision of credit.

The paper concludes that more time needs to be spent looking at best practices, evaluation, and donor coordination.