Key Principles of Microfinance CGAP is a consortium of 28 public and private development agencies working together to expand access to financial services for the poor, referred to as microfinance. These principles were developed and endorsed by CGAP and its 28 member donors, and further endorsed by the Group of Eight leaders at the G8 Summit on 10 June 2004.

1. Poor people need a variety of financial services, not just loans. Like everyone else, the poor need a range of financial services that are convenient, flexible, and affordable. Depending on circumstances, they want not only loans, but also savings, insurance, and cash transfer services.


2. Microfinance is a powerful tool to fight poverty. When poor people have access to financial services, they can earn more, build their assets, and cushion themselves against external shocks. Poor households use microfinance to move from everyday survival to planning for the future: they invest in better nutrition, housing, health, and education.


3. Microfinance means building financial systems that serve the poor. In most developing countries, poor people are the majority of the population, yet they are the least likely to be served by banks. Microfinance is often seen as a marginal sector—a “development” activity that donors, governments, or social investors might care about, but not as part of the country’s mainstream financial system. However, microfinance will reach the maximum number of poor clients only when it is integrated into the financial sector.


4. Microfinance can pay for itself, and must do so if it is to reach very large numbers of poor people. Most poor people cannot get good financial services that meet their needs because there are not enough strong institutions that provide such services. Strong institutions need to charge enough to cover their costs. Cost recovery is not an end in itself. Rather, it is the only way to reach scale and impact beyond the limited levels that donors can fund. A financially sustainable institution can continue and expand its services over the long term. Achieving sustainability means lowering transaction costs, offering services that are more useful to the clients, and finding new ways to reach more of the unbanked poor.


5. Microfinance is about building permanent local financial institutions. Finance for the poor requires sound domestic financial institutions that provide services on a permanent basis. These institutions need to attract domestic savings, recycle those savings into loans, and provide other services. As local institutions and capital markets mature, there will be less dependence on funding from donors and governments, including government development banks.


6. Microcredit is not always the answer. Microcredit is not the best tool for everyone or every situation. Destitute and hungry people with no income or means of repayment need other kinds of support before they can make good use of loans. In many cases, other tools will alleviate poverty better—for instance, small grants, employment and training programs, or infrastructure improvements. Where possible, such services should be coupled with building savings.

7. Interest rate ceilings hurt poor people by making it harder for them to get credit. It costs much more to make many small loans than a few large loans. Unless microlenders can charge interest rates that are well above average bank loan rates, they cannot cover their costs. Their growth will be limited by the scarce and uncertain supply soft money from donors or governments. When governments regulate interest rates, they usually set them at levels so low that microcredit cannot cover its costs, so such regulation should be avoided. At the same time, a microlender should not use high interest rates to make borrowers cover the cost of its own inefficiency.


8. The role of government is to enable financial services, not to provide them directly. National governments should set policies that stimulate financial services for poor people at the same time as protecting deposits. Governments need to maintain macroeconomic stability, avoid interest rate caps, and refrain from distorting markets with subsidized, high-default loan programs that cannot be sustained. They should also clamp down on corruption and improve the environment for micro-businesses, including access to markets and infrastructure. In special cases where other funds are unavailable, government funding may be warranted for sound and independent microfinance institutions.


9. Donor funds should complement private capital, not compete with it. Donors provide grants, loans, and equity for microfinance. Such support should be temporary. It should be used to build the capacity of microfinance providers; to develop supporting infrastructure like rating agencies, credit bureaus, and audit capacity; and to support experimentation. In some cases, serving sparse or difficult-to-reach populations can require longer-term donor support. Donors should try to integrate microfinance with the rest of the financial system. They should use experts with a track record of success when designing and implementing projects. They should set clear performance targets that must be met before funding is continued. Every project should have a realistic plan for reaching a point where the donor’s support is no longer needed.


10. The key bottleneck is the shortage of strong institutions and managers. Microfinance is a specialized field that combines banking with social goals. Skills and systems need to be built at all levels: managers and information systems of microfinance institutions, central banks that regulate microfinance, other government agencies, and donors. Public and private investments in microfinance should focus on building this capacity, not just moving money.


11. Microfinance works best when it measures—and discloses—its performance. Accurate, standardized performance information is imperative, both financial information (e.g., interest rates, loan repayment, and cost recovery) and social information (e.g., number of clients reached and their poverty level). Donors, investors, banking supervisors, and customers need this information to judge their cost, risk, and return.  ¶ 1:08 PM 0 Comments

  The Four Principles of Natural Capitalism Natural Capitalism is a new business model that synergizes four major elements:

1. Radically increase the productivity of resource use. Through fundamental changes in production design and technology, leading organizations are making natural resources stretch five, ten, even 100 times further than before. The resulting savings in operational costs, capital, and time quickly pay for themselves, and in many cases initial capital investments actually decrease.
2. Shift to biologically inspired production (Biomimicry) with closed loops, no waste, and no toxicity. Natural Capitalism seeks not merely to reduce waste but also to eliminate the concept altogether. Closed-loop production systems, modeled on nature's designs, return every output harmlessly to the ecosystem or create valuable inputs for other manufacturing processes. Industrial processes that emulate nature's benign chemistry reduce dependence on nonrenewable inputs, eliminate waste and toxicity, and often allow more efficient production.
3. Shift the business model away from the making and selling of "things" to providing the service that the "thing" delivers. The business model of traditional manufacturing rests on the sporadic sale of goods. The Natural Capitalism model delivers value as a continuous flow of services—leasing an illumination service, for example, rather than selling light bulbs. This shift rewards both provider and consumer for delivering the desired service in ever cheaper, more efficient, and more durable ways. It also reduces inventory and revenue fluctuations and other risks.
4. Reinvest in natural and human capital. Any good capitalist reinvests in productive capital. Businesses are finding an exciting range of new cost-effective ways to restore and expand the natural capital directly required for operations and indirectly required to sustain the supply system and customer base.


Innovative organizations are already prospering from these four principles. Their leaders and employees are also feeling better about what they do: eliminating unproductive tons, gallons, and kilowatt-hours makes it possible to invest in human capital—the people who foster the innovation that drives future success.

This thesis is fully developed in Natural Capitalism: Creating the Next Industrial Revolution, co-authored (with Paul Hawken and Hunter Lovins) by Rocky Mountain Institute CEO Amory B. Lovins.



"Natural Capital" refers to the natural resources and ecosystem services—air and water purification, climatic stabilization, waste detoxification, and so on—that make possible all economic activity, and indeed all life. Ecosystem services are of immense economic value; some are literally priceless, since they have no known substitutes. Case in point: in 1991–92, the $200-million Biosphere II project in Arizona was unable to sustain breathable air for eight people. Biosphere I—Earth—performs this task daily at no charge for six billion people.



"Human Capital" refers to the monetized "human resources" of educated minds and skilled hands and the far more valuable but unmonetized "social system services"—culture, wisdom, honor, love, and a whole range of values, attributes, and behaviors that define our humanity and make our lives worth living. Just as unsound ways of extracting wood fiber can destroy the ecological integrity of a forest until it can no longer regulate watersheds, atmosphere, climate, nutrient flows, and habitats, unsound methods of exploiting human resources can destroy the social integrity of a culture so it can no longer support the happiness and development of its members. An overworked but undervalued workforce, outsourced parenting, the unremitting insecurity that threatens even the most valued knowledge workers with fear of layoffs—these all corrode community and undermine civil society. The health of societies depends not only on choosing the right means to satisfy human needs but also on understanding the interlinked pattern of those means.  ¶ 1:43 AM 0 Comments