All financial services providers adhere to accepted good financial services practice.

Key indicators (to be read in conjunction with the guidance notes):

• Set clear strategy and standards for use of grant versus loan interventions (see guidance note 1).
• Financial products are offered at market prices, with no interest subsidies (see guidance note 2).
• Financial services institutions conduct rigorous and transparent credit appraisals (see guidance note 3).
• Programs and funders support institutions with time-limited subsidies, and set performance expectations early on (see guidance note 4).
• Standards and good practices for effective financial services are exactly the same in crisis-affected and non-affected environments (see guidance note 5).
• Financial services providers conduct, and donors insist on, annual external audits and monthly financial statements based on International Accounting Standards (IAS) (see guidance note 6).
• The foundation is laid for long-term formal financial institutions.

Guidance Notes:

1. Clear strategies and standard on grants versus loans: In some circumstances, infusions of cash and capital in the form of one-time grants for households and businesses may be necessary to spark reconstruction and revitalization, and to stabilize incomes. However, it is critical that there is consistent communication related to the one-time nature of the grants. In the program design phase, it is important to consider what types of activities require a one-time infusion of cash and/or materials versus needs that are more cyclical in nature and therefore more sustainably funded via credit.

Examples:
(1) An NGO assists a group of women to form a cooperative to sell baskets and other crafts to local and regional markets. The NGO provides a one time grant to the women to purchase some of the equipment they will need for the business, while linking them to a local financial institution for a loan to purchase the dyes and other materials they will need on a regular basis to make their crafts.
(2) Starting a new business, or purchasing a cow to provide for basic family needs, may be more suitable to a grant. Purchasing inventory or expanding a herd of livestock for primary milk production for local wholesale could be more suitable to a loan.

2. Market pricing: In order for financial infrastructure to become embedded and sustainable, financial services interventions should focus on offering market-priced, unsubsidized interest rates. While subsidies may seem attractive in the short term, once initial donors leave an area and normalized market forces return, clients’ former dependence on artificially low interest rates will damage their ability to succeed economically. Additionally, in an area with multiple donors and financial services providers, subsidized interest rates from some short-term actors can undercut the long-term viability of other providers who lend at market rates. These kinds of subsidies, when extended, can heavily distort the market.¹⁷

3. Rapid and transparent credit appraisal: One of the cornerstones of sustainable financial service provision is the reduction of credit risk. A provider cannot scale outwards if default rates are high and client businesses are not viable. Therefore, it is critical to conduct speedy and accessible credit appraisals.¹⁸ Furthermore, providers should share credit ratings and methodologies with one another, where all are able to do so by law, for both transparency and efficacy. Providers should also be transparent with clients as to why loans are or are not made.

Example:
If one provider is unaware of the risks of a certain type of enterprise, then transparent assessments will lead to lower default rates, more sustainable institutions and ultimately, a better chance of economic recovery. While credit ratings might exclude certain populations from becoming loan clients, these groups could still be served through other products such as savings or insurance.

4. Time-limited subsidies and performance expectations: MFIs with time-limited subsidies must realize that donor funding will not continue in perpetuity and that foundations must be laid for sustainable financial services. Additionally, by using time-limited subsidies, MFIs signal a commitment to a long term presence. These institutions often perform needs assessments before beginning operations to determine the scheduling of subsidy reductions. Donors should recognize and support these institutions as they move away from subsidies.

5. Standards and good practices for effective financial services are exactly the same regardless of whether environment is crisis-affected or not: Although the aftermath of a crisis may be marked by economic upheaval, civil unrest and other factors that undermine stability, standards and good practices for effective financial services should still be used. Needs-based product design, credit appraisal, financial education, and impact evaluations are just several of such aforementioned good practices. While the output of their usage may look different in a post-crisis context, their application should be just as rigorous as in a non-crisis context.

6. Support for annual external audits and monthly financial statements based on IAS: The use and promotion of international accounting standards immediately conveys a commitment to best practices. Donors should insist that financial service providers adhere to IAS, thus supporting full transparency and accountability with financial records. This will facilitate future funding, as potential donors and creditors can more readily assess and assist a financial services institution, as well as more efficient operations.