The United Nations Capital Development Fund (UNCDF) offers a unique combination of investment capital, capacity building and technical advisory services to promote microfinance and local development in the Least Developed Countries (LDCs):

Uganda (Photo by Adam Rogers)

• UNCDF’s microfinance programmes provide poor households and enterprises with enhanced access to a wide range of financial services by promoting inclusive financial sectors and providing investment capital for emerging microfinance institutions (MFIs) and other financial service providers (FSPs) in the LDCs.
• UNCDF’s local development programmes support national decentralization strategies in the LDCs and seek to improve social services, governance and pro-poor economic infrastructure at the local level by providing technical assistance and investment capital directly to local authorities.

UNCDF’s investment capital is flexible, high-risk and innovative. It is channeled primarily to poor rural areas in the LDCs where poverty reduction, capacity and governance challenges are typically the greatest. UNCDF currently invests in 28 LDCs with a total programme portfolio amounting to approximately US$125 million. Through its programmes, UNCDF strives to contribute to the attainment of the Millennium Development Goals (MDGs) and to the implementation of the Brussels Programme of Action for LDCs in a direct, concrete and measurable way.

Microfinance

Despite the rapid growth of the microfinance industry in the past ten years, it is estimated that between two and three billion people still lack access to a broad range of financial products and services on a sustainable basis. The situation is particularly dire in the LDCs, where often more than 90 per cent of the population is denied access to financial services from the formal financial system.

Guinea (Photo by Adam Rogers)

Numerous studies have demonstrated that access to financial services like credit, savings and insurance is important for people and businesses to generate income, manage cash flow and protect against risk. The critical importance of microfinance to achieving the MDGs was highlighted at the 2005 World Summit, as well as by the Monterrey Summit on Financing for Development. The final declaration of the Monterrey Consensus put particular emphasis on strengthening domestic financial sectors to include underserved markets, such as rural areas and women.

Key bottlenecks to building financial sectors that are inclusive of poor and low income households and micro and small enterprises include a lack of strong institutions providing a broad range of financial services on a sustainable basis, enabling legal, regulatory, and supervisory environments to facilitate access, and government vision and commitment to the development of inclusive financial sectors. In addition, the private sector needs to become more active and fully engaged in providing financial services to the poor.

Against this background, UNCDF concentrates its microfinance programmes on building inclusive financial sectors in the LDCs. An inclusive financial sector is defined as a financial sector that offers a range of financial services to the entire active population of a country. An inclusive financial sector is characterized by competition among financial service providers, a diverse range of financial service providers, sustainability with respect to the permanence of access to financial services, and legal and regulatory environments that ensure the integrity of the financial sector and access to financial services.

The main features of UNCDF’s financial sector development approach within its microfinance programmes are:

• Financial Sector Assessment: Diagnosis of the financial sector with a view to identifying constraints and available opportunities that need to be addressed to allow for full participation of poor households and micro and small firms in the financial sector.
• National Vision, Strategy and Action Plans for Inclusive Financial Sectors: Based on multi-stakeholder consultations, a national strategy and action plan are adopted by policymakers outlining the main areas that need to be addressed to promote financial inclusion.
• Investments: Based on proposals received from MFIs and other FSPs, investment capital in the form of grants and credits are made available through a multi-donor investment fund managed by an Investment Committee. Investments are made in capacity building, capitalization of MFIs and other FSPs, financial infrastructure and improvements in the policy, legal and regulatory environments.

UNCDF’s financial sector development approach ensures that investment requirements for increased financial inclusion are met in a structured and coherent way and that regulatory and policy constraints to financial inclusion are continuously monitored. The aim is to improve access by poor households and micro and small enterprises to the full range of financial services – including savings, credit, mortgages, insurance, pensions, payments, local money transfers, international remittances, leasing and factoring.

As a result of UNCDF’s financial sector development programmes, National Strategies and Action Plans for financial inclusion have been adopted and are currently being implemented by a number of LDCs. UNCDF is focusing its efforts of building inclusive financial sectors on LDCs in sub-Saharan Africa, but also has programmes in LDCs in Asia and the Arab States.

Local Development

Niger (Photo by Adam Rogers)

There is growing consensus that democratic governance creates the conditions for sustainable development and poverty reduction. Similarly, it is increasingly accepted that achieving the MDGs and eradicating poverty needs to be done at the local level and thus requires the involvement of local authorities.

Local authorities can play a major role in this effort by ensuring more effective and accountable local infrastructure and service delivery for the poor and by improving the dialogue among the state, citizens, their communities and the private sector. Too often, however, sub-national levels of government are not involved in consultations on national poverty reduction strategies or sector policies. Nor are they given the mandate or institutional and financial capacity to plan and deliver local development interventions such as social services and local infrastructure.

By building local capacity, promoting institutional reform and policy change, and providing grant-funded investment capital, UNCDF assists local authorities to fulfill this potential. UNCDF’s effectiveness and comparative advantage in this respect are based on its flexibility, local presence, investment mandate, and 40 years of experience in local development around the world.

UNCDF’s Local Development Programmes (LDPs) introduce participatory planning and budgeting systems at the local level. These programmes seek to ensure a voice for women and other disadvantaged groups in local public decision-making. The programmes also work within, and support, the national system of central-local government institutional and fiscal relations.

The main features of the LDP approach include:

• Sub-national Focus: Supporting sub-national local authorities and integrating them into national fiscal transfer systems and national decentralization strategies.
• Emphasis on Local Level Institutional Development: Improving procedures and practices for local level resource mobilization and public expenditure management (including development planning, investment programming, performance budgeting, procurement, implementation, asset management and internal controls) to enhance the efficiency, effectiveness and accountability of local authorities in poverty reduction activities.
• Performance-linked block-grant funding facility: Providing local authorities with general purpose development budget support for sustainable, small-scale, local investments in social and economic infrastructure, such as schools, health clinics, rural roads, water and sanitation and natural resources management. This support is linked to agreed measures of local performance and serves as an incentive for local capacity building.
• National Policy Relevance: Piloting national decentralization policy frameworks and promoting the “scaling-up” of decentralization programmes to country level. The ability of local authorities to deliver improved social services and local infrastructure strengthens local democracy and may be instrumental in sustaining peace-building efforts in a post conflict environment.

UNCDF has been continuously refining its LDP approach since the early 1990s. The approach has received widespread recognition as a successful local development methodology. Within its Local Development Practice Area, UNCDF currently invests in 23 LDCs with a strong focus on Africa and plans to expand its portfolio to 40 LDCs in the next five years. In 2005, UNCDF supported 493 local authorities and assisted these authorities in making 2,779 investments.