Small business

6.4 Micro and other finance programmes 
Objective: To build sustainable financial systems in support of SME development.
The product/service offer of micro and other finance programmes can cover a wide range of practice
including revolving savings and loan funds; mutual guarantees associations, credit unions; and village and
co-operative banks. This reflects different segments of the customer market. Studying the different models
is important for the design of effective support policies (see Annex 9).  A key aim in many countries is to
construct links to the formal banking system.
The microfinance sector can be distinguished from the formal banking sector by:
• Its greater emphasis on short-term lending, without grace periods, with a consequent strong focus on
capacity to repay (rather than project assessment), working with small client groups and a personal,
hands-on approach to delinquency measurement and follow up;
• The creation of active social partnerships involving all key stakeholders in the governance of lending
programmes;
EFFECTIVE POLICIES FOR SMALL BUSINESS - © OECD 2004
6. Programme Development 
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In some countries, business education and training for SMEs is highly formalised within the national vocational education
and training system. In Germany the two tier system of vocational training demands that before qualified ‘journeymen’ can
practice in a self employed capacity they must acquire qualifications to Meister level.

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• Judging business on the basis of intangible assets – there is a strong focus on the person, character,
networks, relationships, family;
• Incentives for timely repayment and the use of peer pressure and peer guarantees (mutual) to repay; 
• Greater willingness to nurse defaults where there are legitimate reasons;
• The linking of credit to (a) savings, (b) services such as mentoring and business development support;
• A high degree of localisation to maximise personal relationships and use of local knowledge, with a
resulting high level of decentralisation of management;
• The gradual building up of client lending over time, depending on performance;
• Simple procedures and speed to minimise costs for the client.
The first point makes it clear that, although they are (incorrectly) seen to have their origin in developing
economies, microfinance programmes should not be associated with soft lending. Loans are usually made
at full cost. However, programmes may be accompanied by loan guarantee schemes and a willingness to
convert debt into equity. 
The substantial growth of microfinance worldwide and its increasing professionalism has led to wider
experimentation in the microfinance field. Microfinance programmes have also extended into leasing,
insurance and pensions and, with the advent of new information technologies, into innovative products such
as smart cards and credit cards.