<!-- Start of picture text --> Box 3. The role of microfinance in post-conflict environments<br>Given the breakdown in the formal financial sector during conflict, microfinance has become a principal<br>source of credit for the SMEs that are the main private sectors actors in post-conflict environments.<br>Experience with microfinance institutions (MFIs) in several countries suggests that it is an effective means<br>of reaching the smallest micro-enterprises, not least because MFIs do not rely on formal enforcement<br>mechanisms and are thus able to operate in almost any governance environment (and many MFIs are<br>created and operated entirely in the informal sector). In Cambodia, following thirty years of war and<br>instability, the financial system was virtually non-existent. Eight years later, over 340,000 clients were<br>accessing microfinance services. Similar success stories can be found in Liberia and Kosovo.<br>Several lessons emerge. Among others, the business environment must be relatively secure, there must be a<br>minimum level of economic activity and demand for financial services, and operations must be built up<br>over time. Perhaps most importantly, microfinance must be approached as a long-term source of financial<br>services for SMEs—it is neither a post-conflict reconstruction grant, nor a conflict resolution tool.<br>Sources: USAID (nd).; CGAP (2004).<br><!-- End of picture text --> beyond the medium term and PSD interventions that catalyze job creation, whether in the formal or informal sector, over the medium to long term are essential. It is also important to note that, initially at least, the informal sector is the most likely source of jobs in a post-conflict situation.<sup>27</sup> While stimulating the creation of jobs in the formal sector is an important long run goal, it should not come at the expense of curtailing informal employment in the interim. Job-generating private sector economic activity needs to be encouraged, no matter where it takes place.

# **Capacity to Deliver Services**

Given the limited capacity of governments to deliver public services in the post-conflict period, the private sector can play an important role in plugging the gap. Conflict damages both the physical and logistical infrastructure used for the delivery of a wide range of essential public services, including electricity access, telecommunications and water & sanitation facilities. In many situations, private sector suppliers are quicker to re-establish these services than public sector providers.

Telecommunications is one area where private sector providers are famously fast in providing services, often in areas that are still in conflict. In Somalia, competition between nine telecoms companies—with over 50,000 mobile phone subscribers between them—has driven prices down to some of the lowest in Africa, with local calls costing less than 10 cents/minute and international calls available for less than $1/minute. These mobile phone networks also facilitate local commerce and the transfer of funds to and from abroad via _hawala_ networks, including remittances.<sup>28</sup> The private sector can also supply basic infrastructure and services that are more traditionally associated with government providers. For example, in Somalia, micro entrepreneurs

> 27 Langford 2005. 28 Nenova and Harford 2004.

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