This paper describes the work of the Local Development Programme (PRODEL) in eight cities in Nicaragua where it provided small grants for infrastructure and community works projects, and loans for housing improvement and micro-enterprises, targeted at low-income groups. The external funds provided by the Swedish International Development Cooperation Agency (Sida) were matched by municipal, community and household contributions. Between 1994 and 1998, more than 38,000 households benefited and both loan programmes achieved good levels of cost recovery. The paper describes the micro-planning workshops and other methodologies through which households and communities were given more scope for participation. It explains how local governments and the bank responsible for managing the loans learned to work in a more participatory way, and it outlines the measures taken to ensure that the needs and priorities of women and children were addressed. The paper ends by considering some of the lessons learned in terms of sustaining the initiatives after projects are completed, and institutionalizing citizen participation in social programmes. It also describes how PRODEL’s methods have come to be used by central and local governments in other programmes.