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Throughout the sub-region of the Southern Africa Development Community (SADC), rural financial institutions (RFIs) serving smallholders and the poor are not well developed, have limited area coverage and generally have to operate with inadequately trained staff. RFIs more often consider themselves the custodians of the project credit lines, rather than the catalysts to aid the development of the target farmers. This means their concerns are in administering the loans and ensuring repayments, rather than assessing and/or giving advice about the enterprises being financed. As a corollary to this, RFIs often remain too independent of other project activities and agencies, taking only a limited interest in the overall project objectives. This attitude has been fostered, on occasion, as a result of being paid flat rate commissions. High transaction costs are a major problem for the RFIs, the actual costs of dealing with a large number of small loans being frequently underestimated.
In Swaziland (121 SZ), the Swazi Development and Savings Bank (SDSB) was to be strengthened to increase lending to smallholders; but only 750 out of a target of 7,000 was reached. Main reasons cited were high collateral requirements, high borrower transaction costs and limited staff capacity. Repayment rates also declined significantly. In Botswana (076 BT), the credit component was abandoned by the government, because the National Development Bank and the Botswana Cooperative Bank were not staffed or structured to deal with small-scale credit.
The
design of the credit input component needs to be undertaken after careful
assessment of the potential beneficiaries' needs, the likely investment
options and, equally important, the method of channelling, administering
and ensuring repayments of the loans. RFIs, in conjunction with project
staff, need to explain the responsibilities inherent in borrowing and
need to work together to appraise loans satisfactorily. RFI coverage may
need to be supplemented; e.g., by the use of non-government organizations
(NGOs). Institutional strengthening is an important overall general objective
of the projects and can have long-term benefits for RFIs.
- There must be a clear division of responsibilities between the project managers and the credit agency staff, with a high degree of coordination and cooperation. The appraisal and approval of loans requires the integration of the skills from both organizations.
- RFIs need to be adequately supported, if they are to be effective channelling mechanisms for the type of credit most often encountered in IFAD-funded projects. This means a realistic assessment of the RFI and the practical conditions under which it is being asked to operate, followed by an identification of the training and additional staff resources needed.
- The potential role of NGOs in being a more cost-effective channel for credit, as well as undertaking beneficiary identification and training, should be investigated at the design stage.
- The ability of the RFI to mobilize savings and link these to lending, in order to increase beneficiary commitment and participation and to provide additional funding, should be encouraged whenever possible.
Select any of the following related project profiles for background information: 076 BT, 070 MW, 120 MW, 158 MW, SRS 008 MZ, 121 SZ.
