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In agrarian conditions where the poor are mainly the landless or near-landless (see L085CREE and L086CREE), credit channeled to them will be used almost exclusively for non-farm activities (e.g., more than 95% of the credit in Sri Lanka (219 SR) and Indonesia (215 ID) projects). However, the way in which credit is both seen and used is usually different from that presumed in the design of credit components. Evaluations have shown that in such households the credit received is interchangeable and is used: (i) for more than one purpose, including the funding of emergency expenditures and consumption needs; (ii) for secondary activities (i.e., not to add to the main earning activity of the household, which is usually non-farm labour); and (iii) as part of a risk-reducing strategy to increase the number and diversity of their income streams. Once the original loan-financed activity has been absorbed into the households capital and labour capacities, and if cash is still available, then alternative investments will be made.
The most common first use of credit by the landless poor has been to purchase small livestock for fattening or rearing. These animals are used as a source of income but are viewed, even more so, as a store of value and as a means of risk aversion. Evaluations have noted that with each successive loan there have been significant gains in income. For example, in Indonesia (215 ID), income from the first loan activity increased by 31%, whereas it increased by 72% for the third loan. This probably occurs because the borrowers have developed the confidence to undertake activities which have progressively higher risks and returns, but have a sufficiently diversified "portfolio" of activities that this can be justified. It should be noted that group formation activities may be limiting to such households, because they can be too cumbersome and may take the decision-making away from the household head. This applies, for example, to the preparation of formal Business Plans in Indonesia (215 ID).
In
Sri Lanka (219 SR) and Indonesia (215 ID), it was reported in the mid-term
evaluations (MTEs) that, on the average, each poor household had two to
three working members and two or more sources of income. In Indonesia,
although the loans were given for a specified purpose (described in a
Group Business Plan - GBP), they were used in various other income-generating
activities and were also used to finance emergencies and consumption.
In Sri Lanka, 47% of the loans were used to finance a secondary or tertiary
activity of the household. This illustrates the concern of the poor to
multiply and diversify their income streams, often using the labour of
different members of their households.
- Project credit interventions in circumstances of landlessness, or near landlessness, need to be based on the realities that: (i) the household and not the individual should be targeted for credit; (ii) the project activities will be undertaken using the labour availability of the entire household; and (iii) the loans will be repaid from the combined income of the household and not necessarily by the individual borrower. Repayment rates for such loans have been extremely high (95% for projects in Sri Lanka, Indonesia and Bangladesh).
- The preparation of Group Business Plans should not hinder loan appraisal. What is important is the cash flow of the entire beneficiary household. The GBP can, however, become a powerful instrument for beneficiary training.
- The real need of the landless poor is for a "portfolio lending" approach, that is undirected and flexible, with loan repayments being made on the basis of their total and seasonal income flows. This implies multiple loans.
Select any of the following related project profiles for background information: 166 NE.
