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Throughout the southern and eastern regions of Africa, 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 on 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. High transaction costs, the actual costs of dealing with a large number of small loans being frequently underestimated, are a major problem for the RFIs.
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 were 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. In Rwanda (232 RW), the credit component was to be implemented through the Banque Populaires; the project defrayed 50% of the banks costs, constructed additional buildings and set up a guarantee fund. The Mid-term Evaluation (MTE) reported that the banks were only interested in collecting rural savings and were not interested in contributing to or playing an active part in rural development, with the result that few loans had been granted and a main channel for project benefits was blocked.
The
design of the credit component needs to be undertaken after careful assessment
of the potential beneficiaries' needs, the likely investment options,
and the institution that will be responsible for 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, but 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; then, 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 their scope for 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, 121 SZ, 070 MW, 120 MW, 158 MW, SRS-008 MZ.
