Article by Lennart Båge, President of IFAD published in Uluslararası Ekonomik Sorunlar, a bi-monthly journal of the Turkish Ministry of Foreign Affairs
The Forbes magazine rankings and the Deutsche Bank report underscore the fact that microfinance has moved beyond the fringes of financial services. Over the decades, microfinance has demonstrated that poor people are viable financial-service customers. As a result, the borders between traditional microfinance and the larger financial system are starting to blur. At the grassroots level, microfinance institutions (MFIs) are expanding their reach, while commercial banks and other formal financial institutions are increasingly moving into rural areas to reach poorer and more remote clients. For example, the ICICI Bank, India’s second-largest bank, has opened more than 2,000 rural internet kiosks that will provide financial services throughout India. Brazil’s Caixa Econômica Federal bank is extending financial services franchises to nearly 14,000 outlets including lottery kiosks, supermarkets and local vendors in Brazil. Despite these achievements, there is still a long way to go to fill the demand-supply gap, especially in rural areas where delivering financial services presents particular challenges. It is this gap that IFAD, and other agencies, work hard to fill. At IFAD, we look at the double bottom line – financial sustainability and social performance. In 2000, IFAD adopted its Rural Finance Policy. Our rural finance policy aims to build sustainable rural finance institutions that reach the rural poor, promote sound rural financial infrastructure, create an enabling policy and regulatory environment, and foster stakeholder participation. Low risk, high returns Financial services play a critical role in reducing poverty. Permanent access to financial services can help poor people take control of their lives. Good management of very small assets can be crucial to the survival of poor people who live in precarious conditions, threatened by lack of income, shelter and food. To overcome poverty, they need to be able to borrow, save, invest and protect their families against risk. Direct access to financial services can allow very poor people to progress from hand-to-mouth survival to planning for the future, acquiring physical and financial assets, investing in better nutrition, health and education. Through microfinance institutions such as credit unions and some non-governmental organizations, poor people can obtain small loans, receive remittances from relatives working abroad, and safeguard their savings. With access to small amounts of credit at reasonable interest rates, poor people can set up small businesses. Experience shows that poor people are a good risk, with higher repayment rates than conventional borrowers in countries as diverse as Bangladesh, Benin and Dominica. In the Amhara region of Northern Ethiopia, for example, the Amhara Credit and Saving Institution, which is supported by an IFAD microfinance programme in Ethiopia, ranked sixth in Forbes’ list of top microfinance institutions. The repayment rate stands at over 98 per cent, while portfolio at risk is less than 3 per cent. Its reach is extensive, with over 530,000 borrowers and another 225,000 savers. The programme’s success was helped by the fact that in the late 1990s, the Ethiopian Government liberalized the regulatory framework for microfinance operations and lifted interest rate caps. Poor women often have the best credit ratings. Women tend to default on loans less often than men. As a result many microfinance institutes target women as customers. This has benefits for poverty reduction, and for the women themselves. Credit extended to women has a much greater impact on household consumption and the quality of life for children. Women’s status, both in their homes and in their communities, is improved when they are responsible for loans and for managing savings. When women control their own income, they gain a level of power that allows them to make decisions independently and command more respect. More than just credit IFAD’s goal is to empower poor rural women and men in developing countries to achieve higher incomes and improved food security. To do this, one of IFAD’s objectives is to promote access to a wide range of financial services in rural areas. This requires an effective system of rural financial institutions. These institutions must be accessible to all segments of the rural population, not as beneficiaries of charity, but as commercial users or user-owners. There is no single model of a rural microfinance institution. It can be a formal or informal financial institution. It may provide only small-size financial services to the rural poor or may also provide larger financial services to small or medium-sized enterprises. Microfinance institutions are many and varied. They include indigenous rotating savings and credit associations, financial cooperatives, rural banks, specialized NGOs, and agricultural development banks. Sustainability is vital Today, IFAD is one of the largest lenders in rural finance for poverty reduction. About 20 per cent of our total loan portfolio is in rural finance, representing an investment of around US$720 million. A full two-thirds of our individual projects have a rural finance component, focusing on credit, savings, insurance and remittances. We continuously seek the most effective models, delivery mechanisms and innovative approaches to providing rural financial services. The idea is to establish ongoing links between microfinance providers and mainstream commercial banks that continue beyond the life of an IFAD project, allowing financial services to rural communities to grow and develop. But sustainable poverty reduction requires the political will of governments and a conducive policy framework. No poverty-reduction programme can be sustainable without good governance and adequate policies. Tailoring solutions to meet specific needs In addition, income in rural areas often depends on agriculture and related activities. This income is often seasonal and less predictable than other sources of income because it is dependent on weather. Microfinance institutions in rural areas need to find innovative ways to provide cost-effective services adapted to their clients’ needs. This often requires decentralized management and mobile branches. The cost of establishing a rural finance network in a remote area is likely to be 80 per cent higher than in a more accessible region. IFAD’s experience has shown that, to be effective, we must tailor our microfinance efforts to an individual community’s needs. A strategy or delivery mechanism that works well in India, for example, may not work well in eastern Africa. Each effort must fit the local context. As a result, we support a wide range of microfinance initiatives including cooperative banks in Armenia, financial services associations in Benin and Haiti, and rural banks in Ghana. IFAD-supported credit and savings associations provide financial services to poor rural people in Kenya and Tanzania. In India, self-help groups are being developed and linked to commercial banks, giving poor rural people access to financial services on a massive scale. In the Philippines, a second-tier institution has refinanced a large number of microfinance institutions with IFAD support, helping them increase their lending activities in rural areas. In Latin America, IFAD has worked with commercial banks, savings and credit associations and rural banks. Respecting cultural sensitivities, improving women’s lives The IFAD-funded Dir Area Support Project used a new system – Islamic Banking or Islamic Finance – to make microcredit available to borrowers in a way that is compatible with Islamic regulations. The system makes the lender an active, risk-sharing partner in the enterprise, who not only advances credit but also provides training on relevant topics, such as basic accounting and marketing. The project began by introducing the Islamic micro credit system to members of women’s organizations. For the women participating in the project, the benefits have been tangible and considerable. Bacha Khela, from the Shaikh Ahid women’s organization, is supporting five children and an older, unwell husband. With a loan of just US$227, she managed to set up a grocery shop in her own home. Bacha repaid the loan within a year and now earns a net income of US$38 to US$45 a month. She has started selling clothes. With her profits, she now plans to buy a house and find a bride for one of her sons. “Before I joined the women’s organization, I had no hope of having my own income,” Bacha said. “Now I have my own business and my life has improved. I have bought a stove and a refrigerator. My goal now is to buy my own house and to pay for my other children’s education.” Younger women have also learned skills and acquired capital, enabling them to support an entire family. Razia, as the oldest child, became responsible for her family when her father became ill and was unable to work. She took part in a two-week vocational training in embroidery arranged by the project. The project also provided her with US$151.50, enough to buy 30 shawls and other material to begin embroidering. By selling each shawl for US$6, she earns US$4. Now, she is not only repaying her loan but also making a profit and supporting her family. Helping poor people to help each other The Grameen bank, which began providing tiny loans for groups of women in Bangladesh in 1974, forged the way for microfinance in the 1970s. It was based on the principles of mutual trust and responsibility, with each woman responsible for making sure the group’s loan was repaid. Today, more than 6 million borrowers, 97 per cent of them women, have access to financial services through the national Grameen network. Grameen-style banking now delivers financial services to poor people in many part of the world. In the Philippines, for example, IFAD and the Asian Development Bank have financed a country-wide project, modelled on the Grameen bank, which lends money to groups of poor people rather than to individuals. No collateral is required, and clients must repay loans in weekly instalments. More than 160 microfinance institutions in the Philippines have adopted this approach, lending at commercial rates that cover all cost and allow for profit. They provide financial services for more than 400,000 clients, 98 per cent of whom are women. Loan repayment rates average 96 per cent, far higher than the recovery rates of most commercial banks in the country. Thanks to the project, it is estimated that clients’ incomes have increased by more than 28 per cent, and they are spending more on food and schooling. The NGO model Not only does the trust have a strict repayment policy, it also has invested in training its client groups so that field officers need to meet with the clients only once a month instead of every week. This has allowed field officers to expand the number of clients and outstanding loans they can handle. Field officers reach large sections of rural Kenya by using motorbikes to cover a radius of 25 kilometres from each branch. Higher staff efficiency has made it possible to develop financially sustainable operations, even in rural areas. As a result of the intensive client training, the trust has been able to hand over more power to groups to manage their own affairs. Group leaders become, in effect, Kenya Women Finance Trust field managers, taking active care of the groups’ loan applications and repayments. The trust’s own field staff take annual courses on customer care. As a result, relations between clients and staff tend to be very good. Small business loans are the focal point of the trust’s operations, but new products are also being developed based on requests by clients. These include loans for school fees, solar panels, water tanks, cooking gas equipment and community phone lines, as well as voluntary life insurance. Self-help groups in India Determined to improve her life, Sarasu met the minimum savings requirement and soon took out a loan to buy two dairy cows. Sales from the milk raised her income to 100 rupees a day. Another loan helped her start a firewood business. Now, years later, both loans have been repaid and two of Sarasu’s children have graduated from university. In India, self-help groups are the backbone of microfinance services. In 2003, the Government of India announced that more than 2.5 million poor families had gained access to credit and other financial services through 150,000 self-help groups. Self-help groups were piloted by NGOs, notably Mysore Resettlement and Development Agency (MYRADA) in India in the mid-1980s, to provide financial services to poor people. In 1986 and 1987 there were about 300 self-help groups in MYRADA’s projects. MYRADA staff provided training on how to organize meetings, set an agenda, keep minutes, and other areas vital to successful business ventures. Analysis showed that the members were linked together by a degree of affinity based on relationships of trust and support; they were also often homogeneous in terms of income or of occupation (for example, agricultural labourers), but not always. Caste and creed played a role, but in some groups affinity relationships and economic homogeneity were stronger; as a result, several groups included different castes and creeds. What started as a pilot programme has now become a movement for social empowerment – particularly for poor rural women. The number of self-help groups linked to banks has increased from about 500 in the early 1990s to more than 1.6 million in 2006. Financial services associations: the Benin success stories The project closed recently after successfully developing strong financial services associations (FSAs). The FSA model first appeared in Africa some ten years ago in response to poor rural people’s lack of access to formal financial services. Initiated as village-level financial structures, FSAs are owned and operated by the villagers themselves. They focus both on mobilizing equity and on delivering credit. Since 1998, 144 FSAs have been created in Benin under two IFAD projects, PAGER and the Microfinance and Marketing Project (PROMIC). As of December 2005, the projects involved 820 villages representing 40 per cent of the country’s rural villages, and 32 per cent of Benin’s microfinance institutions. Approximately 60,000 shareholders participate in FSAs: 47 per cent of them are men, 48 per cent are women, and 5 per cent comprise production and marketing groups. The total cumulative mobilized capital is US$1.2 million, with 35 per cent of it in the hands of women. The amount of loans approved reached US$13 million, representing more than 12 times the mobilized capital. FSAs have been extremely successful in Benin because they fill a gap left by the more classic microfinance institutions, proving that they are the right tool to facilitate access to credit for poor rural people. The novelty of the concept attracted thousands of villagers, many of whom had never dealt with a bank or a financial institution before. Through FSAs, poor rural people were able to access credit without facing the usual deterrents such as the time and cost of repeated travel to a bank’s branch office, a high minimum loan requirement, and time-consuming paperwork. “I am now used to obtaining credit at the Avakpa village FSA,” says Dolou Abayo, a member of the Ayidote FSA group. “The scheme has helped me develop my small commercial activity.” “I buy beans or maize from the village and on local markets to sell later to the big national market in Cotonou,” Abayo says. “I used some of the profits to repair the roof of my bedroom, which was damaged during a storm. I have already bought seven shares in the FSA and I am planning to obtain more.” Living conditions in the communities involved have generally improved, with increased school attendance and better household nutrition and family stability. Communities are especially proud of their strong ownership of the FSAs they built during the six-year project. Maximizing the impact of money sent home The magnitude of remittances worldwide and their potential to reduce poverty are of great interest to the international development community. However, many poor people in the rural areas of developing countries have trouble obtaining these funds because they lack access to financial service facilities. Promoting low-cost, easily accessible remittance services can have a dramatic impact on the livelihoods of the rural poor, providing them with a strong incentive to increase savings or to invest in other assets. In Ecuador, a network of ATMs enables poor and rural families to access remittances sent by relatives working in Spain. Banco Solidario, an Ecuadorian bank for poor people, offers a debit card (La Chauchera) that clients can use to withdraw money deposited in Spanish savings banks, including La Caixa, Caja Madrid and Caja Murcia, as well as Banca Sella in Italy. Clients can access remittances at more than 800 ATMs nationwide or at any of the many cooperatives with which Banco Solidario has a strategic alliance. Experience has demonstrated that the impact of remittance services increases dramatically when they are linked to other financial services such as savings, insurance and lending. For many remitters and their families, remittances can serve as a point of entry into formal financial institutions. When combined with other services, remittances offer a chance to accumulate savings and invest in schooling, housing or a small business. Given the nature of rural finance institutions and their proximity to poor people in rural areas, they play an increasingly important role in providing access to remittances in remote areas. Reaching the Millennium Development Goals February 2008 Source: IFAD |
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Ever since Muhammad Yunus and his Grameen Bank were awarded the Nobel Peace Prize in 2006