Microfinance for Smallholders

A Billion Rural Poor

Over 4 billion people live in developing nations, some 2.6 billion women live in rural areas and, of these, close to 1 billion – almost one quarter of the world's population – live below the poverty line. These rural poor are not a homogeneous group of people, even at the country level, and a framework for assistance needs to be adapted to their specific circumstances.

Targeting the Poorest in Rural Areas

Since its inception in 1977, IFAD has directed its financing to the poorest of the world's rural poor. It has adapted a flexible approach to meeting the needs of these poor and has used a wide variety of support mechanisms. Its experience shows that microfinance can be a powerful tool in overcoming poverty. Under a variety of conditions, the rural poor are indeed bankable, and integrated, flexible programmes are necessary.

The Fund has great success in providing microcredit to the rural poor. Using small loans to purchase basic inputs such as seed, fertilizer, tools and nets, or to start up microenterprises, millions of rural men and women are lifting themselves and their families out of extreme poverty and into a more productive life.

Loan repayments in countries as diverse as Bangladesh, Benin and Dominica are at a remarkable level of 97% – about 20% higher than agricultural credit repayments in some industrialized countries. As of November 1996, the Fund had committed over USD one billion towards the provision of financial services to the rural poor.

IFAD Initiatives

As an early supporter of the Microcredit Summit held in Washington, D.C., 2-4 February 1997, IFAD recognizes the importance of the Summit's goal of reaching 100 million of the world's poorest families, especially women, with credit and other financial and business services by the year 2005.

Specific initiatives planned for 1997 and beyond include:

• assisting government agencies in improving their microcredit delivery capacities and in establishing mutual accountability with local practitioners; collaborating more closely with the private sector in the area of microfinance and increasing donor contributions to the microfinance sector;
• expanding IFAD's knowledge base on rural poverty issues and particularly on microfinancing;
• enhancing donor coordination and cofinancing and, through networking, increasing access to donor information regarding microfinance operations.

IFAD Clients

IFAD clients can be broadly defined as comprising two categories: one group that needs to build up their capacity to be able to use loans and another group that can absorb small loans productively, but is severely constrained by limited direct access to rural financial services. For the first group, IFAD focuses its support on capacity-building through the provision of technology and the development of technical and managerial skills. For the second, it seeks to facilitate the provision of microcredit lines as initial capital channelled through formal and informal financial institutions. This capital is used to support small-scale investments in agriculture and rural microenterprises, which make a significant contribution to poverty eradication. Twenty-three per cent of IFAD financing to poor farmers is directed towards improving access to credit in order to purchase the means of production: agricultural inputs and equipment.

The problems of poverty and microfinance are interlinked. In order to eradicate poverty, IFAD seeks to address the following problems associated with the delivery of microfinancing to its clients:

• unavailability of credit: the limited credit resources available to many of the very poor prevent them from achieving economic and social advancement;
• marginalization: certain groups with good investment potential, particularly rural women, the landless and indigenous minorities, have been denied access to microfinance services;
• access to land: many of the poorest are unable to meet collateral requirements as a result of problematic access to land ownership;
• geographic isolation: the rural poor often live in remote and isolated areas for which support services, such as microfinance, are costly;
• transaction costs: microfinance service providers face high transaction costs when dealing with very small investments and businesses. The poor need decentralized and accessible microcredit facilities;
• lack of capacity: the rural poor are still facing, to various degrees, a limited capacity to effectively use loans. Similarly, rural financial institutions need to strengthen their service capacity to reach out to small farmers and rural microentrepreneurs.

Underlying Microfinancing Principles

A Business Perspective to Approach Poverty Alleviation

Many of the rural poor constitute good credit risks. Their marginal productivity from investments can be highly competitive, with returns on investment equal to those of the urban commercial sector.

Microcredit Needs to be Embedded in Microfinance Activities

Microcredit in the form of small loans to poor people for income and employment generation needs to be offered in combination with savings, training, community mobilization and networking.

Microfinance Fosters Self-Reliance and Dignity

Microfinance creates conditions for the consolidation and creation of employment and encourages initiative.

Women Are a Particularly Potent Force for Poverty Eradication

Rural women are a dynamic and largely untapped force for development. Women produce at least half the food consumed in the developing world – up to 80% in Africa – but have had far less access than men to productive means, including loan capital. Women must be seen – and treated – as full partners in the development process, particularly with respect to microfinance services.

IFAD's Regional Experience

Building on these principles, IFAD identifies means to tap the productive potential of the rural poor. Projects supported by IFAD have shown that impoverished rural households can be transformed into independent and viable agents of change:

In Africa, rural financial services continue to be at the centre of IFAD project activities.

Innovative approaches are being used for self-sustained development.

Participatory approaches and community mobilization are being systematically promoted.

Support is provided to establish and empower grass-roots organizations, such as women's groups, farmers' groups and rural micro-enterprises.

In Benin, for example, IFAD financed an outreach programme enabling the savings and loan cooperative system to reach the poor. Credit recovery rates were more than 97 per cent at the time of project completion.

The IFAD credit line under the project generated a positive financial spread for the savings and loan network and, given the sustained high credit recovery rates, continues to operate.

Other examples of IFAD support for microfinance in Africa include utilization of traders as credit agents in Zimbabwe, strengthening of rural banks for micro-enterprise support in Ghana, the establishment of informal thrift and credit associations in Mozambique, and support for capacity-building, in the form of an IFAD grant, to the African Regional Agricultural Credit Association (AFRACA).

In the Asia and the Pacific Region, project ownership and participation of the targeted rural poor is one of the most important objectives of project microfinancing design thrusts.

Early engagement of project beneficiaries through workshops and greater effort at social mobilization and group formation are some of the approaches.

The Income-Generating Project for Marginal Farmers and Landless in Indonesia exemplifies IFAD's support of participatory development through microfinance.

IFAD promoted a new approach to credit for the poor through member-managed self-help groups. Credit from Indonesia's main rural bank is channelled cost-effectively to these groups for investments in viable micro-enterprise activities.

The groups are supported by field extension workers who also strengthen the linkage between the commercial bank and the village groups. The loans to small farmers and landless people are accompanied by technology packages and extension services.

This approach has resulted in exceptionally high repayment rates of more than 95 per cent throughout the project. Initial loan sizes were as low as Rp 100 000 (USD 50) per month.

Examples of the experience in microfinance promotion in Asia also include IFAD's early support to the Grameen Bank in Bangladesh, and to its replications in The Philippines and Nepal, introduction of a new credit methodology in Sri Lanka for lending to the poor, and grant assistance for capacity-building, to the Asia-Pacific Rural and Agricultural Credit Association (APRACA).

In the Latin America and the Caribbean Region, IFAD has designed projects with credit components that strengthen farmer organizations, promote income generation at the household level, encourage women as small entrepreneurs, and generate links between on-farm and off-farm income-generating activities.

IFAD's Peasant Development Fund projects in Paraguay were designed to provide poor rural households with access to credit. Existing banks rejected poor households as clients because they could not provide adequate guarantees.

IFAD helped to create the Peasant Development Fund (PDF) as a second-tier financial institution.

The PDF gives loans directly to grass-roots financial organizations such as savings and credit cooperatives and has been considerably more effective than the agricultural banks in reaching the very poor. In a follow-up project, IFAD is expanding the approach to reach 25 000 additional clients.

Other examples of support for access to microfinance in the region include the establishing and strengthening of indigenous organizations in Bolivia and Panama and support to peasant communities in Mexico and Peru.

In the Near East and North Africa Region, collaboration with grass-roots organizations is being strengthened, together with participatory approaches linking resource conservation with economic incentives such as credit.

IFAD assistance to the Near East-North Africa Regional Agricultural Credit Association (NENARACA) typifies its approach in the region. NENARACA has received three grants from IFAD to strengthen the microfinance capabilities of national rural finance institutions.

NENARACA's training seminars, workshops and forums, supported by IFAD, focus on increasing technical capabilities in areas such as credit delivery to women, collateral substitutes and efficient branch management.

The most recent IFAD grant, effective this year, focuses on two major objectives: local capacity-building and the sustainability of demand-driven training programmes.

Other examples of microfinance support in the region include the establishment of special credit windows for women in rural banks in Egypt, and the promotion of decentralized financial institutions accessible to the poor in rural areas in Georgia.