Rural Financial Services

1. Rural finance is, according to IFAD Rural Finance Policy, “a vital tool in poverty reduction and rural development” since access to financial services represents a crucial precondition for income-generation and food security among the rural population. In line with its mandate, IFAD has focused on meeting the specific needs of the poor, including women, by tailoring the rural finance components of its projects to their aversion to risk, lack of collateral, low financial skills and lack of investment experience. Its projects have contributed to improving access to financial services and developing innovative institutions for the rural poor.

2. In the Near East and North Africa (NENA) region, as elsewhere, IFAD has supported a variety of rural finance institutions, notably national agricultural or rural development banks. In many countries, these banks are the main source of both credit and extension and other services for rural farmers. The Fund has, however, also helped develop alternative institutions, both informal and semi-formal, wherever an enabling policy environment could be found or cultivated. In particular, it has contributed to rural microfinance initiatives, building on its experience with the Grameen Bank in Bangladesh. It has recently focused on developing sustainable institutions able to integrate the poor and their microeconomic activities into formal financial networks. In this process, it has sought tools not just to serve the poor’s financial needs, but to do so in ways that are transparent, sustainable, market-wise and appealing to stakeholders, notably formal financial institutions and the private sector.

3. IFAD-cofinanced projects in the NENA region have used various models of microfinance services and institutions to reach the rural poor, and women in particular. So far, experience suggests that no one specific model works best in meeting women’s needs, since women in different areas have different savings and credit requirements depending on their livelihoods, market opportunities, skills and social obligations, and on the availability of social capital (notably the habit of working in groups). Possible models include credit-plus-training packages, non-governmental microfinance institutions, savings groups, revolving funds and village banks. While this site contains a general overview and papers on some specific institutions, this paper will investigates one particularly interesting model, the sanduq (plural sanadiq), or village fund.

Rural Finance in Syria

4. The main rural finance provider in Syria is the Cooperative Agricultural Bank, a semi-autonomous institution linked to the Ministry of Economy and Foreign Trade. About 20% of it clients are rural households. Despite its capillary presence in rural areas, the bank has not succeeded in providing suitable services to the rural poor. It lacks products meeting their savings, credit and insurance needs; its collateral requirements are rigid; and for climatic reasons, it is unwilling to operate in chronically poor areas. Moreover, many of its clients access loans via membership in cooperatives, which typically require owning land and thus tend to exclude women, who represent only about 5% of cooperative members (2002 data).

5. Given their difficulty in accessing bank services, the rural poor have traditionally relied on different informal mechanisms, some illegal and many ostensibly rooted in interest-free Islamic banking norms but in fact usurious. In the 1990s, international organizations – in particular, IFAD, the United Nations Development Programme (UNDP) and the World Food Programme – have tried to cultivate informal and semi-formal rural finance in Syria, capitalizing on timid, but growing government encouragement of market self-reliance. IFAD has included rural microfinance components in its Jebel al-Hoss Agricultural Development Project and its Idleb Rural Development Project, building on the experience of the UNDP in developing a network of sanadiq in Jebel al-Hoss. This model is only one of several that can be used to build sustainable grass-roots financial institutions, and is not necessarily the best model in general or for women in particular. That said, it deserves study because of its high potential for sustainability and replication and its ability to overcome many of the constraints faced by poor women.

UNDP Sanduq Experience in Jebel al-Hoss

6. The UNDP project in Jebel al-Hoss, developed jointly with the Government, was designed to test a sustainable and equitable poverty reduction strategy based on the revitalization of local solidarity. In particular, it aimed to mobilize local self-help capacities and tap into existing social capital by strengthening indigenous informal institutions, notably the sanadiq generated by voluntary savings groups. Sanadiq have several advantages in tackling rural poverty: they do not rely on external support; they seem to nurture local solidarity; and they offer interest-free financial packages, conforming to Islamic prescriptions (see Box). They also have some features that are especially appealing to women, notably their lack of formal application processes requiring collateral, the completion of forms (many women are illiterate), travel outside local villages, and interaction with strangers.

7. Although sanadiq were relatively rare in the area, other informal groups existed, notably the jam’iyyat masari, or money groups, in which women participated, though to a lesser degree than men due to their lack of steady income sources such as wages. Moreover, women tended to participate in jam’iyyat to meet consumption, rather than investment needs. In any case, the project decided to encourage the sanadiq because they seemed more likely to stimulate sustainable poverty reduction, as they could, with relative ease, be scaled up to tap into formal financial sources. The goal was to develop such funds into microfinance institutions capable of offering sustainable services that local communities could manage autonomously by choosing members, electing officers and determining loan terms. Moreover, the funds were to be financially self-sustainable, i.e. able to generate sufficient resources and returns from savings and profit-sharing, without depending on external credit provision or subsidies.

8. A study conducted by an IFAD rural credit specialist in August 2000¹ identified the following characteristics of the sanduq model:

• local resource mobilization based on savings deposits, which could later be complemented by credit lines or investment on the part of banks, investment funds or international agencies;
• five main forms of capital, notably social capital, profit-earning members’ shares, profits earned in the previous year and reinvested in the sanduq as retained capital, equity investments by non-members, and grants;
• voluntary savings enabling access to profit-sharing at rates set autonomously by each sanduq above the inflation rate and based on either capital performance (in the case of share capital) or expected earnings (in the case of savings);
• a relatively sophisticated process of bookkeeping to support differential profit-sharing rates based on the kind of project and the form of capital, generally guaranteeing that management costs and potential loan losses are covered;
• the possible inclusion of an insurance fund, which may be formed with a portion of loan charges and used for life insurance or as an emergency fund; and
• specific membership norms and voting rights established either on a one person/one vote basis or on a one share/one vote basis (which may create great power imbalances in communities with significant economic disparities).

9. Although the funds should be self-managed and self-reliant, UNDP project management assisted them from start-up by selecting target villages of different income levels and mobilizing communities by stressing self-reliance. The option of forming separate sanadiq for women was considered, but communities did not express a strong preference for it (which was also the case in IFAD project in Idleb). The project also helped form a management committee for each sanduq, and provided training, auditing and accounting services to ensure fund sustainability and impact. Finally, the project undertook policy dialogue to promote a model sanduq law and a governmental regulatory/supervisory system for financial services.

10. After a suitable phase of development at the village level, sanadiq were to be organized into a regional association that would operate as an apex organization (possibly in the form of a central fund). This organization would provide training, auditing and consulting services; facilitate self-regulation; and undertake policy dialogue with the Syrian Government. It would also provide liquidity and refinancing services, which would stabilize access to resources beyond the micro level and would therefore be crucial for sustainably breaking the poverty cycle. On the other hand, such scaling up should take into account that the needs of the poor, and of women in particular, are likely to require continued flexibility and a small scale of financial services. In other words, creation of an apex organization should not affect the structure of the grass-roots funds, so as not to create barriers similar to those that characterize the formal sector.

Project Contact Information:

Dr Isaam Zanoon
Director
Jebel al-Hoss Agricultural Development Project
Ministry of Agriculture and Agrarian Reform
Al Hijaz Square
Fax: 00 963 11 633 310

IFAD Rural Finance Policy

1/ Hans Dieter Seibel, “SYR/97/004 Rural Community Development in Jebel al-Hoss: Developing Self-Reliant Community-based Microfinance Institutions (Sanduq/Sanadiq), Mission Report”, IFAD, Rome, 12 August 2000.