Rural finance
Learning note
Print this pageThis Note relates to KSF3: Alignment of design features with IFAD Strategic Objectives and lessons learnt; analysis and results framework
Version: January 2008
Core issues
IFAD interventions in rural finance (RF) should promote increased access to diversified financial services for the rural poor on a sustainable basis. Services may include credit, savings, remittances and in some cases micro-insurance and leasing finance. The following key issues may need to be addressed during design and/or implementation:
- Conditions for feasibility of investment in rural finance. Minimum conditions include sufficient human population, absence of high inflation and financial repression policies, minimum levels of security and political stability, some basic economic and trading activities, as well as marketplaces and monetisation of the local economy - see IFAD RF Decision Tools, Part 1, Section 5 for more details.
- The rationale for RF intervention. Rural finance should be an essential contributor to meeting major development objectives and a useful intervention in the project context, not an automatic component. Stand-alone RF projects are a positive trend that should be encouraged. When RF is one component among others it must have a critical mass, sufficient budget and a clear rationale.
- Support for formulation and implementation. Unfamiliarity of some borrowers with the IFAD RF approach may call for a high level of technical support, formation of new partnerships with strong/close international or national partners, intensive stakeholder consultations and close attention to demand, equity and interest rate concerns.
- RF strategy envisioned. Project support should create rural financial institutions (RFIs) that are sustainable and show credible poverty outreach and social performance.
- Selection of RF partners. Potentially credible RF partners need to be found and supported as necessary. For a new RFI, strong technical assistance may be needed to support project implementation and the use of non-specialised NGOs should be avoided. For an existing RFI, the RF partner selected should have a credible strategy for growth, outreach and sustainability, and a viable governance structure – although at the planning stage the study and discussion of governance options are more important that finalisation.
- Monitoring of partners’ work. A simple system for performance-based monitoring is essential. Reporting on Microfinance Information Exchange (MIX) should be actively promoted - see IFAD RF Decision Tools Part II, Section 10.
- Budget composition. IFAD’s priority in RF development is not to supply loan capital, but to build the capacity of rural financial services. Budgets should provide support for technical assistance for institution building, especially at start-up and during early growth phases.
- Savings mobilization. If the intention is to encourage savings mobilization the legal implications and implied responsibilities need to be clear, especially when seeking voluntary deposits from the public - see IFAD RF Decision Tools Part I, Section 4.
- IFAD’s Policy on RF and IFAD’s Decision Tools for Rural Finance (see references) provide detailed guidance for design and review teams on RF issues. Priority tasks and important caveats are flagged below.
- Confirm that minimum conditions for viability of an RF intervention are met. Evolve a clear rationale for RF intervention based on analysis of gender-differentiated needs, demands and constraints or overall RF demand; however, avoid tendencies to put RF components into all projects.
- Seek out and involve potential RFI partners at national or international levels. To build their interest and/or assess credibility, discuss and validate concepts and plans with potential partners and local RF experts. Evaluate demand for rural financial services (especially through existing small or informal funds), and assess gender and equity concerns. Agree interest rate policies and lending criteria with relevant authorities.
- For RF partners to be selected at the formulation stage, generate realistic targets for achievement: avoid over-optimism in their growth projections or provisional financial statements concerning outreach or financial performance.
- Ensure a balance in project financing between funding essential capacity building and technical assistance (TA), versus creating/expanding credit lines. Ensure that provisions for international TA are adequate, especially for project inception.
- When an apex institution is planned, develop a clear rationale for choosing this instrument (are there enough RFIs to be supported; what is the apex added value?). Devise means to shelter the apex institution from political interference – for instance, government representatives should not be allowed to dominate apex governance structures.
- Keep data on formulation documents and evaluations of ongoing operations concise and to the point. Focus on potential or current RF partners and their future interest or current performance as co-operators with IFAD.
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