Decision tools for rural finance

Part III: Regional specificities

One striking characteristic of IFAD rural finance programmes has been the great variety of approaches and models promoted across regions. These models include, inter alia, financial NGOs, ROSCAs, financial cooperatives, financial services associations, Grameen Bank replications and self-help group models. Despite this great diversity, all these approaches often face similar issues and challenges, such as how to combine effectively their objectives of outreach and sustainability, how to improve their internal reporting systems and administrative efficiency, and how to document more accurately the depth of their poverty outreach and their impact on the lives of the rural poor. In that context, the cross-cutting issues (Part I) and the challenge of improving project cycle effectiveness (Part II) are largely shared in principle by most of these models. However, they are reflected operationally in different ways across regions.

These differences have been highlighted in the regional strategies that were finalized in the wake of the Strategic Framework for IFAD 2002-2006. These regional differences are analysed in Part III, which includes, for each region, a brief summary of the current status of rural finance in the region, a review of IFAD interventions, and the methods and tools that are particularly relevant to the region. IFAD’s comparative advantage in rural finance in the region is also considered.

11. Western and Central Africa

11.1 Current State of Rural Finance in Western and Central Africa

At the end of 1999, the Central Bank of West African States (BCEAO) reported 272 decentralized financial systems (227 savings and credit institutions, 21 direct-lending institutions, and 24 programmes with credit components), covering 2 351 800 clients. The penetration rate in the WAEMU zone was 7.5% of the active population, with 20% of households having access to the financial services of decentralized financial systems.

In 2000, the Central African Banking Commission (COBAC) had 1 034 microfinance structures in Central African Economic and Monetary Community (CEMAC) countries (12 umbrella organizations with 762 connected entities and 260 independent bodies), servicing 414 000 clients or members. Note that the microfinance structures counted by COBAC are not identical to BCEAO’s decentralized financial systems, as the latter are more institutionalized and organized in networks The penetration rate in the CEMAC zone was 3% of the active population, with 8% of households having access to the financial services of microfinance structures.

As a result of the increasing number of decentralized financial systems and volumes of deposits and loans handled (4% of national financial systems, on average), the monetary authorities took an interest in this sector and decided that it should be regulated and supervised.

In Western Africa, a framework law defining the legal framework governing the activities of decentralized financial systems in the subregion was passed by WAEMU’s Council of Ministers in December 1993, in Dakar. This law applies to mutualist savings and credit institutions or savings and credit cooperatives, and their unions, federations or confederations, who must apply for a licence from the Ministry of Finance. Non-mutualist decentralized financial systems can apply for framework agreements with the relevant Ministry of Finance.

In Central Africa, the Bank of Central African States and COBAC began a census of decentralized financial systems in 2000. Preliminary CEMAC draft regulations covering conditions for exercising and controlling microfinance activities were circulated for consideration by all member countries, with the expectation of regulations becoming effective early in 2002.

Decentralized financial systems in Western Africa have a strong rural tradition and they generally started in rural areas. Of the subregion’s fifteen largest decentralized financial systems, at least ten still operate mainly in rural areas. However, they are concentrated in wealthier rural areas with cash crops or secure production from irrigation systems, to the detriment of areas that are more disadvantaged, either in terms of rainfall or because of distance and accessibility. Furthermore, in an attempt to reach financial self-sufficiency more rapidly, numerous mutualist systems have been leaving villages for secondary cities or large towns and markets.

The same trend is underway in Central Africa, with an even sharper rural-urban split. The majority of microfinance structures are concentrated in large cities, secondary cities and built-up areas, and are sparse in rural areas and village contexts. Thus, villagers and small-scale farmers in Central Africa have little access to formal financial services.

In most countries in Western Africa, more than 60% of the population – and 70 to 80% of the rural population – lives below the poverty line. Decentralized financial systems generally reach clients in the “average” and “slightly above average” categories. Such systems practise solidarity group lending, and the mutualist system’s credit and education programmes reach poor or medium-poor women, while CVECAs reach villagers in disadvantages rural regions. The very poor population is probably not reached at all.

According to the 1999 estimates of BCEAO and national statistics institutes, the average loan amount in Western Africa increased from CFAF 181 000 in 1997 to CFAF 251 000 in 1999, or approximately 100% of the per capita gross domestic product (GDP) (CFAF 245 000) for the WAEMU zone. The microfinance sector uses average loan size to give an indication of the economic level of the clients reached: 100% of the per capita GDP indicates an “above average” clientele. This trend also applies in Central Africa. In Cameroon, where the average loan amount is CFAF 380 000, half of loans are for more than CFAF 200 000 and a fifth are for more than CFAF 500 000.

Overall, demand is relatively well met in cities and in wealthy rural areas in Western Africa. Outside of these areas, demand is only partially met, since active decentralized financial systems are more difficult to find. In countries where the sector is relatively dynamic, a large part of these ‘borderline’ zones are reached nevertheless, although it would be both possible and desirable to increase the volume of supply.

In Central Africa, the sector is still very immature and there is considerable unmet demand everywhere – particularly in the countryside, where microfinance does not yet seem to have made an entry-point. There is immense potential for extension.

An analysis of decentralized financial system funds in Western Africa revealed that out of a total of CFAF 157 billion, 64% came from deposits and 20% from equity. In Central Africa, out of a total of CFAF 77 billion, deposits represented close to 69%, whereas equity represented only 11%. The conclusion is that the main hindrance to growth and extension of outreach does not seem to be access to external capital.

Relatively few decentralized financial systems in the two subregions have attained financial self-sufficiency, according to CGAP’s method of calculation. Numerous decentralized financial systems still receive subsidies for operation and investment. It would seem, however, that approximately 40% of the decentralized financial systems identified in Western Africa have attained operational self-sufficiency. However, the survey conducted in the CEMAC zone did not allow for meaningful comparisons. The situation in Central Africa appears more fragile.

In both subregions, mutualist financial organizations or savings and credit cooperatives are the dominant legal model, although both models adopt very different approaches.

In Western Africa, mutualist financial organizations have a widespread and relatively homogenous membership – farmers, crafts workers and small-scale salespeople. Here the main governance problems relate to:

conflicts of interest typical of cooperative savings and credit structures, in which the decision-makers are also the users;
elected members’ lack of qualification to manage financial structures that are becoming increasingly large;
lack of motivation among elected members who have very little personal financial stake in the structure due to dilution of ownership, in addition to the volunteer nature of their regulatory status; and
power struggles between elected members and salaried staff, in a framework in which roles and responsibilities are not clearly defined.

This governance problem has reached such proportions in Western Africa that it is at the origin of the freeze or failure of several of the largest networks. A legal and regulatory solution will need to be found to resolve the situation.

In Central Africa, and Cameroon in particular, because of the more urban nature of the savings and credit cooperatives and their promoters’ profiles (businessmen, public and private sector executives, former bank executives), the social base is both smaller and of a higher educational level. These structures operate rather like small banks, with branch offices that drain popular savings towards lucrative private investments. The risk here is that rural or working-class small-scale savers might well be omitted.

Decentralized financial systems in the two subregions have serious failings in accounting, financial management, MIS, internal control and operational organization. Tools exist at an international scale, but need to be adapted to local realities. Service providers – auditors, training organizations, computer services and consultancy firms – specialized in the microfinance sector are still relatively rare and need to perfect their knowledge and practices.

Thus, the sector’s main need is for technical assistance and capacity-building, much more than for capital, whether in the form of equity or loan capital.

11.2 IFAD’s Rural Finance Interventions in Western and Central Africa

Traditionally, in Western and Central Africa, IFAD’s portfolio contained mainly integrated rural development programmes with agricultural credit components. Since the internal revision of its rural finance portfolio in 1996, most of these programmes have been redefined or re-oriented. IFAD has entrusted the loan components to operators or specialized decentralized financial systems, supported professionalization for generic NGO operators, and backed the institutional transformation of credit components into formal, decentralized financial systems.

The new generation of IFAD programmes in Western Africa fall into two categories.

11.2.1 Programmes to support the emergence or development of decentralized financial systems on a regional or national scale

Such programmes operate by either:

enabling local NGOs to specialize as operators for IFAD-initiated models such as FSAs, or through context-appropriate approaches such as CVECAs; or
supporting the extension of existing decentralized financial systems into areas not yet covered.

11.2.2 National microfinance sector support programmes

National microfinance sector support programmes have encompassed:

elaboration of national strategies and plans of action;
institution-building for decentralized financial systems;
professional structuring;
enhanced coordination among banks and decentralized financial systems;
strengthening of supervisory and control institutions; and
consultation among donors.

While there is room for further improvement, IFAD has already integrated the major lessons learned from past programmes – both successes and failures – in its more recent interventions.

A recent external assessment of the portfolio of rural finance programmes for Western Africa concluded that the new prorammes are generally well designed. Greater attention has been paid to analysing programme sectoral contexts. The decentralized financial systems supported or promoted are also studied more attentively, and efforts have been made to select operators based on their professionalism and experience in the rural finance sector. Similarly, on a more general level, better consultation among donors has been sought, with some success, thus contributing to the credibility of the approach and the success of undertakings, especially in the face of national sectoral policies.

The challenge for the coming years lies in the proper implementation of these new programmes, anchoring IFAD more decisively in microfinance “best practices”. This means that the Fund will need to train its monitoring staff; review its partnerships with cooperating institutions or find specialized technical partners; allocate more resources to technical assistance in projects; and review its operational position in relation to governments.

11.3 Operational Considerations for IFAD Rural Finance Interventions

IFAD’s current comparative advantages in microfinance in relation to other donors can already be clearly identified, and relate both to its mandate and its experience, reflecting:

focused interventions in rural areas, including disadvantaged rural zones, while most donors are withdrawing from such areas;
grass-roots interventions as close as possible to communities, and consequently the ability to encourage them to participate in designing products and systems to better match local needs, constraints and strategies;
launches of new, decentralized rural finance institutions, with encouragement for action research and innovation; and
establishment of long-term partnerships of a decade or more to successfully nurture the growth and outreach of its rural finance partners in challenging rural areas.

To achieve this innovative involvement with rural finance in difficult contexts, particularly for the rural poor, various methods and tools have been evolved by IFAD and its cooperators that can be used to improve implementation of IFAD’s new rural microfinance proprogrammes in Western and Central Africa. Some of these are considered below.

11.3.1 Supporting rural finance institutions

A set of participatory microfinance assessment tools proposed by MicroSave can be found in Participatory Rapid Appraisal for Microfinance (see www.microsave-africa.com/toolkits.asp), and can be attached to operators’ terms of reference, to assist them with participatory feasibility studies.

Similarly, Part II contains practical recommendations on how to select RFIs (and see also CGAP’s Format for Appraisal of Microfinance Institutions), to use calls for bids to select a good technical operator, and to establish lists of performance indicators for MFI outreach and sustainability, allowing appropriate monitoring and assessment. Impact monitoring tools were covered in Part I of this document.

11.3.2 National microfinance sector support programmes

Programmes in support of national microfinance sectors are being increasingly considered in the region. This is why they are discussed here, in this regional section, although such tools are valid everywhere.

National microfinance sector development support programmes are only recommended in countries where decentralized financial systems are dynamic and have a clear vision of their development strategies, and where they are sufficiently organized to become strong interlocutors vis-à-vis the government and donors. Without these prerequisites, a national strategy risks losing control to either the government or to donors.

Where these preconditions are met, and the value added by such national microfinance strategies clearly demonstrated, IFAD can support their development, in coordination with other donors.

11.3.3 Elaborating national strategies and plans of action for microfinance development

The approach should, above all, be participatory, transparent and open. One should ensure that no single party can impose their views on or dominate the others.

As a first step, undertake a diagnostic study on the state of the sector and analyse the supply of and demand for financial services by people excluded from classic banking systems. This analysis should be broken down by geographical zone, market segment (women, small-scale farmers, small-scale shopkeepers, artisans, urban very small enterprises, etc.) and type of products and services (savings and credit). Elements to be included in such a study and analysis are listed below.

Assess the performance of the most significant decentralized financial systems in the country, including both institutional analysis (organization, management, governance, vision, procedures, human resources management, business plan) and financial analysis (reliability of accounting and information systems, examination of financial statements for the past three years, calculation of profitability and efficiency indicators). Examine the business plans of decentralized financial systems, and evaluate quantitative and qualitative evolution in the sector, including looking at matters from the sector’s own perspective.
Promote a benchmarking mechanism among the country’s decentralized financial systems and between the country’s decentralized financial systems and similar decentralized financial systems in other contexts.
Seek to build a consensus around a few principles of good management for decentralized financial systems, with performance indicators accepted by all, as the basis for financing and support provided in the framework of the plan of action.
Observe the consequences of MFI development on need for financing, refinancing and supervision. Ask each category of stakeholder to establish its own plan of action.
Assess banking sector interest and ability to play a role in meeting RFI refinancing needs.
Ask regulatory authorities to assess control needs, then devise a method of meeting those needs, and estimate the resources probably required (staff, material and financial means) for effective implementation.
Discuss with donors the potential for pledging financial commitments.
National strategies define a vision, objectives to be attained and principles of action to which all adhere. Hence, clear distribution of roles among all the various categories of stakeholders is crucial for success. Good national strategies must be elaborated jointly by all parties involved; they must not be written by any one stakeholder alone – whether it be the government, donors, or even a decentralized financial system with a dominant position in the country.

The resulting plan of action must be specific, scheduled over time, and quantified. The stakeholders responsible for each section must be clearly identified and must accept their roles. Good national plans of action can be measured by the degree to which the stakeholders concerned internalize such plans, which contributes to improved effectiveness in implementation.

11.3.4 Key elements of national microfinance plans of action

A national microfinance plan of action could include a number of elements.

Structuring the sector, through the emergence and strengthening of a professional association likely to be able to (i) represent the interests of decentralized financial systems; (ii) formulate proposals to the government, supervisory authorities and donors; (iii) institute self-regulation within the profession; and (iv) be organized in such a way as to offer relevant services to its members.
Supporting the adoption of appropriate regulations and effective supervision to foster an enabling environment for the pluralist development of microfinance. The plan of action can help clarify choices by making provision for conducting complementary studies, providing specific expertise or training of supervisory staff, or a combination.
Securing the sector by analysing the main risks that might be encountered, and establishing collective mechanisms to limit such risks, such as through regional or local credit information bureaux, deposit insurance funds, or measures to clean up the sector involving the liquidation or turnaround of failing RFIs.
Developing the sector through individualized technical and financial support for the establishment of business plans for healthy decentralized financial systems. This could cover MIS, internal control, new product design, staff training and increasing equity and investment capabilities, as well as general capacity-building for decentralized financial systems through management training for salaried technicians, local elected members and umbrella structures.
Coordinating activities with the banking sector to increase loan funds, through training banks in microfinance, and training decentralized financial systems in elaborating refinancing or guarantee applications.

The implementation of plans of action requires the availability of specialized intervention-specific expertise. It is best to ensure that such expertise is available before making specific commitments.

12. Eastern and Southern Africa

12.1 The Current State of Rural Finance in Eastern Africa

12.1.1 General characteristics

The main characteristics of the countries in the subregion, according to the IFAD Regional Strategy Paper, Eastern and Southern Africa (December 2001) are:

considerable economic poverty, which can be seen in the per capita gross national product (GNP), ranging from USD 110 to USD 350 for more than half the countries in the subregion, with 83% of the rural population living in extreme poverty;
large populations, as the 21 countries in the subregion have 350 million inhabitants, led by 63 million in Ethiopia, 30 million in Kenya, 24 million in the United Republic of Tanzania and 23 million in Uganda;
the preponderance of the rural sector, with three-quarters of the inhabitants of the subregion living in rural areas and depending on agricultural for survival; and
centralized government very obvious in economic regulation until recently, and slow to adopt proposed reforms.

Poverty reduction – the primary challenge in this region – clearly depends on rural development.

12.1.2 Characteristics of microfinance in Eastern Africa

According to a MicroSave/UNCDF (2000) comparative study of member-based MFIs in Eastern and Western Africa, the microfinance sector usually comprises two sub-groups:

member-based MFIs, such as savings and credit cooperatives (SACCOs) or FSAs; and
non-member-based MFIs, such as solidarity group lending systems and small enterprise loan systems.

Until recently, in Eastern Africa, the member-based MFI sector was not seen as belonging to microfinance because of the strong influence of the promoters of the non-member-based category. Today, this difference is narrowing and countries are starting to define sectoral policies that cover both categories and place them under the supervision of the monetary authorities, clearly accepting them as part of the financial sector.

MFI penetration rates in the subregion are relatively weak, at approximately 1 to 2% of total population, with some concentration in urban areas and very little coverage of rural populations. SACCOs are present in rural cash crop (coffee and tea) production zones. There are practically no microfinance interventions in areas of rural staple food crop production.

12.1.2.1 Savings and credit cooperatives

Depending on a country’s political history, the SACCO sector is more or less developed. Thus, in Kenya, SACCOs are very present in large cities and rural towns, have close to two million members, mobilize millions of United States dollars in savings, and play a very large role alongside commercial banks. However, in countries such as Tanzania and, above all, Ethiopia, successive governments’ policies were not favourable to the cooperative movement and such structures were banned during certain periods. SACCOs there are either very few (especially in rural areas of Ethiopia) or very weak (as in Tanzania), playing hardly any meaningful role in financial intermediation. However, this movement is currently gathering momentum.

SACCOs share certain characteristics:

presence in cities where the population is made up, in large part, of the salaried staff of enterprises;
presence in rural areas limited to small towns in cash crop production zones, where they form the financial counterpart to cash crop (coffee, tea) production cooperatives from the time when a state monopolies relied on cooperatives to commercialize these products; and
absence in staple food crop production zones, remote areas and villages.

Their operating methods also show some similarities:

a strong capacity to mobilize savings, despite somewhat unattractive product and interest rate policies (commercial banks create increasingly strong barriers to access to their services, pushing small-scale savers more and more towards SACCOs; and
a weaker capacity in loan disbursement and management (apart from loans secured by payments for cash crops), which gives them excessive liquidity. SACCOs place most of the savings they collect in commercial or cooperative banks, and therefore do not meet the credit needs of their members, who continue to make use of ROSCAs to finance their needs. ROSCAs are very numerous in these countries.
With the liberalization of economies, SACCOs have to undergo considerable change, and to redefine their roles in their local economies. This implies reviewing their policies toward member services, and the need to acquire new skills.

12.1.2.2 Client-based microfinance institutions

With the exception of Ethiopia, client-based MFIs were set up in the 1990s by NGOs, supported by donors. They share the following characteristics:

they are concentrated in cities;
they focus on a medium-income, small-scale entrepreneur clientele;
they use a solidarity group lending approach, which is quite restrictive and may possibly explain their relatively poor outreach. The largest have no more than 25 000 clients, in Kenya and Tanzania;
they rely on professional management that is relatively centralized and standardized, leaving little room for clients in the definition of products and participation in management;
there is considerable use of loan fund capital from outside donors (either grants or loans at concessional interest rates); but
there is little mobilization of local savings and little coordination with their country’s banking system.

In Ethiopia, the main microfinance institutions were promoted by the government – which continues to play a central role, both as shareholder and member of boards of administration, and as provider of loan capital. These MFIs are concentrated in two rural regions (Tigray and Amhara), leaving the rest of the country relatively uncovered. They work with a population made up of small- and medium-scale agricultural producers, providing agricultural and rural loans and mobilizing the savings of their clients and of local institutions. They have good repayment rates and are relatively efficient. Their fragility is often attributable to their strong dependence on subsidies and government funds, which can influence their governance and sustainability.

12.1.2.3 Legal and regulatory frameworks

Ethiopia is the only country to have created a regulatory framework specifically for microfinance, by establishing a licence for MFIs in the form of public limited companies. This framework is comparatively open, and has enabled about twenty local entities to obtain licences in four years. The central bank is the supervisory body, although it does not really have the tools it needs to ensure control.

In Tanzania, there is a national microfinance policy that includes SACCOs, banks working in this field, and NGOs, although no specific regulatory framework has yet been defined.

In Kenya, SACCOs still depend on the Ministry of Agriculture, which removes them from the financial sector. NGOs that promote microfinance projects have clearly separated this component from their other activities and given the activity a specific legal identity, although not that of a financial institution as such. Only K-REP Bank has made the full transition from NGO to commercial bank, licensed by the central bank.

In general, governments are aware of the potential for microfinance and favourable to developing this sector.

12.2 IFAD’s Microfinance Interventions in Eastern Africa

According to IFAD’s Regional Thematic Review: Rural Finance in Eastern and Southern Africa: Africa Division II (May 2001), previous projects focused on granting agricultural loans, either for inputs or as medium-term loans to finance animal-drawn cultivation, irrigation equipment or soil preparation.

During the 1990s, the development banks in the subregion were closed or privatized, largely depriving IFAD of its traditional formal-sector financial partners. In addition, IFAD sought to counteract the generalized culture of not repaying loans, a widespread habit, especially in countries where the government showed little determination to implement reforms.

In 1993, a turning point was reached, with both the introduction of savings mobilization and the diversification of loan purposes beyond agriculture. With this change, programme approaches also underwent profound changes, and tended to turn more towards promoting financial intermediation in rural areas.

This new orientation is consistent with IFAD’s approach, as set out in the Regional Strategy Paper: Eastern and Southern Africa (December 2001), which aims to “enable the rural poor to overcome their poverty”. This poverty reduction strategy is resolutely focused on growth and concentrates on the regions with medium to high production potential. There, it is a matter of providing a response to the demand of the rural poor for a range of financial services, including savings, loans to smooth consumption and face shocks, financial transfers, and secure household subsistence. The regional strategy recommends (i) helping small-scale farmers develop their own savings and credit organizations; (ii) identifying viable forms of coordination with the formal financial sector; and (iii) facilitating direct access to financial institutions by some small-scale producers for medium- and long-term investment needs.

At this stage, the majority of non-bank financial institutions and SACCOs or other member-based organizations are only getting started, and the institutional environment requires mainly capacity-building initiatives. It appears that sustainable development support for rural financial systems will be necessary for the next 10 to 12 years.

The present rural finance programmes funded by IFAD are characterized by three aims:

developing grass-roots organizations;
improving the legal and regulatory framework; and
coordinating activities with commercial institutions.

This is the case for recently approved programmes in Tanzania (2000), Ethiopia (2001), and Uganda. In order to best support these interventions, these Decision Tools may be used in the following areas:

identification and selection of RFIs, based on their potential to meet IFAD rural finance objectives;
establishing conditions and modalities for accessing bank refinancing;
establishing conditions to be met for institutions mobilizing deposits, and for possible support through appropriate technical assistance;
creating through policy dialogue with governments, an enabling environment for grass-roots initiatives;
supporting appropriate legal and regulatory framework development for microfinance through policy dialogue; and
identifying the role of PMUs, specialized technical assistance and cooperating institutions in implementing and monitoring rural finance programmes.

12.3 Operational Considerations for IFAD Rural Finance Interventions

Given the new direction being taken by rural finance programmes in the region, some more specific tools might be needed, and these are discussed below. Mobilization of savings in particular is a new element in the re-orientation of IFAD’s programmes, along with policy dialogue and improving the regulatory framework in the region.

As emphasized in Part I (Section 5), understanding when and how to promote savings mobilization, and ensuring that the necessary safeguards are in place when doing so, are crucial issues for IFAD to consider in its interventions.

The issue of legislative and regulatory framework is also of key importance in eastern and southern Africa. Section 12.3.3 highlights what might be considered an optimal development process for such policy – one that protects savers while not prematurely imposing any framework that could have the adverse consequence of slowing the microfinance industry’s growth and stifling innovation. IFAD, however, should carefully assess its comparative advantage before becoming directly involved in this technical area, which might best be left with more specialized partners with strong field presence. However, when appropriate, IFAD may engage its government partners in a dialogue to understand the process and ideal sequencing that they should consider when planning to introduce relevant legislative and regulatory frameworks.

12.3.1 Requirements and responsibility for institutions mobilizing microsavings

As part of the new direction taken by IFAD for rural finance in the subregion, mobilization of savings is increasingly a crucial element.

However, savings mobilization implies both risks and responsibilities, and therefore the meeting of preconditions, before it is encouraged. The preconditions for RFIs to mobilize savings, considerations as to an appropriate design of savings services, and the operational implications for IFAD’s support to savings mobilization, especially with respect to areas of possible interventions, were developed in detail in Part I (Section 5). Those preconditions apply particularly to the opportunities and challenges that IFAD faces in Eastern Africa.

12.3.2 Elements of policy dialogue with governments to create an enabling environment for grass-roots initiatives

Since IFAD wishes to support the autonomy of rural populations and their organizations, it is essential that there be policy dialogue with the national authorities so that they facilitate grass-roots economic initiatives and free association, and encourage the emergence of motors for popular proposals.

In facilitating the process, IFAD should help national authorities to clarify their roles as creators of favourable environments and as supervisory and control entities, while relinquishing direct involvement in promoting and managing economic and financial systems, so as to avoid being both judge and jury.

The government should create the conditions for microenterprise development, for initiative taking in the framework of local and community development, and for the emergence of local economic operators. It should be committed to non-interference in the orientation and decision-making of grass-roots organizations, and in the implantation, loan and interest rate policies of microfinance institutions.

12.3.3 Elements to consider when analysing the legal and regulatory framework for microfinance

When nothing exists in terms of a legal and regulatory framework for microfinance, it is appropriate to analyse the sector’s state of development, its size, its level of structuring and the maturity of existing entities, in order to determine the timeliness of regulation. When regulations are already in place, it is appropriate to assess their pertinence in relation to the sector’s development prospects. If necessary, proposals for modifications could be submitted.

Several stages are recommended in the setting up of a legal and regulatory framework that takes into account stakeholders’ processes. These are:

An initial stage of taking inventory and becoming aware of what exists in the field so as to classify entities according to their real situations. This might be done by the regulatory authorities’ offices.
A second stage of simply recording these entities with the monetary authority in charge of supervision, with a mandatory statement of existence and some basic information such as implantation sites, services offered and means mobilized. Annual activity reports must be requested, accompanied by financial statements. The reports should be used by the regulatory authorities to establish a database and produce annual sector evolution reports. The authorities can, at this stage, conduct field visits to gain familiarity with these types of entities and better understand how they operate.
A third stage of regulating savings and credit activities by classifying the entities in general categories (with out without savings, with or without bank loans, etc.), planning their licensing accordingly, and defining the management rules to be followed for each category. Moreover, the entities are categorized by segment, according to transaction volumes with corresponding increasing reporting and external audit requirements. The regulatory authorities license and control structures both through documents submitted and on-site visits, and ensure the proper application of regulations by the ensemble of licensed structures.
A fourth stage can be the legalization of microfinance institutions, strictly speaking, namely the creation of a specific legal status if needed, and once the sector has reached a level of maturity at which such status can be defined in a relatively stable manner.
- Regulations can be established without passing laws, which is always preferable in new sectors of activity.
- Over-hasty legislation is often prejudicial for the development of the sector because it tends to create a rigid mould into which all institutions must fit – which can inhibit all innovation and reduce the flexibility necessary for the proper operation of these enterprises.
- Good legislation acknowledges the validity of plurality in approaches and allows all institutions to adopt the type of status and the organization that suit them and are appropriate for the market segments they address. However, all single-control entities must be excluded, permitting only cooperative or joint stock company status.
- When regulations or laws are enacted, whether directly by the government or at the behest of national monetary authorities, it is crucial to ensure that those regulatory instruments include the means necessary for implementation, monitoring and control. Laws that are not applied, regulations without, or with inadequate, supervision and control, all increase the sector’s fragility rather than making it safer or stronger.
- Staff working for the authority in charge of supervision should be trained to recognize and control this type of institution. Staff must become aware of microfinance specificities and the need to adapt their skills and attitudes to those of the stakeholders.
- It is advisable that all microfinance institution categories be regulated and supervised by the same monetary authorities, whether central bank or banking commission. Countries where SACCOs are supervised by the Ministry of Agriculture or the Department of Cooperatives, while MFIs are supervised by the central bank, display distortions in terms of requirements and norms of good management among institutions that conduct financial activities.

13. Asia and the Pacific

13.1 Current Status of Rural Finance in Asia

The Asia and the Pacific Region has been host to a great variety of rural finance and microfinance approaches, some of which have become landmark successes. They include the pioneer model of the Grameen Bank; the subsequent development of some of the fastest growing MFIs in the world, such as the Association for Social Advancement in Bangladesh; innovative models with very strong outreach, including self-help groups and bank linkage models in South and Southeast Asia; reformed state-owned institutions such as the Bank Rakyat Indonesia – Unit Desai in Indonesia, with its great success in promoting saving mobilization; and financial NGOs that have successfully transformed themselves into licensed commercial institutions, with impressive outreach, such as the Association of Cambodian Local Economic Development Agencies in Cambodia or Centre for Agriculture and Rural Development in The Philippines.

It is important to highlight the essential characteristics of the Asian context, in view of their impact on rural finance.

IFAD’s regional strategy paper emphasizes the persisting high incidence of poverty in Asia, where the growth and profound economic changes in the region over recent decades seem to have been accompanied by an increase in economic inequalities. More than two thirds of the world’s poor live in Asia, and South Asia represents approximately half of this figure. Furthermore, the accent is on rural poverty, as 80 to 90% of Asia’s poor live in rural areas, and the rural population still represents more than half of the active population in most of the countries of the region.

Poverty affects areas of low agricultural productivity in particular, notably upland and mountain areas frequently inhabited by minority ethnic groups. The regional strategy paper emphasizes that the causes of this poverty among ethnic groups include non-access to resources, of course, but also political oppression and population displacement. In Viet Nam, for example, the IFAD regional strategy paper notes that the incidence of poverty among ethnic minorities ranges from 66 to 100%, whereas the national average is 51%.
One must emphasize the extremely high variations between and within the different zones in Asia, in terms of both general environment (population density, climate) and cultural and social contexts that encourage or hinder the formation of groups and people’s participation, justifying equally diversified intervention methodologies. Within a given country, and especially in rural and mountainous zones, one can note the presence of ethnic groups with very diverse cultures, religions, languages and social structures. This can be very marked, even within provinces. Thus Shan State in Myanmar comprises a dozen different ethnic groups.
The level of state intervention in most of these countries is generally high. Nevertheless, Asia comprises a set of very heterogeneous countries, and, in certain cases, one can note movement towards liberalization. The fact that some countries stand out as exceptions, and have significantly more liberal environments, such as Cambodia and Mongolia, must also be emphasized. This has resulted in microfinance success stories regarding state intervention in the sector, such as Bank Rakyat Indonesia and the Bank for Agriculture and Agricultural Cooperatives in Thailand. However, strong state involvement in some cases has also resulted in constraints to microfinance development (rate caps, subsidized state interventions, etc.).
The microfinance sector’s maturity level varies greatly. For example, in Bhutan and Mongolia, this sector is just emerging, whereas in Bangladesh and India the sector is very structured and includes many stakeholders. In countries where microfinance is just emerging (China, Mongolia), there are few good quality partners, and they are often absent from rural areas. In contrast, in countries where microfinance is already well developed, such as Bangladesh and Indonesia, the supply is diversified. In some countries, one can also note the coexistence of different models, such as both community-based organization linkages and solidarity group lending in Bangladesh.
In Asia, IFAD often faces several dilemmas: Should it support and help reform existing partners, even if they are weak? Should it help set up new institutions? How can IFAD become involved in piloting innovative rural finance approaches within state-controlled institutions (post banks in Mongolia; rural credit cooperatives in China)? Which model should be privileged and in which environment?

13.2 IFAD’s Interventions in Asia

13.2.1 Current interventions

Since 1978, IFAD has funded at least 153 projects in Asia and the Pacific, for a total commitment of approximately USD 2 400 million (see IFAD regional strategy). Out of the Fund’s USD 602 million in outstanding loans in 1999, microfinance represented USD 253 million (42%), among 15 countries. The main microfinance commitments were in China (45%), India (15%) and Indonesia (10%, but for a single project).

Projects and programmes that include microfinance components are being progressively abandoned. IFAD interventions in Asia concern mainly the rural finance sector, through support to systems using a variety of approaches that can be classified into three general categories:

self-help groups and community-based organization linkage (e.g. India, Indonesia, Nepal);
support to state structures and cooperatives (China); and
through NGOs and institutions, notably inspired by the Grameen Bank and solidarity group lending methodologies (e.g. Cambodia, The Philippines).

One IFAD programme characteristic is that its interventions have often targeted remote rural areas, such as mountainous areas, where ethnic minorities predominate.

13.2.2 Lessons learned from IFAD interventions

As mentioned in Part II (see Section 9.2), the underlying question in Asia, as in the other regions, is not so much that of identifying which model is best, but rather that of assessing the strong points and unanswered issues of the models tested in different contexts, in order to identify practical operational recommendations for IFAD programmes. With regard to each of the three categories indicated above, a certain number of lessons have been learned, and a brief summary of the advantages and risks identified for each of the types of model tested in Asia is presented in Table 10.

One conclusion is that several key issues will need to be further assessed.

13.2.2.1 Social mobilization

Analysis of prior social cohesion and informal activities (informal financial systems) is particularly crucial for two reasons. First, this level of participation by the population in managing the financial system may not be appropriate in certain social environments, as groups of 15–20 people are not always possible in some contexts. Second, caution should be exercised to avoid imposing a self-help group structure that might replace other traditional solidarity mechanisms instead of complementing or strengthening them.
To what extent are supporting NGOs indispensable for coordinating or running self-help groups after the launch phase, or can the groups’ mobilization be maintained without support from NGOs or national agencies? Is this support recurrent? If it is recurrent requirement, who will finance it in the long term and what role will these groups have in the governance of the structure? If it is not a recurrent requirement, how can one prevent possible drift by these groups after the departure of the NGO?
Generally speaking, it seems important to validate the extent to which the creation of groups and the nomination of representatives for these groups truly reflect organization by the clients themselves, which, in any case, takes time.

Table 10. Summary of factors affecting the Self-Help Groups – Bank Linkage Model

Strong Points

Limitations and Questions

The outreach of these systems is very impressive. At the end of 2000, the self-help group programme supported by Nabard in India covered 5.8 million members through 364 000 self-help groups, 194 500 of which had links to banks(¹).

Strong community participation in launching and managing systems can have positive impacts beyond financial services alone (collective organization of other services such as mutual assistance, literacy or collective infrastructure).

This model can have a very strong demonstration effect (e.g. spontaneous creation of groups in India).

Self-help groups are strongly oriented towards client demand and can be innovative in terms of financial products and services, as was shown by the analysis of six cases of Small Farmer Cooperatives Ltd. in Nepal(²).

When they are effective (e.g. India), links with bank refinancing may help anchor the self-help group system in the national financial sector.

Uncertainty remains as to the capacity of self-help groups to survive after the departure of the supporting NGO that has played a crucial role in launching the system. Surely, long-term subsidies would be required for these systems?

Links with the banking sector are possible in countries where the state shows strong determination to provide support and has an objective interest in making underutilized bank structures in rural areas prbBanks in India). Are such links possible elsewhere?

It seems necessary to reflect on an umbrella structure or common services and financing for the creation of such structures or services. Reflections on sustainability must include the whole system rather than just the groups alone. These reflections have only just begun and need to mature.

Analysis of the cost of the system and its financial equilibrium should include (if necessary) the need for long-term support from NGOs or umbrella structures. In most cases, the overall reflections on the system’s sustainability still need to be undertaken.

Frequently, there is insufficient information available to judge financial performance – mainly because these systems rarely have complete MIS, especially when it comes to arrears.

The question has been raised as to whether or not the very poor are excluded from these groups.

Sources: (1) Seibel, H.D. 2001. Self-help group banking: a financial technology for reaching marginal areas and the very poor. [IFAD] Rural Finance Working Paper, N°A9.
(2) Staschen, S. 2001. Financial technology of Small Farmer Co-operatives Ltd. (SFCLs) in Nepal: products and innovations. [IFAD] Rural Finance Working Paper, N°C5.

13.2.2.2 Ties with banks

When supporting this model, prior analysis of the banks’ interest and services, and of state involvement, is crucial in order to assess the self-help groups’ refinancing possibilities.
Beyond any political determination displayed, it is important to assess the banks’ real interest in ties with self-help groups: What is the banks’ financial interest, and what risks will they take? How viable are these banks?

13.2.2.3 Governance

The need to plan a legal status for self-help groups or self-help group federations is becoming increasingly obvious. In India, for example, banks objectively take risks in refinancing these groups in the absence of a clear legal framework.
The question of amalgamating self-help groups or setting up common services for these groups also needs to be addressed. No matter how well the groups function, group leaders have limited capacity to manage financial products and recurrent training needs. Technical support (financial control, MIS) is needed. In addition, groups often have difficulty in negotiating refinancing conditions directly with banks.
Several questions arise when planning the setting up of umbrella structures or common services: How will they be financed? Are the self-help groups ready to request and pay for common services or political representation (as might be needed for negotiation of refinancing conditions)? Is the whole structure – groups + umbrella structure – viable? How should its governance be organized?
In the case of bankruptcy, who will be accountable? What will be the division of responsibility between banks or a federation of these groups?

13.2.2.4 Sustainability

It seems necessary to reflect further on how sustainability can be achieved for this model by:

• strengthening information systems, notably to ensure more precise long-term monitoring of arrears;
undertaking detailed analysis of costs for the whole structure, including, for example, second-tier representation when deemed pertinent, and assessing whether or not the interest rates charged on loans will enable the system to be sustainable; and
monitoring these systems’ clientele (are they part of the poor or the very poor – or is the system used more by a well-off minority of villages?) and verifying that the products match needs. An important indicator will be client dropouts. It would be interesting to know the reasons for a high proportion of dormant groups in some areas. A 1994 mid-term evaluation report, Indonesia: Income-Generating Projects for Marginal Farmers and Landless, indicated 23% dormant groups in Indonesia in general, with 48% in West Java.

In conclusion, at this stage there is very promising scope for IFAD to further analyse and document this model in order to gain a better understanding of its success and its vulnerability, and the conditions for successful expansion or replication.

Table 11. Summary of factors affecting pilot reform programmes within state-owned banks

Strong Points

Limitations and Questions

If the pilot reforms are successful, they may have a strong demonstration effect for the state-owned bank and the national rural finance policy.

The structures concerned (e.g. rural credit cooperatives in China) have massive networks in rural areas and some comparative advantages for rapid scaling up of successful pilot programmes.

Even with successful rural finance pilot programmes, reforms risk being cumbersome and costly, with a real risk of failure. Among the difficulties to be addressed are:

– governance issues, which are generally complex;

– internal resistance, which may often be considerable (attitudes of staff and regulatory bodies, sometimes limited knowledge of the target clientele);

– products not suited to the poor clientele (e.g. collateral required for loans); lack of flexibility in procedures and products;

– lack of competent staff and executives when it comes to techniques and management; and

– a considerable volume of doubtful debts, which is a specific problem to address.

These networks’ target populations are not necessarily poor (notably when there are important requirements for prior savings, collateral, etc.).

More specifically, a number of considerations might be considered when dealing with pilot reform programmes within state-owned banks. These considerations are in part reflected in an interesting IFAD evaluation report: Thematic Study on Rural Financial Services in China.

Working initially on a pilot scale makes it possible to verify the feasibility of the reform and the system’s sustainability prospects. The “experimental” notion is also a political argument: governments may accept as experiments situations that they would probably not immediately accept on a larger scale.
Which zones or structures should be chosen for pilot reform programmes? This question was raised for the rural credit cooperatives in China, as their contexts and levels of development were very mixed. The reforms would perhaps have a greater chance of success with the best-performing rural credit cooperatives (motivated staff, dynamism), but these cooperatives are not necessarily interested in the prospect of attracting a new clientele and they are not necessarily in the rural zones concerned, which often are isolated.
Prior in-depth analysis of the strengths and weaknesses of the structure to be reformed is required, to enable the implementation of a real diagnostic study, as the starting point for project design.
Government confirmation of its strong political support for the programme is indispensable.
It is important to verify the structure’s interest in the reform and in lending to the target population, and not just to the wealthier segment, and also to analyse in detail how well the products and procedures match IFAD target population requirements, so as to help these services to develop.
It is essential to increase, to the extent possible, the accountability and responsibility of the structures affected by the reforms. This means verifying the structures’ financial interest in the reforms beyond political support. This also means that these structures, which are made responsible for borrower selection and recovery, should be able to take charge of the risk.
Providing technical support is fundamental, because this type of institution suffers from a lack of technical skills on the part of staff. Capacity-building may also be necessary for regulatory bodies.

In conclusion, the success of reforms of state structures requires prior strong political will on the part of the country concerned. In this case, it is particularly pertinent for IFAD to become involved in policy dialogue with the country, making it possible to implement the reforms successfully, define an appropriate legal framework, and remove existing constraints to microfinance in the country. When an initial in-depth diagnostic analysis confirms the local interest in attempting this type of reform, it is nevertheless preferable to proceed first with a pilot test so as to verify the experiment’s accomplishments before expanding.

13.2.2.5 NGOs and financial institutions

In reality, this is not a true model, as such, because very different realities co-exist under the appellation NGOs and financial institutions: more or less decentralized systems, different capital structures, varied levels of client participation in management, different approaches regarding savings mobilization, etc. The mixed nature of this category makes it difficult to list specific strengths and weaknesses. Nevertheless, IFAD’s experience in Asia reveals the following elements:

There is no one standard model, but rather multiple options that can be relatively flexible and adaptable. The clients’ level of participation in the methodology can take on diverse forms, including participating in equity financing, management, or loan distribution in particular contexts.
In Asia (e.g. in Cambodia and The Philippines), such NGOs’ and financial institutions’ methodologies are often based on small, progressive loans, with or without compulsory or voluntary savings components. A central or regional technical division supports the local branches or units.
Institutional considerations (financial viability, organizational self-sufficiency, legalization) are generally taken into account relatively far upstream. However, no matter what methodology is chosen, establishing a sustainable institution is a long-term task, especially in less favourable, sparsely populated or mountainous rural areas.
It is particularly important to encourage this type of institution to be demand-driven; it is sometimes tempting for them to develop very rapidly, based on only one, relatively standardized, product, to the detriment of flexibility in services and ability to adapt to changes in client needs. The risk is client dropout. It is crucial, therefore, to set up adequate tools to adapt and diversify products.
For the Grameen Bank-type of approach to solidarity group lending, as for any model, attention must be paid to the model’s replication limits and the requirements for its adaptation to local contexts.

13.3 Operational Considerations for IFAD Rural Finance Interventions

Four priority niches for IFAD interventions are identifiable, corresponding to its comparative advantages.

Work with poor populations in remote, mountainous rural areas. Intervening under such conditions presents considerable difficulties, but IFAD’s experience in Asia gives it a comparative advantage relative to other donors.
Analyse and document self-help group and community-based organization linkage experiences. Above all, it is a matter of learning lessons from the major examples of this model, notably in India, to analyse replicability in other environments. This implies conducting in-depth studies, perhaps on the oldest and most mature examples of this model (e.g. Maharashtra in India, and certain Small Farmer Cooperatives Ltd. in Nepal).
Pilot test reforms of state structures. Here, too, it is a matter of testing an original model on a limited scale and capitalizing on the experience.
Policy interventions. Such policy interventions at government level and in dialogue with all stakeholders apply notably in countries where the sector faces strong constraints (e.g. capped interest rates or other obstacles to the viability of MFIs) or where microfinance is only just emerging (Laos, Myanmar).

In this general context, and in line with its current interventions, IFAD faces a few key operational questions, discussed below.

13.3.1 How can the poor populations be reached?

Given IFAD’s focus inter alia on interventions in remote rural areas, one of its constant concerns in this region is knowing how to reach poor populations, how to verify that they are really part of the RFI client base, and whether access to financial services actually contributes to their social and financial empowerment.

Here, three key points mentioned earlier are of importance:

The surest way to offer the poor long-term financial services is to set up sustainable MFIs. The aim of attaining financial equilibrium for these institutions should be encouraged right from the start when designing programmes, and attention must be paid to avoid defining an overly narrow target that might work against this objective. For example, targeting the poorest 10% of farmers in each village is probably not viable for an MFI in a mountainous area with sparse population.
It is not so much a matter of targeting the poorest in remote areas, but rather one of proposing products that are appropriate for this target population, and planning an equally suitable mode of management for the institution, particularly regarding the extent of decentralization.
Tools to monitor the clientele, understand their needs and adapt products to better meet those needs do exist, such as client satisfaction or dropout surveys. These tools, especially those developed by AIMS and MicroSave, were described in Part I of these Decision Tools.

13.3.2 What should be the population’s participation?

In Asia, the question of people’s participation in rural financial systems is central, notably for models such as self-help groups.

As indicated in Part I, client participation can take on different forms in MFIs: participation in borrower selection; decisions to grant loans; management; ownership; etc. Rather than starting from preconceived ideas on this subject, it is appropriate to start from the awareness that the desirable level of participation is a factor of the specific context. Above all, it is vital to take into account existing social models, which should be analysed in feasibility studies.

In some countries, such as China or Viet Nam, society is organized at all levels (from local or village level up to national level), both politically (e.g. elected representatives in villages) and through the implantation of mass organizations (women’s union, farmers’ union, etc.). In such contexts, in terms of ‘participation’, one should consider that groups or associations cannot be formed independently of this pre-existing structure. While these mass organizations can play an active role in social mobilization, intermediation in selecting borrowers and in organizing credit, they are not qualified or able to replace MFIs.

When working in a decentralized manner with local elected officials, the risk is that the credit tool, which carries strong social and financial stakes, may be usurped by a few influential persons, to the detriment of IFAD’s programme target of the very poor households. To prevent this, particular attention should be paid to understanding the RFIs’ real clientele, and in particular by using the tools developed by AIMS or MicroSave, such as clientele surveys, client dropouts, etc.

13.3.3 Must one choose a model?

As indicated in Part II, it is important to remember that the approach taken when designing an intervention methodology should not be exclusive. Rather, it should consider several options and chose among them, according to what the potential partners may propose, based on their experience and knowledge. Ideally, one should retain realistic options – outside of any ideological debate – that correspond to the potential partners and the particular context.

This is all the more valid in Asia, as the main models supported by IFAD have not provided satisfactory answers and validation regarding several key aspects pertaining to governance and sustainability prospects. A potential way forward for IFAD in this context could be to capitalize on the experiences that seem the most satisfactory, and to use field studies before proposing the elaboration of similar experiments in other contexts.

13.3.4 What monitoring should IFAD implement?

Whatever the model selected, it is necessary to take into account legislation and governance issues as early as possible. In the case of self-help groups, for example, one should reflect on the need for federations and support services, and on the possibility of the cost being borne by the groups.

Planning for long-term support is all the more necessary when IFAD intervenes in relatively disadvantaged zones or in ambitious public structure reform programmes. This implies accepting a realistic time frame for the institutionalization of financial structures, which could be at least ten years in sparsely populated zones. It is also a matter of using technical assistance to support MFI capacity building rather than simply providing lines of credit.

Whatever the model, development and optimization of the monitoring tools used – financial indicators and portfolio analysis, as well as clientele monitoring – will help provide a clearer assessment of programme performance.

13.3.5 Enter into policy dialogue

In some countries in Asia, several impediments are linked to state intervention. Positioning itself as a policy interlocutor for the government, in consultation with other donors, is a real stake for IFAD in this region. Long-term dialogue with governments can make it possible to:

Lift constraints on the microfinance sector. Capping rates is often a fundamental question for some countries. It is necessary to prove to the government, both in practice and based on impact assessments or an analysis of informal sector rates, that sustainable access to financial services is often considered more vital by poor populations than the cost of these services.
Create a favourable context for a pilot reform of public structures, and follow up the demonstration effect in the case of successful pilot tests.
Lead the government to acknowledge the validity of diversity in microfinance approaches, in order to provide access to basic financial services for the largest clientele possible.

14. Central and Eastern Europe and the newly independent states

14.1 Current State of Rural Finance in Central and Eastern Europe and the Newly Independent States

The countries of Central and Eastern Europe and the Newly Independent States currently (2002) borrowing from IFAD are: Albania, Armenia, Azerbaijan, Bosnia and Herzegovina, Georgia, the Republic of Moldova, Romania, and The Former Yugoslav Republic of Macedonia. This group of countries comprises 53.3 million inhabitants, 23.2 million of whom live in rural areas and earn their livelihoods from agriculture.

The collapse of the former centralized economy and the closure of many state-controlled financial institutions left a vacuum in the provision of rural finance services. Although the past ten years have witnessed the emergence of several successful microfinance banks in the region, their operations have mainly remained concentrated in urban areas.

The poverty situation in this region is an unusual one and represents a unique challenge for IFAD. Just like poor people elsewhere, the poor in the countries of this region lack access to basic services, have a low standard of living, and feel powerless and insecure. Unlike other parts of the world, however, this situation is relatively new. Currently, the people living in transition countries attend schools and many are well educated. Until recently, they enjoyed secure employment and social benefits. Poverty reached its current level – one person in five in the region lives on less than USD 2.15 per day – only after the collapse of the communist system.

Poverty and inequality are much higher in rural than in urban areas. Despite land reforms and other important policy changes, rural incomes have remained stagnant because of limited access to inputs, technology, markets and off-farm employment opportunities, coupled with scarcity of rural credit. The main challenge in poverty reduction is to build new institutions adapted to current realities.

14.2 IFAD Rural Finance Interventions in the Region

IFAD supports, among others, two interesting types of programmes in the region. It favours the emergence and consolidation of savings and credit associations at village community level, so that they can provide local financial services to rural populations that are excluded from the classic banking system. For small- and medium-sized farms, which need medium-term investment funds and loans to access markets, IFAD provides lines of credit to existing banks, in order to facilitate their access to bank financing.

14.3 Operational Considerations for IFAD Rural Finance Interventions

IFAD could encourage a more in-depth assessment of the concepts of savings and credit associations. This initiative would also benefit other donors that have been supporting this model. In particular, the prospects of institutional and financial viability for this model could be further analysed, such as by applying CGAP’s Format for Appraisal of Microfinance Institutions to ongoing initiatives.

For existing commercial banks, the challenge seems to provide them with the credit technology and institutional capacity to reach out to some of IFAD’s client base in rural areas, including small transformation and agro-processing operations, and individual microentreprises. In this area, IFAD could develop promising partnerships with some microfinance operators that have already successfully enhanced local bank capacity to enter this market (such as international project consult). IFAD could negotiate with such partners to extend their activities in rural areas, where access to basic financial services has been scarce.

Finally, IFAD might have a role to play in supporting, in coordination with other donors, a policy dialogue with governments on the setting up of an appropriate regulatory framework for RFIs, based on the analysis and general policy recommendation reflected in Part I (Section 7.3).

15. Near East and North Africa

15.1 Current State of Rural Finance in the Near East and North Africa

Most countries in the region (with the remarkable exception of Lebanon) have a history of direct state intervention in the financial sector. The current level of intervention of governments remains generally high, resulting in important constraints on the development of sustainable RFIs because of interest rate caps and subsidized credit. In some countries, the government’s position has been recently evolving towards liberalization.

Existing community banks and MFIs are mainly concentrated in urban and peri-urban areas. The delivery of financial services to rural areas has long relied on large SOABs. However, there is consensus on the fact that these SOABs have generally failed to provide adequate financial services to the poor. The adjustment programmes launched in the 1990s reduced the resources of governments and exacerbated the difficulties of these large banks.

15.2 IFAD Rural Finance Interventions in the Region

The countries in the Near East and North Africa region currently (2002) borrowing from IFAD are Algeria, Egypt, Jordan, Lebanon, Morocco, Sudan, Tunisia and Yemen, representing USD 214.4 million in outstanding loans in 1999, of which microfinance represented roughly 40%.

IFAD’s intervention in rural finance in the region has long been through the provision of credit lines to SOABs. The cooperation with SOABs has now declined and recent programmes involving SOABs tend to focus on small-scale reform initiatives. Thus, in Algeria, a recent IFAD project encourages the pilot creation of local Caisses mutuelles de proximité out of the national, large, Caisse nationale de mutualité agricole.

Increasingly, IFAD also tends to support the provision of short-term credit through emerging specialized NGOs, while relying on SOABs for medium- and long-term lending only.

Two interesting initiatives supported by IFAD in the region should be highlighted:

In Lebanon – a country with a favourable context in terms of no direct government intervention and free interest rates – IFAD supports the establishment of a network of savings and credit associations. An interesting aspect is that two local commercial banks have accepted to refinance the savings and credit association network, not only through a secured credit line from IFAD but also with their own funds.
In Syria, IFAD is taking advantage of the recent openness of the Government to support the development of a network of small-scale credit associations in rural areas – the Sanduq network.

It must be remembered, however, that both activities are still very recent and not yet mature. In particular, the institutional model of the Sanduq network in Syria still has to be defined and its viability prospects further analysed.

Last, but not least, IFAD is actively involved in policy dialogue in several countries of the region.

15.3 Operational considerations for IFAD rural finance interventions

Based on the general recommendations in Part I (see Section 2), it might be possible to test cooperation with carefully selected SOABs, on the basis of pilot technical assistance programmes rather than through the provision of credit lines to these institutions. The recommendations and possible options highlighted in the above section may apply here.

Since very few SOABs may be ready or able to launch pilot programmes based on new rural finance practices, IFAD should consider, when possible, support to alternative rural finance models. IFAD should, however, ensure that:

Such programmes take into account at an early stage the issues of institution building and sustainability. In particular, interest rates should be set at a level that should ensure the institution’s full sustainability.
Specialized technical assistance is provided to those rural finance programmes, and, for capacity building, one should avoid relying on generalist, non-specialized NGOs.
The rural finance methodology should be carefully appraised before scaling up the programme. In-depth analysis of the strength and weaknesses of the approach should be assessed to verify sustainability prospects and set the conditions for successful expansion.

Taking into account its experience in policy dialogue in the region, IFAD may have a role to play in supporting evolution towards a more conducive enabling environment for rural finance. However, given IFAD’s limited resources, the Fund might want to concentrate on a few countries where positive evolution in the socio-economic environment seems possible in the short term.

16. Latin America and the Caribbean

16.1 Current State of Rural Finance in Latin America and the Caribbean

Five hundred million people live in Latin America, three fourths in or around urban areas, of which half are in Brazil and Mexico. The main characteristic of this region is the existence of a dual society marked by very strong social inequalities inherited from the colonial era. This applies notably to access to productive resources, and land in particular.

While growth occurred nearly everywhere in the past ten years, the number of poor and very poor people has also grown, to reach a level of slightly more than 200 million people, or approximately 40% of the region’s total population. This increase in poverty seems to have been accelerating since 1997 at an alarming rate. According to a report prepared for IFAD’s Latin America and the Caribbean Division (Quijandría, B., Monares, A., and Ugarte de Peña-Montenegro, R. 2001. Hacia una región sin pobres rurales.), the rate of increase in poverty has been between 10 and 20% in Central America, Brazil, Mexico and Venezuela in the past four years. Thus, according to the IFAD Regional Strategy Paper: Latin America and the Caribbean, (2002), the wealthiest 20% receive 60% of total incomes, while the poorest 20% receive only 3%.

Ninety percent of rural poverty is concentrated in a few large arid and semi-arid ecosystems that cover 9 million km2, including northeastern Brazil, northern Mexico, the Pacific coasts and the central regions of Honduras and Nicaragua, as well as the Andes regions of Peru, Ecuador, Bolivia and northern Chile. Two thirds of rural populations currently live below the poverty line – some 80 million people, including 24 million indigenous peoples.

It is estimated that the microfinance sector’s outreach in Latin America in 1999 was to 1.5 million clients, or between 4 and 8% of the poor and very poor in the region.

There is a clear imbalance between microfinance’s very low penetration in the most heavily populated countries, such as Argentina, Brazil and Mexico, and its greater penetration in countries such as Columbia and Peru. The areas in which microfinance is little developed – Mexico and the Southern Cone Common Market countries – are relatively rich and have interventionist governments when it comes to financing the economy and agriculture. In other countries, microfinance has reached a level of penetration of almost 30% of poor households, although strong disparity remains between urban and rural zones. The clear implication is that there is still a large unmet demand for financial services from poor people in rural areas.

Regulated institutions now dominate the microfinance market, with 53% of the clientele and three fourths of the outstanding loan portfolio. A few large institutions and networks serve most of the microfinance sector’s clientele, such as the Foundation for the Promotion and Development of Microenterprise (PRODEM), a non-profit financial institution in Bolivia, Caisses Municipales in Peru, and Genesis in Guatemala.

The special-licence limited public PRODEM and Freedom from Hunger in Bolivia), companies using the pre-existing legal status for financial companies (CONFIA and Fondo de Instituto Nicaraguense de Desarrollo (FINDE) in Nicaragua), and banks (Bancosol in Bolivia) were created by influential NGOs specialized in microfinance. Historically, the majority of these institutions have been oriented towards a rather urban clientele engaged in commercial activities, services and processing, through the development of various individual and solidarity lending methods. Some of these institutions have, however, started to expand their activities towards rural areas (e.g. PRODEM), as part of a new “frontier” where penetration is still low compared to urban zones.

The SOABs’ overall focus on agro-export activities, as well as their usual collateral requirements, have largely excluded small-scale farmers. However, some state-owned institutions have started promising pilot microfinance programmes (such as Banco del Estado in Chile, and Banco do Nordeste in Brazil), opening up new ground for innovation and potential scaling up of programmes, if successful.

With a few exceptions, commercial banks have tended not to invest in agriculture, or else they have lent to pesticide and input merchants and to enterprises that collect and process harvests (mills, silos). Those, in turn, have sometimes extended loans to small-scale producers. However, according to the Strategic Framework for IFAD 2002–2006, “Because the amounts involved are small and the poor lack collateral, banks are usually not interested in lending to them”.

Programmes and projects and NGOs not specialized in microfinance abound, above all in Central America and the Andes. They see credit as a means to attain other objectives, such as adoption of ‘modern’ production technologies. These initiatives do not seek sustainability for the services they offer, and generally combine grants and subsidies with credit, inviting high arrears. Consequently, their activities have a tendency to hamper the development of more rigorous systems, and, in the absence of effective sanctions, they spread the idea that loans do not need to be repaid.

SACCOs do not weigh heavily in rural financing as they are, above all, urban. In the rural world, cooperatives often stagnate, especially when savings are weak and when the literacy level of their members is low, confounding self-management requirements. These cooperatives are frequently dominated by important local figures, who sometimes take advantage of their position to divert funding to their own benefit.

Community banks have sprung up almost everywhere in urban and rural areas over the past ten years, but they have limited outreach and face governance problems similar to those of cooperatives. Nevertheless, these experiments have the advantage of being more focused on clients’ needs, more frequently involving women, and reaching out to the very poor. By including their clients in management and financing credit through savings collections within the group, these organizations also play a tangible role in their participants’ empowerment and education.

Dispersed populations in marginal areas with limited economic potential, poor communications and transport infrastructure, and the low profitability of local producers facing competition from subsidized imports, have contributed to making RFIs’ operations more risky and costly. They have had difficulty in understanding the complexity of agricultural and livestock activities within family economic units and communities whose first objective has not been profit but risk reduction and food security. Yet these households form a sizeable and extremely diversified market. It is also within this group that one encounters most endogenous financial systems, such as ROSCAs and solidarity funds, which clearly indicate the existence of long and productive experience with savings and credit.

16.2 IFAD Rural Finance Interventions in Latin America and the Caribbean

With close to USD 150 million invested in the credit components of 38 projects in 22 countries in the region, IFAD is currently one of the major international aid agencies in the field of rural finance.

Until the mid-1990s, the credit components of IFAD’s programmes and projects were set up on classical lines, by which they were secondary to other objectives, notably increasing production through the adoption of new technologies that often made more intensive use of industrial inputs, such as certified seed, fertilizers and pesticides. This model relied on privileged links with public banks, who played the role of resource administrator with no financial risk, while loan attribution decisions were taken by the programme. The model was not viable, because of high levels of loan arrears. It had also little impact on the rural poor.

In recent years, IFAD has attempted to improve the effectiveness of its interventions in financial markets by learning the lessons from its wealth of past experience and taking into account the emergence of microfinance organizations, now seen as potential partners. The main changes concern:

contractual operations between local credit operators and various local institutions (SACCOs, NGOs, microfinance companies) refinanced through formal banking institutions that administer project credit funds;
loans geared more towards producer demand;
acknowledgement of the demand for services other than credit, such as transfers and savings mobilization; and
increased attention to institutional issues.

Today, programmes are centred around partnerships with a diverse group of national institutions – ministries, commercial banks, microfinance companies, NGOs, SACCOs, etc. This new approach has started to give an increasing role to MFIs, their professionalization and specialization. It emphasizes the identification of market opportunities and the need to adapt financial services to the needs of the rural poor.

The principle modes of IFAD interventions are:

Through new regional support programmes, such as the Rural Financial Services Support Programme and Technical Assistance Grant/Foundation for International Community Assistance (FINCA International) in the institutional area of rural microfinance development. The FINCA International collaboration involves: (i) examining the main obstacles, at the micro, meso and macro levels, that limit the access of RFIs to the rural poor and analysing the best way to deal with them; (ii) assessing the experience of and interactions between FINCA International and IFAD in order to explore the possibility of future joint activities, taking advantage of their individual complementary strengths and unused opportunities; and (iii) preparing for the Micro Credit Summit + 5. It is expected that the outcome of these interactions will enhance the contribution of IFAD and FINCA International to the Summit.
Through certain projects and programmes, such as the Rural Development Project for the Southern Pacific Dry Region and the Project for the Capitalization of Small Famers in the Tropical Area of the Segovias Region in Nicaragua and the Agricultural Development Programme for the Western Region in Honduras, that, in partnership with commercial banks, intervene in the refinancing of financial NGOs and SACCOs.
Through projects and programmes working through specialized public institutions, such as Banco de Fomento in Mexico, the Institute for Agricultural Development in Chili, and Banco de la Republica in Uruguay. However, some are evolving, as in Mexico, where IFAD today supports the semi-public Cajas Rurales network refinanced by Banco de Fomento.

These programmes and projects are facing difficulty with technology transfer and the ties between extension, credit and subsidy. Often, in the field, one can see use of research methods and thematic applications that are not suited to poor farmers, mainly because they did not participate in an appropriate manner in programme elaboration and implementation. Credit is sometimes tied to more or less closed sectors (coffee in Guatemala, dairy and poultry in Uruguay) where small-scale producers may be excluded from the larger commercialization circuits, due to a lack of organizations to defend their interests. Experience has shown that instead of strengthening the economic stability of rural MFIs, the above practices may make them more fragile. Three main lessons can be learned from an analysis of IFAD’s involvement in recent years:

Efficiency and access are not antagonistic, so long as one develops appropriate methods to work with the poor. The key factors are borrower selection, market opportunity and methods to encourage good repayment.
It is necessary to respond to farmers’ demands with a suitable supply, and the interested parties need to participate in the definition of this supply. Innovations are therefore necessary in response to the heterogeneous needs of the rural poor, requiring that diversified solutions must be found.
Savings mobilization is important, but should be encouraged only where appropriate and satisfying the various criteria and conditions linked to the RFI’s status and capacity.

16.3 Operational Considerations for IFAD Rural Finance Interventions

In which rural finance niche(s) should IFAD intervene? In line with its comparative advantages, the Fund has both the means and tools compatible with medium- and long-term rural finance sector development in the four main arid zones, where the marginal rural population is concentrated, and notably indigenous peoples, most of whom have little or no legal access to land.

In line with IFAD’s general and regional strategic frameworks, it may therefore be appropriate for IFAD to consider the following areas of intervention:

Contribute to extending the frontier of microfinance more decisively to the rural world. This could be done in two ways: first, by supporting the emergence and growth of financial institutions rooted in the rural world, such as community banks and others, and which are often member-based organizations, and, second, by supporting the development of existing MFI operations and their extension more deeply into rural areas. Some MFIs that developed very successful operations in urban contexts have been moving into rural areas and bringing to bear their experience, technical capacity and financial resources. They could prove promising partners in that context for IFAD programmes.
When appropriate, encourage diversification of services towards savings mobilization, at least for licensed institutions, reflecting IFAD’s overall policy in that respect. As IFAD states in Strategic Framework for IFAD 2002-2006, “Assistance needs to focus on developing professional and responsive rural finance institutions, with a strong emphasis not just on providing credit but also on encouraging savings”.
When appropriate, contribute to structuring the rural finance sector by promoting appropriate national policies and more efficient cooperation among donors and within the sector itself.
Set up effective and useful monitoring and assessment tools based on a limited number of basic indicators that will enable IFAD to better assess its present and future rural finance partners in terms of their outreach capacity, including depth of poverty outreach; institutional strengths; and financial performance.
Support the structuring of rural finance national sectors, notably through the development of national and regional networks, when feasible and where appropriate. This should be done while carefully assessing the value added by those networks to their member institutions and the type of support, services and representation functions they provide. One important factor to be assessed in that context would be the members’ readiness to contribute financially to maintaining and expanding those networks.
Support farmers’ organizations in developing and acquiring real influence regarding the economic and policy choices that concern poor producers.

IFAD faces a number of important operational questions in Latin America, which are briefly highlighted below.

16.3.1 Choosing an appropriate model

There is no single model that should be encouraged in preference to other options. Different contexts call for different solutions and for innovation. Latin America offers a very large scope and variety of successful microfinance operations, including commercial banks, financial NGOs, community banks, and pilot programmes within large state-owned banks. However, only a few of those partners have ventured successfully into rural areas. IFAD should support them and, when feasible, help them to further extend the frontier of their intervention, in line with their own strategies and capacity.

In order to strengthen the impact of IFAD interventions, care should be taken to avoid diluting programme resources among too many RFIs, by rather identifying a more limited number of rural finance partners who could benefit from more intensive support. In that context, it would be advisable to specify the size of the market that each programme might attempt to reach. Within programme zones, a few institutions could then be selected, according to their capacity and potential to provide financial services to the rural poor on a sustainable basis.

16.3.2 Programme planning and preparation

Programme identification and design may be improved in terms of better understanding local and national socio-economic dynamics, such as investment opportunities, and the needs of target populations. Based on local studies, including agrarian diagnostics that provide a clear understanding of the strategies and needs of producers, and women in particular, it may be possible to commence dialogue with them and seek financial products that closely suit their needs. These studies should adopt a multidisciplinary, socio-anthropological and socio-economic approach, and should involve the active participation of producer organizations, universities and specialized consultancy firms.

16.3.3 Strengthening the sectoral development of rural finance

In addition to interventions focused specifically on selected RFIs, IFAD – much as it has started to do in Western Africa – could envisage taking an active role in structuring and strengthening the rural finance sector. This could be accomplished by supporting these networks’ representation and exchange bodies at national and regional levels, through, for example, the Rural Microfinance Forum initiative in Latin America.

Supporting dialogue between governments and RFIs will also facilitate the emergence of appropriate national rural finance policies. Specific areas of interventions might include (i) helping to set up local and national credit bureaux; (ii) helping to disseminate and publish information on RFIs for the public, including the clientele; and (iii) undertaking studies and applied training on market behaviour, production and economic policy impact in rural finance.

16.3.4 Promoting a suitable legal framework

IFAD’s projects and programmes could often be more efficient if adjustments and improvements were made to the legal framework for rural finance, favouring the implementation of innovative institutional and technical solutions. Whether the need is for grouping local initiatives in emerging networks, external regulation and control of existing networks, or access to savings collection, legislation should be adapted to facilitate the sustainability and expansion of RFIs and their outreach to the rural poor. While reflecting the general considerations on regulation and supervision mentioned in Part I, IFAD interventions could focus on:

seeking acknowledgement of an appropriate status for new RFIs; and
preventing discrimination against RFIs in relation to banks (interest rates, conditions of operations, prudential norms, etc.).

International Fund for Agricultural Development

Enabling poor rural people to overcome poverty

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Enabling poor rural people to overcome poverty

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