Introduction
Decision Tools for Rural Finance is one result of IFAD’s decision
to operationalize its rural finance policy, as set out in the policy paper
approved by the Executive Board at its Sixty-Ninth Session “IFAD
Rural Finance Policy”. That paper identifies four key challenges
in rural finance:
- building sustainable rural finance institutions with outreach to
the rural poor;
- fostering stakeholder participation, including the poor, in the development
of rural finance;
- building a diversified rural financial infrastructure; and
- promoting a conducive policy and regulatory environment.
This manual has been designed to reflect the operational implications
of meeting these challenges. It deals directly with some specific challenges
(for instance,the role of participation in rural finance institutions)
and indirectly with others (such as the provision of loan capital versus
capacity building and technical assistance). It examines some of the core
objectives of the Strategic Framework of IFAD
2002-2006 (e.g. impact analysis. It also incorporates the main thrusts
of the Strategic Framework of IFAD for 2002-2006, and its subsequent development
into regional strategies, as elaborated by each regional division.
The manual is structured in three main parts:
Part I deals with cross-cutting issues and challenges
that apply to IFAD’s rural finance policy in general.
Part II looks more closely at formulation and implementation
mechanisms for IFAD rural finance programmes, and identifies ways
and means of addressing some existing challenges and limitations.
Part III addresses the region-specific characteristics
of rural finance. It provides a brief description of the current status
of rural finance in each region, and examines the main types of IFAD rural
finance interventions. It also highlights some operational considerations
for IFAD’s future rural finance interventions, based on the Fund’s
experience and comparative advantage in each region.
The contents of each part are considered briefly below.
Part I – Cross-Cutting Issues
IFAD’s rural finance programmes are characterized by several key,
cross-cutting issues:
- Funding agricultural needs through rural finance programmes.
How can IFAD address the funding of agriculture-related activities more
effectively through its rural finance programmes? There is considerable
documentation, and a strong consensus among donors, regarding the failure
of past government-led and subsidized agricultural lending practices.
Much less information is available, however, concerning those successful
microfinance programmes that have sustainably provided agricultural
financial services, particularly to marginalized rural households. How
can innovation be promoted in this field, and what are the key issues
to bear in mind when doing so?
- The role of state-owned banks and formal financial institutions
in rural finance. Should IFAD work with these banks and institutions,
and how? There is general consensus regarding the failure of state-owned
banks, and especially state-owned agricultural banks (SOABs), to provide
financial services to the poor. In this context, the IFAD rural finance
policy rightly advocates discontinuing the provision of large credit
lines to these institutions. However, through their large rural networks,
their ability to mobilize savings, and their fund transfer systems,
state-owned banks in principle may have a strong comparative advantage
for reaching very large numbers of poor rural dwellers cost-effectively.
In this context, is there scope for IFAD to continue working with these
institutions on a different basis? How could pilot programmes be tested,
and what are the essential conditions and requirements to be met?
- Savings and remittances. Savings have been called
the “forgotten half of microfinance”. There is growing awareness
within IFAD of the fundamental role played by savings in rural finance,
especially with regard to reaching the very poor, who may lack investment
opportunities but greatly value access to savings services. Research
and pilot programmes (e.g. MicroSave) have shown that access to safe
and flexible savings services can play a critical role in poor people’s
strategies for minimizing risks, mitigating income fluctuations and
building a small asset base over time. However, mobilizing savings implies
risk, and also places specific responsibilities on rural finance institutions,
donors and governments. This manual looks at the key issues that need
to be addressed when supporting savings mobilization.
- How to extend the rural finance ‘frontier’.
How far can IFAD extend its rural finance operations into remote rural
areas while also promoting institutional and financial sustainability?
What innovations can help IFAD extend the frontiers of its interventions
in rural areas?
- Finding a balance between funding capacity building and technical
assistance, and providing loan capital. IFAD is moving away
from projects that provide very large credit lines, toward a more active
recognition of the importance of funding capacity building and technical
assistance for its rural finance partners. However, balancing interventions
in the most effective manner still remains a challenge, and deserves
in-depth discussion.
- The role of participation in rural finance programmes.
IFAD’s rural finance policy places strong emphasis on the value
of participation both in product design and in the management of rural
finance institutions (RFIs), as a means to empower the poor. However,
the concept of participation reflects very different realities, depending
on the local context and type of RFI. The manual analyses what participation
means in the different contexts, and the way in which IFAD can reflect
the appropriate level of participation through various types of interventions.
- Rural finance policy issues. IFAD faces major policy
issues in most of its rural finance interventions. For example, at what
point should it consider designing a national rural finance strategy
as opposed to a more operational, field-oriented programme or project?
How should the Fund deal with the challenges concerning the regulation
and supervision of RFIs? How could it best reflect policy issues in
its rural finance operations?
- Impact analysis. IFAD is facing increasing pressure
to document more effectively the impact of its rural finance programmes.
Are its interventions reaching the poor and the very poor? Can one assess
the impact of IFAD programmes on the lives of its rural finance clients?
What types of impact assessment tools exist, what are their characteristics
and how can they best fit the Fund’s needs and requirements for
impact assessment?
Part II – Design and Implementation Considerations
Part II addresses the specific challenges and issues faced by
IFAD in the design and implementation of its rural finance programmes.
It starts by looking at the formulation process: What are the minimum
conditions to be met in formulation of a rural finance intervention? How
should potential rural finance partners be identified and selected, and
at what stage of programme design?
It then addresses the multiple challenges related to programme
and project implementation: How can IFAD streamline and improve
the implementation process while simplifying the monitoring operations
of its rural finance partners? How can a simple reporting system on basic
performance indicators be set up at the national level? Finally, Part
II looks at some of the operational implications of these issues for IFAD’s
relations both with its cooperating institutions and its government counterparts.
Part III – The Specific Context of IFAD
Regional Strategies in Rural Finance
Beyond the common rural finance challenges faced by IFAD as an institution
(considered in Parts I and II), Decision Tools also has the objective
of capturing the specific characteristics of IFAD’s rural
finance interventions in each region, including the broad policy
directions reflected in the regional strategies that were presented to
the Governing Council in February 2002.
Part III, therefore, reflects for each region:
- the major characteristics of microfinance and rural finance;
- IFAD’s various rural finance experiences and models; and
- operational considerations for future IFAD rural finance interventions,
based on the Fund’s experience and comparative advantages.
