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.