More than a billion poor people lack access to the basic financial services which are essential for them to manage their precarious lives.
Despite well documented and positive impact on the livelihood on the rural poor, rural finance should not be considered as a panacea for poverty reduction. It is but one of several important areas for investment in poverty reduction, and its impact is fully felt only when conducive policies are in place, markets are functioning, and non-financial services are available. The poorest of the poor and destitute, i.e. those without income, may be more effectively reached through income transfers, safety nets and improved social infrastructure. Rural Finance Policy Papers and the Decision Tools In 2000 IFAD finalized and presented the Rural Finance Policy Paper to its Executive Board. The paper identifies the four major policy themes as:
Following the approval of the Rural Finance Policy, the Executive Board requested to “operationalize” the policy into a set of guidelines/decision tools. The Rural Finance Decision Tools paper was presented in December 2002 to the Executive Board. This document translates the broad directions of the Policy Paper into concrete operational recommendations, in order to support the formulation and monitoring of new (and existing) programmes, and to provide guidance on technical issues related to rural finance. The Document is divided in three parts: Part I underlines some key cross-cutting issues that characterize IFAD RF interventions Part II addresses the specific challenges and issues faced by IFAD in the design and implementation of its RF programmes: For example: how could IFAD strengthen the implementation process while simplifying the monitoring of RF partners‘ operations? How could simple reporting system on key performance indicators be set up? What type of key performance indicators should be monitored? How to move from a project approach to a contractual approach? What are the implications for IFAD' s relation with its Cooperating Agencies, as well as its government counterparts? Part III analyzes the specific context of
IFAD RF operations in each of its Geographic Divisions. Beyond the common
RF challenges faced by IFAD as an institution, (reflected in Parts I and
II), the Decision Tools are trying to capture the specific characteristics
of IFAD’s RF interventions in each region, as well as options for
IFAD future RF interventions, based on its experience and comparative
advantages. The implementation of IFAD rural finance rests with the Geographic Divisions. The Technical Support Unit, that comprises several Technical Advisors in key areas of IFAD interventions (rural finance being one of them), is providing on-going support to the geographic divisions in this context. Beyond the existing Policy Paper and the Decision Tools, IFAD has also engaged in recent initiatives that have had an important impact on its operations. IFAD participated to the Donor Peer Review in June 2002, with CGAP and other donors. The review helped to highlight some of the core challenges faced in operations. The Letter to Management that followed this review has been made public, and is available on this website as well on that of the Consultative Group to Assist the Poor. The letter underlines some key areas where IFAD should focus its attention. These are reflected in an action plan, among them, three have important operational implications: (i) Improving the quality and accuracy of performance reporting on RF projects (through a few carefully selected indicators); (ii) Strengthening IFAD technical monitoring capacity in the field, (which is an important challenge since IFAD has no field office structures, contrary to other donors), (iii) Strengthening the competence of IFAD human resources in the area of rural finance, through carefully designed training both for HQ and field staff. Funding and Geographic Allocations 1. Size of the Rural Finance Portfolio The table below provides a summary description of IFAD rural portfolio (both stand- alone or components of larger RD projects), with recent evolution and breakdown per region. Data relate to September 2003.
Although there has been a slight diminishing in of rural finance as a percentage of total loan portfolio, over the past 2 years (34 to 30%), RF remains a major part of IFAD interventions. 2. Type of models and approaches promoted in IFAD RF portfolio IFAD RF projects are very diverse, and the approaches used vary greatly between regions. The table below presents a brief summary of the types of institutional models reflected in IFAD RF interventions: Asia Western / Central Africa Eastern / Southern Africa Eastern Europe / CIS North Africa / Middle East Latin America IFAD’s Rural Finance Interventions in West and Central Africa Traditionally, in West and Central Africa, IFAD’s portfolio contained mainly integrated rural development projects with agricultural credit components. Experience in this region has led IFAD to change this approach and entrust the rural finance project components to operators or decentralized financial systems, as well as to support the institutional transformation of rural finance partners into formal, decentralized financial systems. The new generation of IFAD projects in West and Central Africa can be classified in two categories: a) Projects to Support the Emergence or Development of a Decentralized Financial System:
b) National Microfinance Sector Support Programmes, with the following orientations:
IFAD’s Microfinance Interventions in East Africa Since the early 1990s IFAD has changed its focus from promoting subsidized credit through agriculture development banks, to increasing access to financial services (including savings) through a variety of institutional models (with a focus however on member-based systems). IFAD has been promoting the deepening of financial intermediation in rural areas, through the promotion and articulation between various types of institutions, while helping set up conducive environments and policy frameworks. This new orientation is reflected in IFAD’s regional strategy which aims to “enable the rural poor to overcome their poverty”. The regional strategy recommends (a) helping small farmers develop their own savings and credit organizations, (b) identifying viable forms of coordination with the formal financial sector, and (c) facilitating direct access to financial institutions by some small producers for medium- and long-term investment needs. The present IFAD RF programs are characterized by three aims: developing local rural finance institutions, improving the legal and regulatory framework, and coordinating with commercial institutions. This is the case for recently approved programmes in Tanzania (2000), Ethiopia (2001), and Uganda. In the Asia region, IFAD has been supporting a great variety of approaches, most of which can be classified into three general categories:
IFAD interventions have often targeted remote rural areas (mountainous
areas where ethnic minorities are predominant). IFAD also has developed
an in-depth experience with the self-help group / bank linkage model in
India, and is planning further support to test models that will strengthen
its institutional and financial sustainability. Additionally, IFAD has
undertaken a pilot project to support the reform of some Rural Credit
Cooperatives in China, where it is trying to address some of their core
issues and challenges. The main objective being to develop sustainable
outreach to the rural poor. IFAD’s Rural Finance Interventions in Central and Eastern Europe IFAD supports, among others, two interesting types of programmes in the region. It favors 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 banking system. For Small and Medium Farms, who need medium-term investment funds and loans to access markets, IFAD provides support to existing banks, in order to facilitate the availability of bank financing. Within the region, IFAD sees the potential to encourage a more in-depth
assessment of the Savings and Credit Associations (SCAs) model, in particular
regarding the prospects of its institutional and financial viability.
As for existing commercial banks, the challenge is to provide them with
the credit technology and institutional capacity to reach out to some
of IFAD’s client-base in rural areas (small transformation / agro-processing,
individual micro-enterprises etc…). IFAD’s Rural Finance Interventions in the Near East and North Africa As is the case in the East Africa region, IFAD’s intervention in RF has moved away from supporting Agricultural Development Banks and recent projects now tend to focus on small-scale reform initiatives. For example, in Algeria a recent IFAD project encourages the pilot creation of local “Caisses Mutuelles de Proximité” out of the national “Caisse Nationale de Mutualité Agricole”. Increasingly, IFAD is supporting the provision of financial services
through emerging specialized NGOs. Two interesting initiatives supported
by IFAD in the region may be highlighted here. In Lebanon, IFAD supports
the establishment of a network of SCAs that are refinanced by two local
commercial banks. In Syria, IFAD is supporting the development of a network
of small credit associations in rural areas - the ‘Sanduq’
network. IFAD’s Rural Finance Interventions in Latin / Central America Traditionally, the credit components of IFAD’s projects were set up according to the classical concept by which they were secondary to other project objectives. This model relied on privileged links with public banks that played the role of resource administrator with no financial risk, while loan approval decisions were taken by the project. The model proved unviable because of high levels of loan arrears. It had also little impact on the rural poor, since most of the loans were made to the wealthier farming community. In recent years, IFAD has shifted towards supporting the emergence of diversified microfinance organizations that provide diversified financial services. This is being undertaken primarily in two ways: (i) by supporting the emergence and growth of financial institutions rooted in the rural world (community banks and others), and which are often member-based organizations; and (ii) by supporting the development of existing MFI operations more deeply into rural areas . At the policy and sectoral level, IFAD’s objective is to help promote the adoption of appropriate national policies and build more efficient cooperation among donors, and within the sector itself. Some Lessons Learnt From IFAD’s Experiences To Date (i) Promote institutional diversity while maintaining clear focus on sustainability: Providing financial services in rural areas on a significant scale may not be achieved easily through the "classical" microfinance model. This challenge calls for new institutional set ups and delivery mechanisms. These may range from using (i) large branch networks of established institutions (directly or indirectly through local intermediary settings), (ii) member-based systems (i.e financial cooperatives) or (iii) very decentralized and low cost structures (village bank type). Financial services might even in some cases be provided through non financial intermediaries (in out-grower schemes for example). This variety of models calls for renewed thinking on the application of the concept of sustainability. The objective however remains the same: to provide clients with sustained access to financial services, ensure that the model has the capacity to grow over time on a sustainable basis, and that it has an appropriate governance structure. (ii) The role of savings and other financial services, beyond credit: Although saving mobilization is important for microfinance in general, it plays a special role in rural finance. Propensity to save in different forms is often high in rural areas; a large percentage of the potential client base may value access to safe and flexible saving services more than credit. Savings may also help strengthen local ownership for decentralized and member-based organizations. However, the required conditions for promoting safely saving mobilization from the public should be carefully assessed first (legal status on the institution, supervision etc…). Other services such as remittances and transfers are especially important in rural areas, and should be actively promoted when feasible. (iii) The importance of the appropriate enabling environment: It is very difficult to establish a sustainable rural finance programme in a legal, regulatory, and/or financial environment that hinders financial sustainability (i.e caps on interest rates), inhibits the decision making ability of management, or overburdens it with inappropriate rules and reporting requirements. Host governments have an important role to play in establishing the appropriate enabling environment for rural finance, and it is donors and practitioners' responsibility to raise these issues with the governments before proceeding with the proposed programme. (iv) The need to Focus on Long-Term Results: It is important to take a long term view of any rural finance programme, and understand that it may take a much longer time to achieve success in terms of outreach and operational sustainability . It is also often more costly. Moreover, the implementer must not be pressured to undertake certain activities, or expansion, just to meet the donors’ own goals. (v) The Importance of Carrying out a Candid Feasibility Analysis: One should ensure that the proposed area of operations is conducive for a rural finance programme before proceeding with implementation. This includes assessing whether the minimum conditions are met for a sustainable intervention, including a sufficient underlying demand for financial services (minimum population density and level of economic activity), an acceptable local credit culture, existing partners that are already present or interested to extend their activities in the project area. Many of the failed rural finance programmes are the result of rapidly responding to a perceived “need” for finance, without thinking through what this implies. (vi) Selecting carefully the rural finance partner and support its strategy (within the broad objectives of the donor). Experience has shown that the success of most micro or rural finance operations is first of all due to the quality of the partner selected rather than the donor project design. It is therefore important to strengthen the ownership of the strategy implemented at the level of the partner selected, and enforce accountability through simple performance-based monitoring. |
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Rural
finance is considered by IFAD as a vital tool in poverty reduction and
rural development. Two thirds of IFAD’s current projects
have a rural finance intervention. Most of IFAD’s target groups
are small producers engaged in agricultural and non-agricultural activities
in areas of widely varying potential.Experience has shown that direct
access to financial services affects the productivity, asset formation,
income and food security of the rural poor.