A decade of IFAD’s inclusive rural finance programmes points to an innovative and catalytic future

A variety of financial services, including credit, savings, payments, insurance, and other products, can help the rural poor as they build their livelihoods and confront an ever-evolving set of economic-, social- and climate-related challenges. Indeed, when financial services are accessible, useful and affordable, they can help the rural poor invest in their households and in farm-, non-farm, and enterprise activities, allowing them to improve their incomes, nutrition, and food security.

Fortunately, access to such financial services is growing. Indeed, when IFAD last updated its Rural Finance Policy over a decade ago, the rural finance landscape looked very different to how it looks now. At that time, only 38 per cent of rural people in developing countries had an account at a financial institution. Today, this has increased to 60 per cent – and the number of accounts continues to accelerate.

The range of financial services in rural areas has also expanded thanks to a number of advances, including improved regulatory environments and financial sector infrastructures, the rapid expansion of community-based organizations, and, most recently, the advent of payment infrastructures offered by mobile money operators. While substantial pockets of exclusion remain, and many rural poor – particularly women and youth – are still unable to fully access and employ financial services, the potential for rapid growth in most countries is approaching a tipping point.

To better understand its impact and to inform the development of an updated Rural Finance Policy, IFAD recently completed a stocktake of 10 years’ worth of its rural finance programmes. This meant conducting a deep-dive analysis of 67 rural finance programmes with substantial inclusive rural finance activities across IFAD’s five regions and designed since 2010. It provided a unique opportunity to assess how IFAD’s approach to supporting inclusive rural finance has evolved and responded to lessons learned, knowledge generated, and experience gained in implementing programmes around the world.

The stocktake identified numerous challenges and opportunities for IFAD. One area where IFAD was found to be particularly effective was support for incremental innovations, particularly those related to the development of community-based financial institutions, livelihood development and value chain finance. While some funders prioritized disruptive innovations, IFAD’s approach to innovation focused on how services can be improved gradually, with the customer and the community at the center.

IFAD has also developed new instruments to catalyze innovation from the private sector. Through innovation and outreach facilities used to great effect in Malawi and Zambia, for example, IFAD has offered matching grants and challenge funds to incentivize financial innovation by private and community-based financial services providers on a competitive basis. These grants supported piloting and scaling new financial services models to more effectively reach poor rural people. Additionally, through more recent private sector activities such as the ABC Fund, IFAD is catalyzing new ways for financial service providers and value chain companies to raise capital and strengthen smallholder supply chains in the process.

Rapidly changing market contexts often require a level of flexibility that can challenge IFAD’s capacity to respond. The stocktake identified several instances in which IFAD successfully adapted to change, including its quick and effective support for financial services during the Ebola crisis in Sierra Leone and Liberia and the political crises in Mali (especially in terms of liquidity support to lending operations). Here, it is worth noting that the need for flexibility and increased innovation will only grow as rural communities and their food systems face greater uncertainty due to climate change and evolving market forces.

Looking ahead, the complexity and speed at which innovative financial solutions are often developed, particularly by emerging fintechs, are expected to challenge IFAD’s capacity and processes. Long investment cycles may work for collaborating with larger commercial banks, but will be less effective for adapting to the rapidly changing product development needs of newer players.

The key recommendation emerging from the stocktake notes that, as IFAD moves into a new cycle of inclusive rural finance programming and expands private sector activities, it must innovate on its past successes – be it in community based financial organizations or value chains – while catalyzing emerging products, services, and distribution channels through sovereign and non-sovereign operations.

As a global leader in inclusive rural finance, how IFAD supports innovation and catalytic efforts – its own and those of its partners – will prove critical to helping small-scale farmers and entrepreneurs respond to environmental and climate-related challenges and rebuild after COVID-19. Access to and use of existing and emerging new inclusive rural finance will play a substantial role in this objective, and will support farmers and their households in becoming more resilient to the challenges that they face – and more able to invest in themselves, their farms and their communities.

Publication date: 01 July 2021