Issue 4 - May/June 2005
In this issue
Message from the Director
Microfinance is firmly established as a cost-effective approach for poverty reduction, including rural poverty. Because microfinance builds on self-help principles as well as on social capital foundations, it is proving to be sustainable as well.
Experience worldwide shows that when microfinance services reach women, the benefits are particularly sustainable. Saving rates are higher; group-life is more intensive; repayment rates are remarkable; enterprise growth and graduation is stronger; and there are measurable improvements in child nutrition and education, family health, household sanitation and shelter, and general household welfare.
The impact of microfinance has allowed the microfinance institutions to grow, to become financially robust, to mature in terms of governance, ownership and management, and to obtain solid ratings. The challenge now is to develop sustainable microfinance systems, enabled by inclusive rural finance market policies within a sound financial sector policy context. In addition to savings and credit, these systems would offer a wider range of microfinance services including agricultural microfinance, microinsurance and intermediation of remittances. In partnership with other stakeholders, local and international, governmental and non-governmental, bilateral and multilateral, public and private, IFAD continues to build on its experience, replicating and scaling up. This microfinance business is one example of South-South transfer of technology and knowledge.
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Working with the Government of China to implement bank reform for rural poor people
Poor farmers in remote areas of western and central China lack access to the basic financial services that are essential for them to improve their livelihoods. Increasing access by the poor to financial services and markets is one of IFAD's strategic objectives; the organization uses rural finance to fight rural poverty and promote rural development. Experience has shown that direct access to financial services improves rural poor people's productivity, income and food security at the same time as promoting asset formation.
Formal rural finance in China is usually provided by the Agricultural Bank of China , the Agricultural Development Bank and Rural Credit Cooperatives (RCCs). RCCs, established in 1950, have been identified as institutions that have the potential to deliver credit and microfinance services to the rural poor more effectively. Because they are present in villages through branches and offices, they have the widest outreach among rural populations. Since 1996, following the Government's decision to reform the rural finance sector, IFAD has been providing credit and other financial services to rural poor women and men through RCCs.
However, in the past, operations and policies have raised concerns about the solvency and governance structure of RCCs and have jeopardized their sustainability. As a result, the Government has introduced several innovations in the rural finance sector in order to increase poor farmers' access to financial instruments. These are currently being tested on a pilot basis.
Improving the performance and outreach of RCCs and adding financial products with a focus on poverty alleviation are key measures for developing sustainable rural financial services in China . Within the framework of the rural finance reform, IFAD has been continuously supporting the RCC system.
With its new Rural Finance Sector Programme, which is expected to be effective in 2005, IFAD is stepping up its support for the reform. The programme is financed by an IFAD loan of about US$15 million on highly concessional terms and it will be implemented by the China Banking Regulatory Commission and the RCC system in Shaanxi and Chongqing provinces.
The programme will assist the Government to:
- strengthen the efficiency and sustainability of RCCs
- define RCCs' policies by taking their impact on both poverty reduction and institutional sustainability into account
- provide technical and managerial support to RCCs to supervise and improve their performance
In supporting policy reforms, the programme will focus on promoting lending policies that increase the access of rural poor people to RCC lending, and on institutional and operational policies that enhance the efficiency of the cooperative bank system and contribute to its financial sustainability.
The programme will focus on interest rate liberalization, microfinance, group lending and special loans for women. It will also provide incentives for RCC staff and opportunities to test institutional innovations such as changes in the legal structures of RCCs and RCC unions. The above activities will assist in transforming project-based credit support into sustainable institutional capacity-building.
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Providing financial services to small and marginal farmers in Bangladesh
IFAD has been active in the microfinance sector in Bangladesh for over 20 years and today remains one of the most engaged donors in the sector.
Microfinance NGOs in Bangladesh have been extremely successful in getting credit to the rural poor, thus creating employment, alleviating poverty and empowering women. However, most NGOs have largely limited their lending to functionally landless households owning under 0.5 acres of land. Importantly, small and marginal farming households, owning between 0.5 and 2.5 acres of land, continue to have very limited access to credit from both NGOs and banks.
Development partners agree that one of the most important gaps in the rural finance sector in Bangladesh is the absence of a viable system for delivery of financial services to small and marginal farmers. There are some 6.4 million such farmers in Bangladesh, and they operate 37 per cent of the total agricultural land. With strong links between agricultural growth and the non-farm rural economy, and with overall poverty reduction dependent upon growth in rural areas, there is a strong rationale for introducing a viable system to service the financial requirements of the farming community.
A number of IFAD-funded projects have attempted to provide credit for small and marginal farmers in Bangladesh . The mechanisms for credit provision in these projects have been problematic both in direct lending by banks to farmers and in wholesaling funds from banks via NGOs. Recognizing the need for innovation in this area, IFAD has been reviewing the lessons learned from agricultural credit projects in the country, and preparing concepts of possible institutional approaches to deliver a more viable system.
The most promising concept was to involve the Palli Karma-Sahayak Foundation (PKSF), one of the world's leading autonomous microfinance apex institutions, as a wholesaler of credit to NGOs, for on-lending to farmers. In August 2003, the PKSF Board approved a concept paper for such a project. Subsequently, a US$20 million project was designed in close partnership with PKSF and the Government of Bangladesh, and approved by IFAD's Executive Board in December 2004. The Microfinance for Marginal and Small Farmers Project paves the way for a genuinely new institutional approach to delivery of financial services to small and marginal farmers in Bangladesh.
The project will also enable PKSF partner organizations to innovate through testing new approaches in the delivery of financial services to farmers. Innovations may include:
- extending the grace period before repayments start
- extending the period between repayments from weekly to fortnightly, monthly or even quarterly
- requiring regular payments of service charges only during the first part of the loan period, followed by a series of repayments of both service charge and principal (“balloon loans”)
- offering seasonal loans with lump sum repayment at the time of harvest
During project implementation there will be regular opportunities for partner organizations to share experiences and to learn from each other about the successes and failures of different approaches. It is envisaged that, once proven successful, these new approaches to the delivery of financial services to the farming community would be scaled up with support from PKSF and the development community.
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MIX Market helps IFAD monitor rural finance investments
IFAD recognizes that transparency in performance reporting is a prerequisite for effective results-based management. IFAD's Strategic Framework 2002-2006 calls for rural finance performance to be better monitored and this was also a main finding of a 2002 microfinance donor peer review by the Consultative Group to Assist the Poor.
In December 2004, IFAD therefore decided to develop a partnership with the Microfinance Information eXchange( MIX) Foundation , and introduce this performance-reporting platform to the rural finance institutions (RFIs) it supports. The capacity to capture simple outreach and performance indicators related to rural finance projects is now acknowledged as a key factor in IFAD's successful microfinance interventions.
The MIX Market is a web-based platform where microfinance institutions (MFIs) such as donors and social investors, and supporting institutions such as RFI federations, service providers and rating agencies, can post their institutional profiles and basic performance indicators. By participating in the MIX Market, these institutions have thus created a virtual marketplace for the microfinance industry, which has enhanced the flow of funds and technical assistance to MFIs through increased transparency and improved reporting standards.
IFAD's Results and Impact Management System (RIMS) uses the same rural finance indicators as the MIX Market, which means that key RIMS indicators can be easily found on the MIX site. In addition, reporting to the MIX Market helps IFAD-supported RFIs increase their visibility to other donors and social investors, compare their performance, and highlight funding and technical assistance needs.
The pilot project Innovative Monitoring of Impact through the MIX, launching the partnership between IFAD and the MIX, was funded through the Initiative for Mainstreaming Innovation. It sensitized programme management units and rural finance partners to the advantages of reporting on the MIX Market. During the pilot phase, partner RFIs within IFAD projects that had the potential to report on the site were offered training and support to help them deliver the financial performance information needed. As a result of this pilot initiative, reporting on the MIX provides the standardized information required by donors.
The next step will build on the momentum of the pilot phase and scale it up to all regions. A number of RFIs were not able to produce the necessary data within the time frame of the pilot phase and will require continued training and capacity-building. In the scaling-up phase, long-term partnerships will also be developed with regional and national microfinance associations that can provide training, as well as assistance and technical backstopping to involve RFIs in the MIX Market.
The ultimate goal is to completely transform IFAD's rural finance monitoring system and to fully mainstream the use of the MIX both at headquarters and in the field. In Asia , some major IFAD rural finance partners already report their performance through the MIX. These include XAC in Mongolia and CARD in the Philippines . The scaling-up phase will target rural finance institutions in IFAD programmes in Asia, for example in India, that show strong potential to report through the MIX in the future, and will help programmes that are less ready to report to be able to do so in the medium term.
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