Interim evaluation

Purpose and objectives of the evaluation

The overall aim of the evaluation was to review the implementation performance of those IFAD-financed projects in Tanzania containing rural financial services/credit (RFS/C) components, and to draw up recommendations and lessons learned based on the evaluation for IFAD's future RFS/C operations in Tanzania and elsewhere. As a result, the evaluation focused on three projects/ from IFAD's overall project portfolio in Tanzania. The evaluation also took stock of the evolving structural changes in the economy of the country, which has embarked on liberalisation programmes aimed also at reducing the role of the government in economic activity, while simultaneously encouraging private sector-led development. The evaluation exercise was timely given that IFAD is in the early stages of designing a new project in Tanzania with a RFS/C element.

Country background

The islands of Zanzibar, Pemba and Mafia together with the mainland comprise the United Republic of Tanzania. The total land area of the country is 883,749 km2. The population as of mid-1996 was 30.6 million, with Dar es Salaam being the city with the largest population (around 1.4 million people). The climate is tropical on the coast, and semi-temperate inland. The country gained full independence in December 1961.

From independence till around the mid-1970s, the annual Gross Domestic Product (GDP) growth averaged 4.7%. After the mid-1970s due to a series of factors, the economy started to stagnate. However, the government persisted with its economic policies implemented since independence, based on the socialist system of government, including control and direct state intervention and investments in all sectors. By mid-1980s, the country suffered serious macroeconomic imbalances, including high inflation, persistent government budget deficits, declining per capita income and generally a very poor state of the economy. The consequences were many, most visible of them being wide-spread and acute poverty. Tanzania was obliged to seek external assistance. In 1986 it embarked on structural adjustment efforts and borrowed from the International Monetary Fund (IMF) to support economic recovery programmes, whose thrust was to implement a transition from state-control and central planning to reliance upon market forces and private initiative. Reforms included the civil service, financial sector, parastatals and the introduction of multiparty politics.

Economic performance over the reform period has been mixed. According to 1985 base figures, the average annual growth rate was 3.8% over the four years to 1995. This puts increases in real GDP marginally ahead of the population growth rate, but real income per head has been growing by less than a percentage point annually. External assistance and foreign earnings from export recovery allowed imports to recover well. But the fiscal deficit and inflationary pressure have persisted. The current account balance has remained weak. Agriculture is the principal determinant of overall growth. The sector has grown more or less in step with the rest of the economy over the past decade and its share in total value-added has remained close to 55%. Recorded manufacturing growth has been poor - in 1995 real manufacturing value added was 13% down on 1990. Mining more than tripled its contribution between 1990 and 1995, averaging 27% annual growth in real terms. Tourism is making an increased contribution to GDP. However, after nearly a decade of more or less continuous structural reform, Tanzania continues to be among the most aid-dependent states in Africa and receives some USD 1 billion gross in development assistance annually, upon which economic recovery is almost totally dependent. The long-term policy goal is to ease this dependence.

The financial sector and institutional setting

For most of the period since independence the Tanzanian financial sector was mainly government-owned with pervasive government interference in the financial system. Credit was directed on the basis of government priorities without regard to credit-worthiness, and banks were convenient agents of fiscal policy. The system allowed a single institution to have virtual monopoly in its functional area: the state owned National Bank of Commerce (NBC) monopolised commercial banking in Tanzania. Government restrictions on entry as well as sectoral and functional specialisation reduced competitive pressure. As a result competition has largely been absent. The financial system was also characterised by weak banking supervision. Each institution was governed by its own stature and the Bank of Tanzania's (BOT) supervisory role had been limited. Finally, the environment in which the formal financial institutions operated was also regulated by the state. Credit was allocated administratively by the BOT which established legal ceiling in bank lending and deposits in addition to regulating interest rules. In the prevailing environment, the financial sector's performance was very poor. Savings mobilisation was neglected. Loans to parastatals increased, and no pressure was applied on borrowers to repay their loans. The Government of Tanzania's (GOT) policies resulted in over-staffed and inefficient banks. These loan policies led in 1988 to 70% of NBC's loan portfolio to be in arrears and 95% of this was accounted for by parastatals. The Cooperative Rural Development Bank's (CRDB) rural sector loan portfolio was no better, with 66% of its loan portfolio in arrears as of end 1988. With a non-performing loan portfolio and unable to attract deposits, the formal financial sector was bankrupt, and dependent on financing from the GOT.

GOT reformed the financial sector in 1991 and established the Banking and Financial Institutions Act. Banks were restructured and many of them privatised. Interest rates were also liberalised, and financial operations were to be conducted on a more commercial basis. Along with banking de-regulation, the Cooperative's Act of 1991 was passed which authorised the re-structuring of the Cooperative movement and permitted the establishment of the Savings and Credit Cooperatives (SACCOs). Non-Governmental Organisations (NGOs) also started micro-credit operations in Tanzania. Currently, NGO's are financing approximately 18,000 micro-entrepreneurs. The two largest programmes are run by Pride Africa, with 9,000 members and Juhudiya Akina Mama Scheme managed by MEDA, with 4,000 members.

The legal and regulatory framework

The Banking and Financial Institutions Act of 1991 vested powers on licensing, supervision and regulation of banks and financial institution on the BOT. These powers are further consolidated under the 1995 BOT Act. Hence, BOT are responsible for regulation and supervision of formal financial institutions, including community and cooperative banks. However, supervision and regulation of SACCOs is the responsibility of the Registrar for Cooperatives, who operates through the Regional and District Cooperative Departments. These Departments have very low capacity to undertake such tasks, part of the problem being that they are very much under-funded, and lack equipment and transport to implement their functions satisfactorily. This has resulted in poor supervision, including weak accounting and monitoring standards.

Project implementation

Summary

Based on the objectives of the evaluation, only the implementation performance of the RFS/C components and related issues was reviewed. The credit components in all three projects under consideration were difficult to implement. This is due to a series of inter-related shortcomings: (a) inadequate government policies, including a history of directed credit; (b) lack of appropriate management and capability of the banks involved in credit operations, reflected in low professional competence and skills, inappropriate accounting and financial procedures and limited monitoring/supervisory capability; (c) overall mismanagement, high transaction costs, large non-performing loan portfolios, which contributed to liquidity problems; (d) nearly non-existent links with grassroots level, thus making credit uptake by IFAD's target group extremely difficult; and (e) slow ongoing restructuring of the concerned financial institutions and operating environment. With the overall banking system functioning below par, only a small fraction of credit funds have been utilised (for the three projects jointly, only 6 percent of envisaged credit funds have been disbursed). The three main lending institutions in Tanzania have a poor track record in general, especially in rural credit operations: (i) the CRDB was restructured in 1996 and it is now operating as a commercial bank. Following its restructuring, the bank has not been active in rural lending, although there seems to be an interest on its part to participate in micro/rural credit, mainly as a profit-making bank; (ii) the NBC has been restructured leading to the creation of a National Microfinance Bank (NMB); and (iii) the Peoples Bank in Zanzibar (PBZ) is undergoing reform in order to make its operations more responsive to the needs of micro-borrowers. However, the emergence of national banks and commercial banks in the microfinance sector is constrained by a lack of expertise in microfinance, banking regulations with respect to collateral requirements, a legal system and credit culture that do not support repayment, and the concern with profitability of a retail operation which relies on small amounts, and in many cases, low volume.

To boost its credit operations, IFAD, in close consultation and cooperation with the government, embarked on alternative arrangements for providing credit to members of IFAD's target group, which involved the use and promotion of grassroots level institutions. More specifically, under the Smallholder Development Project for Marginal Areas (SDPMA), a pilot activity involving the formation and training of SACCOs started in June 1996. SACCOs are a very simple form of financial institution, which fit well with the socio-economic milieu of the rural poor and the poor community as a whole. Hence, they are better placed to innovate and develop indigenous financial products relevant to the communities they serve.

With their emphasis on lending, mobilising savings and management at local level, SACCOs appear to be a very promising mechanism for delivery of financial services to the rural poor throughout the country. In view of their proximity to their clients, the operating and transaction costs of SACCOs are relatively low. Further, being organisations formed by beneficiaries themselves, the latter feel a sense of ownership in their respective SACCO and, hence, ensure that operations are conducted according to established criteria and procedures - this has resulted in more effective operations mirrored also in reduced risks in lending and repayments. Finally, SACCOs are democratic institutions where members have a voice in the policies of the SACCO, particularly regarding the setting of interest rates on savings/loans. In all, more than 100 SACCOs have since been formed in the area where the Southern Highlands Extension and Rural Financial Services Project (SHERFSP) is operating, and they appear to be performing well. Several of these SACCOs have operated under the project. In Zanzibar around 40 SACCOs have been registered, although none participated in the Smallholder Support Project in Zanzibar (SSPZ).

Smallholder development project for marginal areas (SDPMA)

Under this project, the first loans were not made till 1992, when a total of Tshs 38 million were initially provided to the CRDB for onlending. However, only Tshs 9.48 million were provided as loans to 147 participants in the Bahi rice irrigation sub-project in Dodoma region. Borrowers were unsatisfied with the loan product, as CRDB provided a twelve month "bullet" loan, with principal and interest repayable as lump sum at maturity. The cash cycle of the loan did not follow the cash cycle of the crop planted. Savings mobilisation was very low and interest rates charged were commercial rates, which was unrealistic also in view of the type of activities the credit was intended to support. Loan supervision and monitoring was very weak, contributing also to low repayment rates, which were around 67.5%. Further, CRDB credit modalities changed during project implementation confusing clients and discouraging potential beneficiaries. In view of the shortcomings with its initial credit operations, in 1994-95 CRDB used a different method for lending, that is the group lending approach. For this purpose, CRDB used the cooperatives as a loan distribution tool to farmers. The cooperatives were responsible for approving each member's loan, and for this an agricultural officer would visit each site to review individual borrower's activities. Once more, CRDB offered a single loan product; a twelve-month "bullet" loan, with principal and interest payable at loan maturity. In this round of operations, a total of Tshs 8.9 million was disbursed. However, no principal repayments have been received due to several factors including: late rains and hence poor harvest; cooperatives selected for loan distribution were newly formed following the Cooperatives Act of 1991 and lacked cohesion and commitment; CRDB staff were not aware fully of the composition of members of the cooperatives; and a pervasive lack of credit culture.

Given its overall poor performance, CRDB withdrew from the project in 1996, and SACCOs were used from this point to channel SDPMA's credit for the remaining period of implementation. SACCOs provided a better opportunity for promoting rural financial services, also because transaction costs were much lower and savings mobilisation improved. In this setting, loan size and repayment terms were linked to the type of activity financed, and no downpayment was required for loan uptake.

Smallholder support project in zanzibar (SSPZ)

The credit component under this project was not implemented till February 1996, even if the project was declared effective in March 1991. This was because the Peoples Bank in Zanzibar (PBZ), the institution selected for channelling the credit, did not comply with the conditionality of IFAD's credit line, namely the provision of audited financial statements, achievement of a debt-equity ratio of 5 to 1, and a profit on loans of at least 1 percent. Around end 1995, PBZ initiated a major operational and organisational restructuring exercise to streamline its activities, a process which was still underway during the evaluation mission. Anyhow, PBZ did ultimately become operational under the SSPZ but has only made 20 loans amounting to USD 50,000. Repayment rates in mid-1997 was a mere 35 percent. The credit programme is obviously not cost-effective, also because the cost of lending was around Tsh 1.20 to every Tsh 1.0 lent. PBZ did not have sufficient capacity to handle such a credit line. Staff skills were inadequate, loans were often advanced without appraising the activity for which credit was demanded, savings mobilisation was nearly nil, loan monitoring and supervision were sub-standard, and recovery rates were exceedingly below acceptable levels. Additionally, the loan application process was lengthy, repayment terms considered harsh and loan ceilings regarded too low (only two types of loans were permitted: a short-term working capital loan up to USD 100 was to be made available to individuals and a medium-term loan of up to USD 1500 could be made to groups of USD 300 to individuals). Finally, political interference in the loan approval process also created further difficulties in implementation.

Southern highlands extension and rural financial services project (SHERFS)

At appraisal, the project envisaged a double track approach to rural financial services: (a) loans would be made through CRDB under the direction of the Ministry of Agriculture and Cooperatives (MOAC); and (b) the Ministry of Community Development, Women and Children (MCDWC) would provide institutional facilities for the formation of groups to mobilise savings.

As far as implementation is concerned no loans were made through the formal banking system. CRDB withdrew from the project and the subsequent subsidiary loan agreement signed with the NBC did not materialise, because of NBC's restructuring, which is still underway. However, in order to prevent a total failure of the credit activities, the Project Coordination Unit (PCU) undertook the CRDB function by recruiting four credit officers (COs) and one Loan Accounting Officer (LAO), and initiated its operations in October 1995, under what was known as the Pilot Credit Scheme. The COs were posted at the regional headquarters of the project area, whereas the LAO was posted at the PCU in Mbeya. Regional loan committees were established to scrutinise all loan applications. To initiate the flow of credit, an initial USD 100.000 (Tshs 61.3 million) was provided to PCU's Credit Management Unit (CMU), which received initially 1150 applications for input loans by November 1995. Disbursements were made to 194 informal farmer groups in kind, in the form of input packages for one acre (fertiliser, improved seeds and agro-chemicals) in all four regions (Mbeya, Iringa, Rukwa and Ruvuma) of the project.

Repayment rates are good and are over 90%. The loans being repaid were relent to 199 groups in 1996/97. The cost of lending was Tsh 0.65 per Tsh 1.00 loaned, although this is unfortunately now increasing. In general, clients were happy about this credit scheme, although some concern was expressed about the efficacy of in kind credit, saying that sometimes the loans arrived late, and some believed they could purchase the same inputs for lower prices.

Savings mobilisation has been low among other reasons, due to lack of sensitisation and institutional back up, although this is now improving. Average savings per group in project Year I was Tsh 13 448, while in Years II and III it was Tsh 5 353 and 34 671, respectively. Despite a setback in Year II, awareness of the advantages of savings by the beneficiaries resulted in a marked rise in savings in Year III. By June 1997, Tsh 58.3 million had been saved by smallholders. Despite the initiatives by the project in mobilising savings, some specific issues caused difficulties in this respect, including (i) closure of some bank branches in rural areas; (ii) decreasing trend of interest rates on deposits; and (iii) spirit of savings mobilisation are still low. In order also to facilitate the mobilisation of rural savings, the Savings and Credit Unit (SACU) promoted the development of SACCOs. As of 31 March 1997, the SACU covered 121 SACCOs with a total membership of 17768. The total savings amount to Tshs 150.2 million. Growth in the amount of savings mobilised has been steady, with the incremental savings of Tshs 44.6 million in FY 1996 and Tshs 13.7 million for FY 1997. However these savings have come at a high cost, with cost per shilling saved being Tshs 1.64 in FY 1996 and Tshs 3.25 in FY 1997.

Recommendations towards efficient rural financial markets and intermediation

An opportunity exists in Tanzania to further develop efficient rural financial services. There is considerable GOT ownership of the initiatives aimed at providing these services to the rural poor. The BOT has been appointed as the main focal point and the donor community has come together to prepare the basis for future multilateral and bilateral interventions. A number of studies have been commissioned which provide valuable information in relation to existing institutions and on the demand for credit. The establishment of the NMB may provide for an institution which could reach IFAD's target group. Finally, enhancing access to financial services for the rural poor entails preserving the macroeconomic environment, removing the remaining policy biases against agriculture and the rural sector, reforming the legal and regulatory framework, developing or strengthening efficient financial intermediaries, providing for capacity building measures and establishing performance indicators for evaluation.

In all three credit schemes, loan appraisal has been a major weakness. Several loans were advanced to beneficiaries starting new agricultural and business activities without them being properly, or in some cases at all, appraised. As a result, the profitability of undertaking some activities was not established in advance, which therefore did not yield expected results, thus causing concerned beneficiaries to default on repayments. It is recommended that future loans should only be approved following a thorough loan appraisal process, as this is essential for the sustainability of the credit schemes.

There has been limited donor-coordination regarding microfinance activities in Tanzania, leading to the promotion of the financial sector in a piecemeal fashion, without due regard to how projects and related activities fit into the overall strategy and framework of the financial sector. Future support needs to be programmed in close collaboration with multilateral and bilateral donors operating in the financial sectors. Cost-sharing arrangements and resource mobilisation will need to be undertaken to provide effective and coordinated development, and agencies should operate and finance those activities in areas where they possess a comparative advantage, in terms of their experience, technical capacity, strategy and mandate, etc.

Local institutions have limited experience in providing support for developing capacity within existing or new financial intermediaries. However, there are a number of regional institutions which could provide this service. Exchanges of experiences and study of best practices can contribute to the design of appropriate training programmes and curricula. It is recommended to include a capacity building component in future projects including training, and exchanges of experiences. Building up new financial intermediaries and/or supporting informal groups requires considerable capacity building measures, and involving reputed regional and sub-regional institutions for this purpose would be cost-effective.

Given the uncertain prevailing financial environment in Tanzania, it is recommended that intense efforts be made by SACCOs and other rural financial institutions to mobilise savings, which would reinforce the autonomy of the present rural financial system and increase their resources availability. In fact, this has been an area where all IFAD credit activities in Tanzania have not performed well. Savings mobilisation demonstrates group cohesiveness and their capability to work together, and must thus be undertaken as an active financial service responding directly to the various needs of savers, such as the security of funds, their confidentiality, their availability, and their role in making the savers eligible for loans.

With specific regard to the financial services under the SHERFS project, two credit programmes are being implemented in parallel, one directly through the CMU of the PCU and another through the SACU and SACCOs. This dual approach is causing increases in the overall cost of operations. Not only is the actual ratio of credit delivery to cost of delivery increasing steadily, but the effectiveness of credit is gradually being strained. Both schemes have occasionally targeted the same areas, causing undue confusion and competition. It is recommended that the two schemes be brought under one umbrella, which would not only reduce costs but improve targeting, monitoring and repayments. It may be more feasible and justified to transfer the CMU's credit operations to the SACCOs operating under the project.

IFAD's more recent experience through the SHERFS project has been quite successful, especially in terms of the operations of the SACCOs. However, it would be advisable to simplify the management of the pilot scheme and reduce its area of coverage. This recommendation is also made in view of the recent escalation in transaction costs of credit operations in the project, as mentioned above. The suggestion to use Ruvuma Region is appropriate. The Savings Mobilisation and Credit Assessment Survey being conducted by the Monitoring and Evaluation Section of the SHERFS project will provide the necessary information for the proposed reorientation.

SACCOs

The overall performance of the SACCOs has been encouraging despite some of their inherent weaknesses. Nevertheless, in view of the important role of SACCOs in rural financial services in the Tanzanian context, it may be worthwhile for IFAD to consider to replicate the SACCOs' experiences in the framework of future pipeline activities. To this end, if SACCOs are to improve, continue and expand their role in rural financial services, they need to be supported through the provision of appropriate capacity building assistance, including training and members' education on savings and credit. This would enable them to upgrade their current level of management, resources, skills, accounting/financial knowledge, assets and overall operating procedures, which would in turn contribute to their sustainability, and make them more effective and efficient.

SACCOs financial linkages with formal financial institutions need also to be strengthened. This will facilitate their integration in the financial systems and their growth and development, and enable them to develop into capable institutions subject to the Banking and Financial Institutions Act of 1991. The whole issue of financial linkage is an important one if SACCOs are to be effective in handling the demand for credit in the rural areas. For instance, this would enable SACCOs to borrow from formal financial institutions in order to lend to SACCO members and clients, and would have the effect to reverse flow of funds from the formal sector to rural areas. Plus, obviously financial linkages would improve SACCOs' overall fund management.

The regulatory and supervisory framework for the SACCOs revolves around the Registrar for Cooperatives and his staff (Regional Cooperative and District Cooperative Officers). The effectiveness of SACCO supervision is currently very low due to several reasons, including inadequate budgetary allocation to the Cooperatives Department and the resulting lack of transport and funds for visiting SACCOs for supervision of their accounts and auditing. Effects of poor supervision are losses incurred through theft, engagement and investment in risky non-financial activities, delayed reporting and un-audited accounts, and violation of Cooperatives Societies Act (e.g. accepting deposits from non-members). Supervision is of paramount importance and safeguarding of depositors' funds is crucial. There have been thoughts of establishing regional apex bodies for SACCOs to offer these services. However, the IEM does not think such an arrangement would be worthwhile as it will simply create a multiplicity of organs. Despite the aforementioned, the existing network is very valid and if strengthened appropriately, it could be a very effective mechanism for supervision and regulation. What is required is to reorganise and strengthen the existing Regional and District Departments of the Cooperatives to enable them to conduct services appropriately. This necessitates additional training and funds to cooperative officers, including the provision of transport and computer equipment to improve supervision and auditing. Furthermore, there is need for the Cooperatives Department to liaise more actively with the BOT with regard to supervisory aspects.

The more successful SACCOs should be allowed to transform into Community\Village Banks in order to make them more effective institutions. However, the graduation of selected SACCOs to Village Banks should be a stepwise process. More specifically, Village Banks are considered as those institutions able to make loans and receive deposits from non-members However, it is too much to expect from even the best positioned SACCOs to take on all such responsibility at once. A first stage should be the acceptance of non-member deposits while restricting lending exclusively to SACCO members. The restriction of lending to members is to enable the mechanisms of peer pressure to continue to apply, particularly to ensure loan repayment. Thus, all borrowers of the Village Banks should continue to be members until a certain threshold is reached where restriction on lending only to members acts as a constraint on the growth of the Village Banks. At that point, the restriction should be lifted, and they should then be allowed to lend also to non-members, which is the second stage.

In order to be in a position to assess the performance of SACCOs, a set of indicators need to be established which would facilitate such a task. Presently, it is not easy to evaluate the achievements of SACCOs and this task is further complicated by the fact that SACCOs, and the services offered by each SACCO, vary from one to another. Based on the aforementioned, it is recommended that broad areas be identified that may form the basis for assessing the performance of SACCOs. The following are a range of performance indicators that may be considered: outreach, quality of services, operational efficiency and portfolio quality, growth rate, profitable interest rates, Management Information Systems' quality, good practice and governance, and transparent financial reporting (please see chapter VI for further details).

It is not possible to do a thorough analysis of loans made to women due to lack of necessary data. In the SACCOs visited by the mission, the majority of clients are men, although a large number of transactions are done by women as they are responsible for operating joint accounts in their husband's name. In some SACCOs, only around 15% of the accounts are in the name of women. Basically, women's use of financial services provided by SACCOs is disproportionate in relation to their representation in the decision-making bodies and ownership of SACCOs. SACCOs should make extra effort to involve women as members so that they may directly be entitled to loans and once they have joined, they should be encouraged to get involved in SACCOs' management and operations.

NGOs

Few NGOs in Tanzania are currently capable of making an effective transition from being traditional credit providers to cost-effective business oriented rural financial services institutions, due largely to their very weak overall capacity. Hence, the role of NGOs as a credit delivery instrument should be very carefully examined. NGOs can nevertheless play a useful part in promoting rural financial services, especially in view of their strategic position in the rural community: they could offer non-financial services (in support of financial services), such as training clients, business management training and advisory service, advocate on behalf of women and the informal sector, etc. Hence, it is recommended that (i) NGOs should be involved in the provision of rural financial services only if they are run as profitable financial institutions, and (ii) NGOs could effectively provide non-financial type of assistance. In both cases, donors and GOT need to extensively invest in institutional capacity building and staff skill training if such institutions are to meaningfully contribute to the promotion of the rural financial sector in Tanzania.

Lessons learned

Financial viability and long-term sustainability of credit operations

The experiences gained through the three projects illustrate that the viability of credit operations depends on a number of factors, including the existence of demand for credit, how well credit operations are managed overall and on the success in keeping transaction costs of lending to a bare minimum. Related to this is the interest rate issue, and the ability of credit intermediaries to adopt such interest rates which will be accepted by its customers, yet provide it with adequate spread to cover its administrative costs. Finally, long-term sustainability of credit operations depends also on (a) high levels of recovery rates to preserve integrity of the capital base; and (b) successful savings mobilisation to increase the amount of funds available for lending.

Institutional appraisal of financial intermediaries

During project design a comprehensive institutional appraisal in the field should be undertaken of those financial intermediaries under consideration to being involved in future projects and related activities. This is fundamental for the success of the financial services component and the project itself. The appraisal should assess the institution's track record in reaching the poor efficiently, its scale of outreach and the relative poverty of the clientele, the quality of the financial services and of the loan portfolio, governance, accounting procedures and experience, management capacity, financial performance over time, and the existence or potential for sound reporting, monitoring and information systems. In none of the projects under review was an attempt made to assess the cost and profitability to the bank of implementing the proposed credit line. It is preferable not to implement credit or financial services components until the financial intermediaries are sound.

Customer-oriented financial services

The financial requirements of the rural poor are not homogeneous and often vary according to the local conditions and circumstances. Customisation of credit packages are essential, which should be based also on the nature of activities the credit is to support. Varying socio-economic circumstances may also necessitate different financial products, including savings mobilisation, short, medium and long term loans, transfer services, and currency exchange. What is important is to have an analysis of the needs and services required by the intended target group, otherwise the efficacy and efficiency of the entire credit operations may be jeopardised, as was the overall case in Tanzania. Project design teams need to customise the loan programme to beneficiary demands, which should be clearly understood through a consultation process.

Credit culture

The success of credit programmes is higher in cultures where borrowers understand their responsibility to repay the loan, in accordance with the terms and conditions imposed at the time the loan was made. At the same time, lenders should also appreciate that they too have to take their responsibility in credit monitoring and repayment to ensure success of the schemes. Design missions should talk with lenders currently active in the region to assess the credit culture and if it is found to be poor, serious reflections should be given regarding implementing the credit component. Project design missions should also consult community leaders, existing and potential clients of financial intermediaries and analyse defaults and product performance.

Credit in kind

Credit in kind should only be considered if the various actors in the process are reliable and committed, otherwise repayment rates will suffer and credit operations will not bear desired results. For instance, under the SHERFS project, while being pleased that loans are being made available, clients are dissatisfied with the in kind component. Such credit has arrived late, in poor quality and at more costly rates than what the beneficiaries themselves could purchase. Where such mechanisms are implemented, it is essential to ensure efficiency and quality of the in kind instrument, so that the credibility of the programme is maintained, as well as the commitment of the beneficiaries to repay and to remain engaged in such schemes.

Pilot components/schemes

When designing pilot schemes after project implementation has started and in response to changes in the macroeconomic conditions or the regulatory and legal framework, it is necessary to review also the major assumptions which were present in the original project design. The size of the pilot scheme must be tailored to the changed environment and the area covered may also need reconsidering. Staffing, resources and procedures require tailoring, and a clear-cut time-bound action plan ought to be worked out to prevent the pilot scheme from becoming too costly in the end, and more importantly, to prevent it from blowing out of its intended proportion and scope. A pilot is an experimental phase, one through which procedures, mechanisms and technologies are to be tested and to gain understanding if the pilot exercise may be replicated at a larger scale, cost-effectively with success.

Developing and promoting grassroots institutions

The strategy of achieving cost-effective credit delivery mechanisms through the promotion and strengthening of grassroots-based institution, especially in the absence of a functioning financial sector, has so far yielded positive results. The use of grassroots organisations not only ensures better outreach, but also results with reduced cost of loan administration. The initiative to involve SACCOs in rural financial services has done much to promote the credit components, especially in the SHERFS project where SACCOs are being used on a wider scale. SACCOs are innovative type of grassroots institutions able to secure the participation of communities at local level, also given their simple approach to credit management and participatory dimension. As IFAD projects are principally concerned that credit reaches the more remote areas of developing countries, it is necessary for IFAD to involve and promote such innovative grassroot institutions to meet the credit needs of rural populations, who, in addition, are able to better identify themselves in such institutions.

Geographic proximity

Especially in larger countries decentralisation of rural financial services are essential if they are to reach and benefit the intended target group, who often live in remote rural areas where distances are huge and means of transportation and communication are much lagging. Decentralisation overtime not only reduces transaction costs, but leads to better credit uptake, monitoring, repayment and management. Geographic proximity not only refers to the establishing of mechanisms for decentralising financial systems such as mobile banking, but also to the need to remain and interact at the grassroots level in a way that actively involves both parties (lender and receiver) throughout the credit lending and repayment cycle.

Management information system

MISs are crucial especially for the success of financial institutions, no matter the size of the latter. MISs need not be complex, neither do they need to capture infinite types of data. What is required is to gather a minimum set of data to ensure proper and efficient credit management, which can provide accurate and timely information on operations and financial performance. Computerisation of MIS would be better, but in the absence of such possibilities what is fundamental is to at least have systematic procedures for data collection, and to ensure books are regularly updated to facilitate accounts and financial statements to be prepared. This will also facilitate and make more reliable/credible the audit function, which is indispensable always, but more so for credit institutions.

Auditing and inspection

It is of utmost importance that project-related accounts are systematically prepared and audited as stipulated in the loan agreement, and that reports are submitted to IFAD and the Cooperating Institutions in a timely manner. These activities are essential to reinforce the quality and security of operations. Internal controls through self-inspection to complement external auditing is also a necessary step in the direction towards sound and proper financial management. At all times accounts should be prepared and audited, and audit reports should be followed up expeditiously, and that external auditors be brought in when audit reports are not received on time.