Poverty reduction and rural finance: From unsustainable programs to sustainable institutions with growing outreach to the poor

Only relief achieves short-term poverty reduction, but is ineffective in the long run. Sustainable poverty reduction can only be attained through well-designed long-term development measures. For example, Indonesia is considered one of the most successful countries with regard to poverty reduction. Between 1970 and 1996, it reduced poverty from 60% to 11.5% of its population, a time span of a quarter century during which local financial institutions expanded rapidly. The Asian financial crisis led to a set-back, but also became the departure point for a more sustainable institutional system. (Getubig, Remenyi and Quinones 1997:89; Seibel and Schmidt 1999:8-10) All our experience tells us: there is no short-cut to sustainable poverty reduction and development; and certainly none outside a solid, prudentially regulated institutional framework. --

Microfinance Strategies: Strategies for developing viable microfinance institutions and sustainable microfinancial services in Asia

In most Asian countries including Vietnam, inadequate access of small farmers and microentepreneurs including women and the poor to effective financial services presents a major challenge. Such services must include facilities to deposit microsavings, access to microcredit for production, consumption and emergencies, and the provision of some basic insurance. Only viable financial institutions with sound practices will be able to respond to the evergrowing demand of the microeconomy for such services and to contribute to its growth. --

Mainstreaming Informal Financial Institutions

Informal financial institutions (IFIs), among them the ubiquitous rotating savings and credit associations, are of ancient origin. Owned and self-managed by local people, poor and non-poor, they are self-help organizations which mobilize their own resources, cover their costs and finance their growth from their profits. With the expansion of the money economy, they have spread into new areas and grown in numbers, size and diversity; but ultimately, most have remained restricted in size, outreach and duration. Are they best left alone, or should they be helped to upgrade their operations and integrate into the wider financial market? Under conducive policy conditions, some have spontaneously taken the opportunity of evolving into semiformal or formal microfinance institutions (MFIs). This has usually yielded great benefits in terms of financial deepening, sustainability and outreach. Donors may build on these indigenous foundations and provide support for various options of institutional development, among them: incentives-driven mainstreaming through networking; encouraging the establishment of new IFIs in areas devoid of financial services; linking IFIs/MFIs to banks; strengthening NGOs as promoters of good practices; and, in a nonrepressive policy environment, promoting appropriate legal forms, prudential regulation and delegated supervision. --

What Matters in Rural and Microfinance

Due to the overall failure of donor-driven subsidized directed credit administered by government-owned development finance institutions, the emphasis in development policy has shifted to (rural) financial systems development and the building of self-reliant, sustainable institutions. While savings-based self-help groups and member-managed small cooperatives are more appropriate to remote and marginal areas, there is little to further differentiate rural and urban microfinance. Regardless of ownership, type of institution, and rural or urban sphere of operation, they ultimately all have to: - Mobilize their own resources through savings - Have their loans repaid - Cover their costs from their operational income - Finance their expansion from their profits. Three worlds of finance continue to exist, in which donors may intervene in very different ways: - The old world of donor-driven development finance, which need to be transformed into sustainable institutions - A new world of development finance, comprising viable formal and semiformal institutions with a commercial orientation, which do not, or not fully, rely on donor support for expansion - Informal financial institutions of ancient or recent origin, based on principles of self-reliance and viability with their potential for innovation and mainstreaming, to which donors may contribute.. There a numerous notable new developments in R/MF; but in the majority of countries, there are still major shortcomings that call for country-driven, coordinated interventions. Donors with their projects are found in both worlds; but there is an overall move from the old world of supply-driven development finance to the new world of demand-driven commercial finance. --

Microfinance for the Poor: Can Miracles be Repeated: in the Philippines, Kosovo, and elsewhere?

Bangladesh is one of the poorest countries in the world; and women in that country are among the poorest of the poor. In the late 1970s, a man performed a miracle there. With a few loans out of his own pocket in 1976, Professor Yunus proved to himself that even the most downtrodden are able to pull themselves out of dire poverty. By planting a vegetable garden, buying a cow or opening a small store, these women are able to make a profit, feed their family and repay their loan with interest. He then took his message to Rome where the International Fund for Agricultural Development (IFAD) had just been established, with the mandate of poverty alleviation in the poorest countries. With his enthusiasm, he convinced IFAD that a loan to the Grameen Bank, as he called his venture, would be a good investment and greatly help to reduce poverty in Bangladesh. IFAD?s loan turned out to be a door-opener for many other donors, including the World Bank. Today, some twenty years later, the Grameen Bank is one of the world?s most successful financial institutions banking with the poor. It provides standardized loans to some two million women, organized in small groups of women who mutually guarantee their loans and repay them in 54 weekly instalments. --

Equity participation in financial intermediaries: a new donor instrument in rural finance? A proposal submitted to the International Fund for Agricultural Development, Rome

The IFAD Rural Finance Policy lists among the initiatives to be supported commercially-operated apex organizations for refinancing MFIs (para. 20) and stipulates that, Equity financing through appropriate apex institutions may be developed by IFAD as a new instrument, which would provide the much-needed external capital and leverage multiples of domestic capital. (para. 32) Equity participation, which avoids some of the pitfalls of credit lines, strengthens the capital base of apex funds and rural financial institutions and leverages additional domestic resources in the form of savings deposits or additional equity. It may also be used to fulfil legal minimum capital requirement when transforming non-formal institutions into formal entities. (para. 44) Examples given of autonomous apex funds are the Social Capital Fund in Argentina, the Palli Karma-Sahayak Foundation in Bangladesh, and the People?s Credit and Finance Corporation in The Philippines (para.32). IFAD may also invest in larger-size financial intermediaries, among them microenterprise banks and rural banks as well as agricultural development banks and some commercial banks, which either refinance smaller rural financial institutions or lend directly to IFAD?s target group. --

IFAD Rural Finance Policy

Two thirds of the Fund?s current projects have a rural finance component; about 21% of the Fund?s resources are dedicated to rural finance.2 Most of IFAD?s target group are small producers engaged in agric ultural and non-agricultural activities in areas of widely varying potential. Direct access to financial services affects the small producers? productivity, asset formation, income and food security. This policy paper is designed to provide an overall framework for the Fund?s work in rural finance. On that basis, operational guidelines and regional strategies will be prepared in due course for the use of staff, consultants and partner institutions, with scope both for innovations and for consolidation of successful existing practices. --

Commodity finance: a commercial proposition? Micro- and Mesofinance for Agricultural Commodity Production, Processing and Trade

This Conference brings together the financial experience of rural and agricultural microfinance institutions and the experience of the Common Fund and other agencies with promoting commodities and small and microentrepreneurs producing, processing and marketing commodities. We expect that this will result in: – the further growth and development of sustainable financial services; and – the further growth and development of sustainable commodity-related enterprises. These two objectives – the growth of profitable local financial institutions and of profitable local enterprises – are interrelated and mutually reinforcing. There is one lesson to be learned from the now developed industrial countries: Focusing in an early stage of development on the poor, who largely depend on commodities, means focusing on a huge future market. We hope to get this message across to large numbers of financial institutions. --

Finance for Small-Scale Commodity Processing: From Micro to Meso Finance - Summary of presentations and discussions

The main focus of the Workshop was on sustainable financial services for the first stages of commodity processing to support small-scale producers to move up the value-added chain and increase their efficiency and earnings in commodity production. In this regard, the Workshop carried out an assessment of investment opportunities and financing needs at the producer level. It further considered whether there is a lack of financial services in the middle-range or meso-credit category around USD 3,000 and above for rural commodity processing. The Workshop addressed the following topics: - Micro and meso-credit requirements of commodity producers and processors - Mechanisms currently employed by financial institutions, non-bank financial institutions, regional agricultural credit associations and donors in micro and meso-credit to the commodity sector and their experience in this area - Measures and options that would alleviate identified problems - The role of the Common Fund for Commodities and other financial and development institutions in this sector. --

Grameen Replicators: Do they reach the poor, and are they sustainable?

The Grameen Bank of Bangladesh is widely considered as one of the world?s most sucessful financial institutions banking with the poor. In an effort to alleviate poverty, donors have supported replication programs in 26 countries. This analysis is based on some case studies from Indonesia, the Philippines and Nepal; no comprehensive evaluation has been available. The biggest obstacle in the development of Grameen-type microfinance institutions (MFIs) was found to be donor support: a powerful incentive to substitute external resources for domestic and local savings. This has undermined the institutions? viability and sustainability. As long as they are not self-reliant, they do not reach the poor in sufficient numbers. The Grameen approach is no magic formula, and no best practice or optimal solution that may be applied around the world. However, it incorporates a number of sound practices which may explain some of its success: ? high moral commitment of leaders based on values enforced through training; ? peer selection and peer enforcement, which preclude adverse selection and moral hazard; ? rigidly enforced credit discipline. It further appears that the most promising Grameen-type MFIs are innovators who have modified the classical replication model: ? local bank status (rather than NGO or national bank status) ? deposit mobilization through differentiated products with attractive interest rates ? differentiated loan and insurance products which cover all costs and risks ? client differentiation through larger-size loan and deposit products for non-poor members. Some of these practices may be recommended for emulation (not replication!), both by Grameen and non-Grameen MFIs. There is no reason why a Grameen-type MFI registered as a bank which mobilizes its own resources through differentiated savings products, offers costeffective loan and insurance products and provides larger-size loan and deposit products to non-poor members should not become viable and self-reliant, offering sustainable financial services to an ever-growing number of poor, and eventually non-poor, clients. --