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									                     Research Framework

A Global Study to Examine Innovative Linkages to Expand
                Rural Financial Services

                          Maria Pagura
                       Rural Finance Officer

   Agricultural Management, Marketing, and Finance Service (AGSF)
             Agricultural Support Systems Division (AGS)
    Food and Agriculture Organization (FAO) of the United Nations

                          December 2004
                                                       Financial Linkages Study
                                                                 December 2004

                                   Table of Contents

I.     Introduction                                              1

II.    Research Rationale and Main Objective                     1-2

III.   Conceptual Framework

       A. Rationale behind linkages                              2-4
       B. Key Research Concepts                                  4-6

IV.    Analytical Framework

       A. Case Study Analysis                                    6-7
       B. Research Questions                                     7-9

V.     Methodological Framework

       A.    Overview                                            9
       B.    Core Research Team                                  10
       C.    Quality Setting Case Studies                        11
       D.    Case Study Selection                                11
       E.    Local Researcher Selection                          12
       F.    Case Study Execution                                13-14
       G.    Final Report Write-Up                               14

VI.    Project Workplan                                          15

VII.   Conclusions and Next Steps                                16

References                                                       17

      I. Introduction

        This paper describes the overall research framework for FAO‟s global study on
innovative linkages between formal, semiformal and informal financial intermediaries in
Africa, Asia and Latin America that result in expanded access to financial services in rural
areas. This document reflects the discussions and decisions taken during the study‟s official
launching workshop held in Rome, Italy, 3-5 November 2004, with the core research team
and two members of the Ford Foundation. The research framework consists of three sub-
frameworks, namely the conceptual, analytical and methodological frameworks.

        The conceptual framework defines the main concepts and terms for this study. In this
section we review the rationale for linkages between the formal and nonformal financial
sectors, define what we mean by financial linkage, present the different types of actors
engaged in linkages, discuss the market segment that linkages benefit and examine different
ways to categorize linkages.

        The analytical framework outlines the main components of the case study analysis and
presents the key questions that the research will address. The components and key questions
will be further defined for each case to incorporate the specificities of the linkage type and its
environmental context. In short, the analytical framework presented here is a general model
to be adapted once the final linkage cases have been identified.

        The methodological framework describes the way this study will be carried out. The
methodological framework describes the following: 1) the core research team and their
responsibilities; 2) the three template case studies, the rationale for using them and how they
were chosen; 3) the strategies for identifying and selecting the remaining seven cases as well
as the local researchers to carry out the field studies; 4) the execution of the case studies; and
5) the strategy for case study synthesis and final report writing.

II.      Research Rationale and Main Objective

         There is a renewed interest in rural finance amongst policymakers, international donor
agencies, rural development and finance practitioners, academics and other professionals.
Many people are concerned with the overall decline in agricultural credit, which began in the
mid-1980s, due to the failures of many state development banks and the lack of the private
banks to enter the agricultural credit market in their absence (Gonzalez-Vega, 2003). Many
people are also concerned with the continued high levels of poverty in rural areas and see
financial market development as a way to help poor people improve their livelihoods. Access
to a broad range of sustainable financial services, such as lines of credit, term loans, deposit
facilities, insurance, and remittance and payment systems can have a significant impact on a
person‟s ability to build assets and weather economic shocks when they have an effective
demand for such services.

        Given this renewed interest there has been a significant shift in focus by many
international donors who are investing millions of dollars in research and program
development to re-examine the key issues of rural and agriculture finance. Although the
refocus on rural finance began in the late 90s, many joined the debate at the Paving the Way
Forward for Rural Finance conference sponsored by USAID in June 2003 (Carter et al.,
2004). This conference encouraged a reengagement and a rethinking by donors and
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practitioners about the field of rural and agricultural finance. Since then many donors
initiated research projects to further review the key issues discussed at the conference.
USAID, as a part of their Accelerated Microenterprise Advancement Project (AMAP), is
examining the challenges and opportunities that rural finance service providers have in
serving rural farm and nonfarm entrepreneurs and households. CGAP, in collaboration with
IFAD and DFID, are examining issues in agricultural microfinance and supplier and trader
finance. The World Bank is conducting case studies on warehouse receipt systems, various
risk management tools (index-based insurance products) and credit-plus systems, such as
processing firms offering inputs, credit and access to markets. GTZ has conducted much
work and review on linkage banking in Asia and Latin. The Food and Agricultural
Organization (FAO) and GTZ jointly have completed work on rural finance issues featured in
the Agricultural Finance Revisited (AFR) Series. In addition, FAO has recently completed a
trader finance study in Asia; similar investigations in Latin America and Africa are being
conducted. The Ford Foundation is sponsoring two important pieces of research in rural
finance. The first is a desk review on recent advances, lessons, debates and opportunities in
rural finance research and projects. The second is this project on financial linkages.

        The overall goal of this research is to increase the learning and understanding about
innovative linkages between formal and nonformal sector finance that lead to expanded
access of sustainable rural financial services. We will examine financial linkages in a diverse
set of contextual environments in Africa, Asia and Latin America to draw lessons about the
key aspects of the linkage that effectively deal with the challenges of intermediating finance
in rural areas. In the end, we will make recommendations about the feasibility of initiating
financial linkages in other areas.

        This research initiative is different from the other rural finance research initiatives
listed above in that we are focusing specifically on the linkage mechanism and how this
impacts the provision of financial services in rural areas. This study is about linkages and
strategic alliances between two or more financial institutions. It excludes the supplier and
trader finance models which link farmers to commercial banks as these models are being
covered by research activities of CGAP, DFID, USAID and World Bank.

III.     Conceptual Framework

       A.         Rationale behind linkages

        Rural people need access to financial services for many different reasons. They need
production credit, be it in cash or in-kind. Rural people need a safe place to save their money
so that they can build up financial assets accessible in times of need. They need money
transfer and payment services that permit them to cost-effectively send and receive money.
Farmers and non-farm entrepreneurs need medium and long term loans to invest in their
business enterprises. Rural people also need emergency loans and a variety of insurance
products (health, life and agricultural) to help weather the individual and systemic shocks they
often face.

       On the other hand, the supply of rural financial services is extremely limited due to the
high costs and risks associated with providing them.1 In most parts of the world, rural areas
are characterized by low population density and wide dispersion. Coupled with poor
 The discussion here is adapted from Miller‟s (2004) presentation on the constraints of rural finance service

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infrastructure and communication links, this makes service provision prohibitively expensive.
Financial service provision is further constrained by risk. Rural finance service providers
have limited opportunities to diversify portfolio risk as most of their clients need loans to
invest in economic activities that are either directly or indirectly related to agriculture. And in
many countries, agricultural outcomes are dependent on weather, pest and disease
management outcomes, which often are not favorable. In addition, service providers are
faced with the seasonality issues that investing in agriculture presents. Liquidity management
of the finance suppliers becomes increasingly challenging in rural markets, where loan
turnover is much slower and loan size is much higher than in urban markets serving
microentrepreneurs. Lastly, rural finance service providers are constrained by the population‟s
low level of education and the shortage of well trained people, impacting the rate and level of
their institutional development.

        The challenges of sustainable rural finance service provision seem daunting if not, in
many countries, insurmountable. One way to address this difficult situation is through the
linking of formal and mostly non-formal development finance institutions, which have natural
complementarities in service provision (Figure 1). On the one hand, formal financial
intermediaries (FFIs) often possess a wide range of financial services; they have extensive
infrastructures and systems; they have access to capital and more opportunities to diversify
their portfolio. However, FFIs are further removed from rural clients, lack the necessary
skills to analyze credit risks of rural clients, are not familiar with local culture and market
conditions, and their systems may be inflexible making it difficult to innovate. On the other
hand, development finance intermediaries are closer to rural clients, are more flexible and
innovative, and know local conditions well. Often however, they do not possess a wide range
of financial services, lack the necessary infrastructure to serve a dispersed clientele, are faced
with very concentrated portfolios, and have at best limited access to adequate capital. Hence
there appears to be much scope for linking and strategic partnering of the formal and
nonformal financial sectors that could result in expanded access to rural financial services.

       In this study, we aim to examine 10-12 linkage cases that have been successful at
surmounting many of the challenges listed above in the hope that we will be able to highlight
lessons and make recommendations that will be useful for those concerned with rural finance

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    Formal Financial Intermediaries                               Development Finance Intermediaries

               Strengths                                                           Weaknesses
    •   Wider range of financial services                             •    Limited range of financial
    •   Existing infrastructure and system                                 services
    •   Access to capital markets                                     •    Lack access to capital markets
    •   Diversification opportunities                                 •    Lack necessary infrastructure to
                                                                           serve dispersed clientele
                                                                      •    Have concentrated portfolios

                 Weaknesses                                                       Strengths
    •   Further removed from rural                                    •    Are closer to rural clients
        clients                                                       •    Are more flexible and often
    •   May not have ability to analyze                                    innovative
        credit risk of rural clients                                  •    Know local cultures and markets
    •   Lack local knowledge
    •   May have inflexible systems and
        cumbersome procedures

Figure 1: Complementarities of Formal and Development Financial Institutions2

        B.      Key Research Concepts

        It is important to clearly define the key concepts that frame the research project. This
is a study about rural finance development, and in particular about the role financial linkages
play in this development. In the following sections we define the following concepts: rural
finance, financial linkage, financial actors and the rural market segment.

                1.       Rural Finance

        Rural finance is a sub-sector of a country‟s overall financial sector and includes
financial services for agriculture and non-agricultural enterprises as well as for basic
household needs, such as deposit facilities, loans, remittance and domestic money transfers
and insurance. Rural finance encompasses a range of financial services and products for rural
people of all income levels (Nagarajan and Meyer, 2004).           Rural financial services are
provided by a combination of formal, semiformal and informal financial institutions, such as
commercial, state/development, or postal banks, microfinance banks, credit unions, NGOs,
cooperatives, rotating and non-rotating savings and credit associations and village banks.
Informal agents, e.g., traders, millers, input suppliers, shopkeepers, deposit collectors, family
and friends, also provide financial services at the local level to small farmers and rural
households in many parts of the world.

  Adapted from Pearce (2003), “Links between Banks and Non-banks to Promote Access to Financial Services
for the Poor,” CGAP Presentation at the ABA Annual Meeting, 2003.

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                In the scope of this study we will examine strategic partnerships and linkages between
         the formal, semiformal and informal financial sectors. In particular, we are interested in
         determining to what degree these linkages impact the institutional capacity of local service
         providers to increase the volume and quality of existing financial services and products,
         expand their outreach to new market segments and/or broaden the types of financial services
         and products they offer.

                        2.       Financial Linkage

                In the scope of this study a financial linkage is defined as a mutually beneficial
         arrangement between formal (commercial, state, postal, APEX banks, etc) and semi and
         informal financial institutions (MFIs, NGOs, credit unions, village banks, self-help groups,
         etc.). The linkage is successful when it results in sustainable expanded access to financial
         services for new segments of the rural population not traditionally served, broadens the
         variety of products and services already offered and/or creates quality improvements of
         current products through better terms and conditions. These linkages are successful when
         based on market principles.

                 Since a wide variety of formal, semi-formal, and informal financial institutions exists,
         the possible number of financial linkages between any two or more actors along the chain are
         numerous. In the diagram below we have grouped financial institutions along a continuum of
         formality, with institutions that are more formal (FFIs) appearing on the left side of the
         diagram on down to those institutions that are less formal (DFIs) on the right side. We prefer
         to define linkages using a continuum of formality principle, especially since the meaning of
         formal, semiformal and informal varies widely across countries. In this way, it is helpful to
         think of linkages as mutually beneficial partnerships between upstream (more formal) and
         downstream (less formal) institutions. This includes linkages between institutions that are
         more in the middle of the continuum as well as those at the extreme ends (Figure 2).

         Formal Financial Institutions (FFIs)              Development Finance Institutions (DFIs)
            Commercial Banks        APEX Organizations        Regulated MFIs         Farmers‟ Organizations
             State Dev Banks         Community Banks         Unregulated MFIs        Women‟s Associations     Informal

               Postal Banks          Microfinance Banks        Credit NGOs            Indigenous Savings &
           Insurance Companies         Credit Unions         Savings and Credit        Credit Associations
            Leasing Companies         Input Suppliers           Associations            Self Help Groups
                                    Money Transfer Firms       Village Banks            Deposit Collectors

         Figure 2: Continuum of Financial Institution Formality

                        3.       Financial Actors

                 There are many different types of formal, semi and informal financial service
         providers. In the scope of this study, we will concentrate mostly on linkages between two
         financial intermediaries. However, there are interesting cases that merit further study, which

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involve linkages between non-bank financial institutions (e.g., APEX organizations, leasing
companies, money transfer firms) and semiformal or informal institutions.

       Linkage examples that result in expanded access to rural financial services may
include but are not limited to the following:

         Commercial and state banks linking with semi- and informal financial institutions to
          wholesale funds through various debt instruments, such as lines of credit and term

         Commercial banks purchasing MFI portfolios backed by mutually acceptable
          collection incentives and risk-sharing arrangements, such as default limits and

         NGOs partnering with postal banks and/or MFIs permitting them to link their clients
          to sustainable deposit facilities.

         MFIs and NGOs strategically aligning themselves with money transfer companies,
          such as Western Union and MoneyGram, to facilitate remittance management for their

         Commercial, state and postal banks using point of sales terminals to provide banking
          services through rural trader shops and MFIs.

         Postal banks acting as payment backbone for a range of MFIs and credit unions.

         Life insurance firms using post office banks and MFIs as payment facility for rural

         Social pensions paid out in rural areas through commercial bank mobile units.

                 4.     Rural Market Segment

        In the scope of this study, we are primarily concerned with the impact of linkages on
the expansion of access of financial services to a particular segment of the rural population.
This market segment includes smallholders, rural non-farm microentrepreneurs, rural
households, small traders and local organizations and associations, e.g., farmers, women, etc.
It does not include medium to large scale farmers who typically have access to formal
financial services. Nor does it include the poorest of the poor in rural areas as their effective
demand for financial service is extremely low to nonexistent. Rather the poorest of the rural
poor often need other social services (food donations, medical treatments, basic housing) to
get them to a level of economic stability.

IV.       Analytical Framework

          A.     Case Study Analysis

       Each case study analysis will consist of a description of the country context, the
linkage actors and the financial linkage model as well as a presentation on the key lessons

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learned. For the country context, each case will review the financial system with particular
focus on the rural financial sector and the regulatory environment as well as the key obstacles
to rural finance service provision in the country.

        A brief description of the financial actors involved in the linkage will be provided. A
more detailed description of the development finance institution will be presented, focusing
on the history, type and level of progress of the institution as well as the market segment it

         The institutional description will be followed by an explanation of how the linkage or
linkages work. This part of the analysis will focus on the particular problem that the linkage
is trying to address. Here, the particular technological, regulatory and/or organizational
constraints it addresses will be identified. We will describe the process of linkage
development focusing particularly on the preconditions needed for it to emerge, how the
involved parties decided to create the linkage, how they created the right balance of mutually
acceptable incentives and what type of learning and adjustment occurred to strengthen the
linkage relationship. Lastly we will examine the outcome and impact of the linkage on the
institutional partners, clients, and industry, focusing primarily on the evolution of the
downstream institutions and the sustainability of their services.

        The last part of the case study analysis will describe the key lessons learned about the
particular linkage under review. We will examine why this linkage case matters, to what
degree it is sustainable in the long-run, and how and under what circumstances it can be
replicated in other countries or regions.

       B.      Research Questions

       In order to carry out the analysis outlined above, we have determined several key
research questions, which are grouped in the following categories:

Constraints to Rural Finance Service Provision
        How do particular linkage models address key constraints to rural finance service
           provision to the rural poor, such as small holders and non-farm

                How has the linkage overcome or bypassed a particular regulatory
                 constraint, such as deposit mobilization restrictions?
                In what ways has the linkage overcome technological constraints, such as
                 insufficient MIS and other electronic devices that improve operating
                How has the linkage overcome organizational constraints, such as limited
                 retail outlets, low staff capability and weak operating policies and

Linkage Preconditions
       What are the preconditions for sustainable linkages to emerge?

                What performance criteria must be achieved by the development finance
                 institution to engage in the linkage?

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               What requirements must be met in terms of organizational preparedness,
                such as record-keeping systems, MIS and standard operating procedures?
               What is the main motivation behind the development of financial linkages?
                Did they emerge from spontaneous local initiatives or is government or
                social pressure a critical factor in creating the linkage? Has key
                management personnel of both financial entities bought-in?
               In what ways has the legal and/or regulatory framework helped the
                establishment of financial linkages?

Design and Governance Issues
        What are the key design factors and processes that led to the success of the
          innovative linkage?

               Who were the key actors involved in designing and implementing the
                linkage processes?
               What mechanisms are built into the contract to ensure that risks and
                benefits are equitably shared across institutions?
               How and by whom is the linkage contract being managed?
               How are reporting and control regulated in the linkage contract?
               Is one of the linkage partners represented on the board of the other?
               In what ways does the design of the contract allow for flexible
                implementation, learning and adjustment?
               If the linkage is supported by third parties, what is the strategy for
                sustainable implementation after support is withdrawn?

Impact at the Policy Level
    How do linkages impact the macro and policy environment?

           Have the linkages initiated policy dialogues (on interest rates, authorization to
            mobilize deposits, deposit insurance, collateral requirements, legal forms for
            MFIs, regulation and supervision of MFIs)?
           How have the linkages affected policy changes?
           What have been the major unresolved issues in the policy environment relevant
            for linkages?

Impact at the Institutional Level
        How do linkages impact the financial organizations that are linked together?

           How does the linkage reduce costs, improve operational efficiency and
            increase overall profitability of the institutions?
           What have been the phases of evolving linkages, eg, pilot periods, time period
            until break-even point?
           Have there been crises in the evolution of linkages, and how did the
            institutions involved cope with them?
           In what ways does the linkage encourage the use of new operating systems and
            procedures that improve efficiency?
           Has the linkage resulted in improvements in internal controls?
           How does the linkage enhance staff managerial and technical skills?
           In what ways does the linkage provide improved financial products and
            services to the end clients?

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            What are the prospects for expanding financial linkages with current or new
             partner institutions?

Impact at the Client Level
        In what way do linkages improve access to rural financial services for rural small
           holders and microentrepreneurs? In what ways does the linkage result in:

            New products and services not previously offered to current rural clients
             (savings, transfers, insurance, etc.),
            Better terms and conditions to existing products, and/or
            Access to financial services to new clients not previously served?

        It is anticipated that these questions listed above will be expanded as each case study
design is further developed.

V.     Methodological Framework

      A.       Overview

       We will conduct 10-12 case studies in Asia, Africa and Latin America over the next
eight months. There are many steps involved in carrying a research exercise of this
magnitude. The methods that we will use to carry out this study are described in this section.

         In order to guide our work, we developed a methodological framework as depicted in
Figure 3. We will first begin with carrying out three quality setting case studies. At the time
that these studies are being conducted we will identify the remaining 8-10 cases and place a
call for local researchers in the chosen countries. Drawing on experience from the three
quality setting case studies we will develop researcher guidelines and any pertinent tools to
assist the local researchers and regional monitors in carrying out the subsequent field studies.
Simultaneously we will review the researcher proposals, make a final decision on selection
and contact the local researchers selected. Once completed, contracts will be initiated and case
studies will be carried out by the local researchers. Regional monitors, three members from
the core research team, will provide field support and supervision for part of the study. This
will also be backed by support from the project coordinator in Rome and from the field for
three of the cases. Once final drafts are approved from the regional monitors and the project
coordinator, regional lessons will be drawn and recommendations made by a smaller subset of
the core team. A final consolidating report will be written by the project coordinator.

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        Analytical                                  Identification
       Framework             Template               of Cases and
      Development           Case Studies            Call for Local

                                 Researcher Guidelines and
                                    Tools Development

                                 Proposal Reviews and Local
                                    Researcher Selection

                                                                         Draft Case Studies
                                      Regional Mentoring

                                           Field Studies                  Regional Lessons

                                      Regional Monitoring
                                                                            Final Report

       Figure 3: The Methodological Framework

       In the sections that follow, we define the main responsibilities of the core research
team and the project coordinator as well as describe in more detail the main components of
the methodological framework.

      B.       Core Research Team

       The core research team is made up eight individuals, seven international researchers
and one project coordinator.

        International Researchers
        The main responsibilities of the international researchers are to help FAO develop the
research framework, identify linkage cases and local researchers, and synthesize study
findings. Three of the seven members will also carry out a case study in an assigned country
based on regional expertise in order to set the quality standard to be used as reference cases by
the local researchers. Three of the four remaining team members will supervise and provide
support to the local researchers in the field. Their main responsibilities will be to explain the
research framework to the local researchers, monitor the case study process by addressing the
questions and concerns of local researchers, approve and carry out a first level editing of the
case study submitted by the researcher; and regularly communicate case study progress to the
project coordinator in Rome. A subset of the core team will be called to participate in the
synthesis exercises at the end of the project.

        Project Coordinator
        The main responsibilities of the project coordinator are to develop the research
framework including all supporting tools and documents, draft and process all subcontracts,
supervise the core research team and their activities, manage the project budget, communicate
project status to the Ford Foundation, and write the final research framework and synthesis

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reports. The project coordinator will be supported by a team of rural finance and agricultural
management experts at FAO.

      C.       Quality Setting Case Studies

        Three quality setting case studies will be carried out by three of the expert researchers.
During the official launching workshop these individuals presented proposals on possible
cases for Africa, Asia and Latin America. To date, two of the cases have been identified, one
in India and one in Bolivia. The first case will be on one of India‟s largest commercial banks,
ICICI, and its financial linkages with development finance institutions, focusing more on the
impacts of these linkages on the downstream institutions.

         The second case will be on FADES, one of largest financial NGOs in Bolivia,
focusing on a set of financial linkages that the organization has established over the last
several years. FADES has entered into strategic alliances with two other NGOs and a
chartered MFI to create Ecofuturo, allowing them to access funds from NAFIBO, a second
tier financial organization. The researcher will examine the failure of a linkage with another
second tier organization and how that failure influenced FADES to seek credit lines with
commercial banks. In addition, the researcher will examine the strategic alliances the
organization has with Western Union and Trapetrol (credit union) to help facilitate
remittances and deposit mobilization services to their clients.

       The third case study for Africa was not identified during the workshop. Since the
workshop cases in Mali, Uganda and Tanzania have been explored, with the Mali case having
the most potential. A study reviewing BNDA (Banque Nationale de Développement
Agricole) and its successful linkages with several MFIs, credit unions and village banks is
pending approval from the bank‟s director at this time.

      D.       Case Study Selection

        Setting Selection Criteria
        Choosing good cases for review is a challenging task. To help us in overcoming this
challenge we have set the following selection criteria. The selected cases should have a
minimum of two years of linkage experience and the linkage should involve the expansion of
financial intermediation rather than simply „facilitating‟ transactions. The linkage
arrangement should be sustainable, in the sense that it is based on cost covering principles. If
the linkage is supported by donors or others, then there should be a clear plan for continuing
the linkage after the support is removed. The case should be able to demonstrate the degree to
which it has resulted in expanding access to underserved rural market segments and access to
relevant data about the case must be assured. Preference will be given to linkages that are
larger in scale, have a high potential for replication and have not already been well
documented. Preference will also be given to linkages that contribute to the overall diversity
of cases, e.g., loans/lines of credit, deposit mobilization, transfer and payment services,
insurance, etc.

        Global Stocktaking
        Our strategy for identifying possible linkage cases is two-fold, engaging in both
internal and external stocktaking exercises. The internal stocktaking exercise consisted of
asking each of the core research members and FAO‟s Rural Finance Officers to provide
suggestions on candidate cases for review. Both groups were encouraged to speak with their

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contacts in the field. In addition, the Project Coordinator with the assistance of an FAO
volunteer conducted an internet search for possible cases.

         The external stocktaking exercise being conducted consists of engaging in an active
dialogue with several international donors working on similar rural and agricultural finance
(RAF) research, such as USAID with their contractors Chemonics and DAI, Inter American
Development Bank, World Bank, CGAP, IFAD, and DFID. Many of these donors attended a
one day session organized by FAO in Washington, D.C. to discuss respective RAF research
initiatives. This was an excellent network building exercise. We have engaged much with
these partners since the October 25th meeting regarding potential cases for review.

        Also, we are reviewing a database, provided by CGAP, on 227 commercial banks
operating in developing countries, some of whom are engaged in financial linkages. They
will also sent us four short case studies on indirect microfinance practices by commercial
banks. Many of these cases could be candidates for further study, if they pertain to expanding
access to rural financial services.

        In addition to the active dialogue with the rural finance donor community, we have
met with micro and rural finance practitioners to discuss the study and how they could help us
in identifying potential linkage cases. We contacted the SEEP (Small Enterprise Education
and Promotion) Network and AFRACA (Africa‟s Rural Agricultural Credit Association) to
solicit their assistance in identifying cases and local researchers. The SEEP Network‟s
Financial Services Working Group sent our request to their member affiliates and partner
networks of micro and rural finance practitioners. AFRACA also sent our request to their
members to identify potential cases amongst agricultural and development banks. We have
also placed a public announcement which describes the study and asks for example cases of
linkages on the DevFinance listserve, sponsored by the Rural Finance Group at The Ohio
State University.

        Final Case Selection
        The internal and external stocktaking exercises will lead to the creation of a global list
consisting of a minimum of 50 cases. The core team and the project coordinator will review
the global list and make recommendations for a short list of 20-25 cases. At that time, we will
gather any additional information needed to help us make the decision on the final cases for
review. We will base our final decisions on the case study selection criteria, to be completed
by the end of the year.

      E.       Local Researcher Selection

       The case study analyses will be carried out by local researchers. One of the
implementation strategies of this research is to build local research capacity. Given this aim
preference will be granted to researchers that are affiliated with a local research institute,
university or private firm. We have set the following minimum selection criteria for the local
researchers that will be used in this study:

          Demonstrated ability in writing English and local language
          Significant knowledge of the local financial system, legal and regulatory
           framework as well as financial organizations involved in the linkage
          Local or regional affiliation with research institution, university or private firm
          Not working for MFI or possessing any conflict of interest

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           Demonstrate guaranteed access to necessary information to conduct analysis
           Availability for case study to be completed in two months
           Willingness to work under direction of regional supervisor
           Agrees to the level of compensation offered (including overhead, if applicable).

       The process of identifying and selecting the local researchers involves two main steps.
Once the case studies have been determined, a „request for researchers‟ notice will be sent out
in the public domain. The announcement will be launched on rural and microfinance
discussion list serves and with practitioner networks. We will also use informal contacts to
invite research institutions, universities and consultancy agencies to submit appropriate

        Once submissions have been made, the project coordinator will conduct a preliminary
review of the candidates, retaining only those meeting the minimum criteria listed above. The
short list will then be furnished to the regional coordinators and other members of the research
team that have experience in the particular country or region in question for their review and
ranking. Upon receipt of this information the project coordinator, along with other members
from the FAO‟s Rural Finance Group, will make the final researcher selection. Immediately
following the decision, she will contact the researchers and begin arranging their contracts.

      F.        Case Study Execution

       Once the contract has been finalized and signed by the researcher, the project
coordinator will conduct an initial debriefing with the individual, preferably by phone.
During the debriefing, she will review the researcher‟s terms of reference, explain the case
study analysis including the detailed outline and researcher guidelines. She will also provide
copies of the quality setting cases and discuss FAO‟s expectations on the content presentation
and quality of the final draft report. The project coordinator will review the field supervision
and support provided by the regional researcher. She will also facilitate an initial contact
between the two parties so that they can begin planning the field study activities.

         Planning of the field study activities will be the responsibility of the local researcher to
be approved by the regional coordinator. An official letter from the FAO Representative in
the country of study will be furnished to the local researcher to facilitate the scheduling of the
field visits. At the earliest possible date, the project coordinator will inform the participating
institutions about the names of the researcher and the tentative dates for the study. The
regional coordinator will finalize a work plan with the local researcher at least two weeks
prior to the commencement of field investigations and furnish it to project coordinator in

        During the field case study the regional coordinator will work with the local researcher
to provide support and supervision. The regional coordinator will review the case study
framework and detailed outline with the local researcher and review the structure of the
interview. The coordinator will observe and provide support to the researcher in carrying out
the field interviews. At the end of the interviews, the coordinator will work with the
researcher to analyze and synthesize the pertinent information received and provide feedback
on the best way to present it in the case study write up. By the fourth or fifth day, the local
researcher should provide the regional coordinator with a 2-3 page summary of the main
information that he has received to date. The regional coordinator will review the summary
and provide feedback to the researcher on the quality of the analysis and writing.

                                                                          Financial Linkages Study
                                                                                    December 2004

        The local researcher will provide a written draft of the case study to the regional
coordinator for technical and editorial review and feedback no later than one month after the
field interviews have been completed. The project coordinator will also review the draft and
provide her comments to the regional coordinator as necessary. The regional coordinator will
work with the project coordinator to determine final approval of the case study work. Once
approved, final payment to the local consultant and closing of the contract will be carried out.

      G.       Final Report Write-Up

        The end product of this study will be a final consolidating report and 10-12 in-depth
case study reviews on successful financial linkages between the formal and nonformal sector
finance. Highlights from unsuccessful cases may be included where appropriate to
demonstrate different approaches in establishing linkages. These highlights will be drawn
primarily from desk reviews and phone interviews with key informants. A detailed review of
the case studies will be carried out by the project coordinator and the regional researchers in
order to determine an initial set of regional lessons learned. A synthesis workshop will be
held in Rome, Italy with a subset of the core researchers to further review the case studies,
refine lessons learned and determine key recommendations based on the study findings. The
project coordinator and other members of FAO‟s Rural Finance Group will participate in this
workshop as well. The project coordinator will write the consolidating report and conduct a
final edit of the case study reviews. Final drafts of these documents will be reviewed by
FAO‟s Rural Finance Group before submission to the Ford Foundation on October 31, 2005.

                                                                                                      Financial Linkages Study
                                                                                                                December 2004

     VI.         Project Work Plan

             In order to assist the project team in keeping to a tight project timeline of 16 months,
     the following work plan listing the main project activities and their estimated duration for
     completion is depicted in Figure 4. It is imperative to adhere to this program in order to meet
     the project‟s completion deadline of October 31, 2005.

                                                                Project Work Plan
                                                                                    2004                             2005
                                                                                                              Mar-     July-    Sept-
No. Activities                                                    July Aug. Sept. Oct. Nov.    Dec.   Jan-Feb June     Aug       Oct

 1 Operationalize project in FAO system                             x    x     x

 2 Develop research framework                                                  x      x

 3 Conduct pilot case study to test research framework                                x    x

 4 Organise official launching workshop in Rome                                       x
   Organise and hold a rural finance research working session
                                                                               x      x
 5 with donors in Washington, D.C.
   Hold official launching workshop with core researchers
 6 and the Ford Foundation

 7 Identify linkage mechanisms for review                                      x      x    x     x

 8 Finalize research framework                                                             x     x

 9 Review and select final cases for review                                                      x       x
   Publicise a request for proposal in Africa, Asia and Latin
10 America

11 Select local researchers to carry out case studies                                                    x

12 Complete local researcher contracts and study work plans

13 Develop researcher guidelines and tools                                                       x       x

14 Supervise and manage case studies                                                                             x        x

15 Review and approve case studies submitted by researchers
   Synthesise lessons learnt and provide recommendations
                                                                                                                          x         x
16 regionally
   Write final consolidating report and submit to the Ford
                                                                                                                          x         x
17 Foundation

     Figure 4: Project Work Plan

                                                                           Financial Linkages Study
                                                                                     December 2004

VII.   Conclusions and Next Steps

        This is a study about financial linkages between formal and nonformal institutions that
result in expanded access to rural financial services. The aim of this study is to determine
how financial linkages and strategic partnerships affect the expansion of financial services to
the traditionally unserved and underserved segment of the rural population. A linkage is
considered successful when it results in one or more of the following:

                      sustainably expands access to financial services for new segments of
                       the rural population not traditionally served,
                      broadens the variety of products and services already offered, and/or
                      creates quality improvements of current products through better terms
                       and conditions.

        Over the next several months we will examine 10-12 successful linkage cases around
the world, draw lessons about linkages and make recommendations for those parties (donors,
policymakers, practitioners, researchers and others) interested in the development of rural
financial markets.

         Currently, we are in the process of establishing a list of possible candidates for review
that meet the initial minimum selection criteria. The final cases will be chosen based on these
criteria. In addition, we will attempt to provide a representative sample of the different types
of financial linkages that are present around the world as previously described. We are also in
the process of organizing the quality setting case studies which will take place during
December 2004 and January 2005. These cases will be used to test the overall framework as
well as set the quality standard for the local researchers who will carry out the subsequent
studies. The results from these studies, and in particular the feedback from the expert
researchers, will help us to refine and finalize researcher guidelines and tools. In the very
near term, the project coordinator will finalize the next round of contracts for the core team as
well as develop template terms of reference and case study guidelines for the local researcher
contracts that will need to be completed as soon as the researchers are chosen in January -
February 2005.

                                                                     Financial Linkages Study
                                                                               December 2004


Carter, M. et al., “Rethinking Rural Finance: A Synthesis of the Paving the Way Forward
for Rural Finance Conference,” Basis Collaborative Research Support Program, University of
Wisconsin and World Council of Credit Unions (WOCCU), Madison, WI. 2004.

Gonzalez-Vega, C., “Deepening Rural Financial Markets: Macroeconomic, Policy and
Political Dimensions,” Key theme paper at “Paving the Way Forward for Rural Finance: An
International Conference on Best Practices,” Washington, D.C., June 2-4, 2003.

Miller, C., “Twelve Key Challenges in Rural Finance,” presented at “Examining Design and
Innovations in Rural Finance for Addressing Current and Future Challenges” an FAO Rural
Finance Workshop, a pre-event at the SEEP Network Annual Meetings, Washington, D.C.,
October 26, 2004.

Nagarajan, G. and R. Meyer, “Rural Finance: Recent Advances, Lessons, Debates and
Emerging Opportunities,” report for the Ford Foundation, forthcoming.

Pearce, D., “Links between Banks and Non-banks to Promote Access to Financial Services for
the Poor,” CGAP Presentation at the ABA Annual Meeting, 2003.


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