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					Rural finance:
Small amounts making a big difference

Most of the world’s
1.4 billion very poor people
live in precarious conditions,
without the security of
reliable income, shelter or
food. Being able to save or
borrow small amounts of
money can make a big

                                                                                                                                                                           IFAD/G. Pirozzi
difference to their lives.
Yet only about 10 per cent
                                              A women’s group meets in Mombasa, Kenya. Members know that if they repay their small loans on time, they should be able to
of poor people living in the                  take out bigger loans. This gives them an opportunity to plan ahead for the development of their small businesses.

rural areas of developing
countries have access to                         It soon became clear that providing                         often at the lowest levels of rural
even the most basic                           loans was not enough. Poor rural people,                       societies. The status of women, in their
financial services.                           like everyone else, needed access to a                         homes and in their communities,
                                              wide range of financial services. Today, the                   improves when they are responsible for
Small, informal savings and credit groups     rural finance sector has moved beyond                          loans and manage their household’s
have operated in different forms around the   credit to include savings, money transfers                     savings. Credit extended to women has a
world for centuries, but the field of         and a variety of insurance products that                       greater positive impact on household food
microfinance (financial services for poor     cover life, health and agriculture.                            consumption and on the quality of life for
people) took off in the late 1970s when          Access to financial services in rural                       children than similar loans to men.
experimental development programmes           areas allows poor people to manage their                           In countries as diverse as Bangladesh,
in Bangladesh began lending tiny amounts      household cash flows, start new                                Kenya and Bolivia, poor people
of money to groups of poor women.             agricultural activities and set up small                       consistently repay their loans more
The women invested the money in small         businesses. When poor rural people have                        reliably than conventional borrowers.
income-generating activities, and reliably    higher earnings and safe ways to save                          This has driven the rapid expansion of
repaid their loans. News of their repayment   their money, they can pay for healthcare                       microfinance since the 1970s. But given
rates, and the difference microfinance had    and education, and plan and invest in the                      that fewer than 10 per cent of poor rural
made to their lives, spread and the field     future of their farms or businesses.                           households have access to the most
quickly grew, reaching more and more             Microfinance is particularly important                      basic financial services, there is still a
people around the world.                      for poor women and children. Women are                         long way to go.
Beyond lending and
saving: new directions                             IFAD’s commitment
in microfinance                                    to rural finance
Microinsurance. Unexpected events and
income shocks can have a devastating impact        and innovation
on any household anywhere in the world.            IFAD’s goal is to empower poor rural women and men in developing
Insurance is a means of cushioning the blow,       countries to improve their incomes and food security. To do this, IFAD is
but it is not widely available to poor people in   working to expand access to a range of financial services in rural areas.
developing countries. The Microfinance Centre
for Central and Eastern Europe is a network of     In 2008 IFAD-supported rural finance institutions reached over 4 million voluntary
                                                   savers, with cumulative savings of over US$1 billion. They also served 21 million
over 90 microfinance institutions from the
                                                   active borrowers, 87 per cent of whom were women, and had total outstanding
region. The MicroInsurance Centre is an
                                                   loans of approximately US$4.6 billion. Approximately 18 per cent of IFAD’s overall
international microinsurance consulting firm
                                                   portfolio of loans and grants is focused on rural financial services, making it one of
that promotes partnerships between regulated
                                                   the top four microfinance funders in the world. Its Rural Finance Policy spells out
insurers and rural finance providers. With
                                                   the guiding principles of IFAD’s rural finance operations.
support from IFAD, these organizations are
                                                      There is no single microfinance model. IFAD works with a wide range of
working to develop microinsurance products         partners, tailoring its interventions to each particular context. Its partners in rural
specifically for low-income individuals and        finance include grass-roots savings and credit associations, financial cooperatives,
families, particularly in rural areas.             microfinance institutions, rural banks, specialized NGOs and agricultural
Index-based weather insurance. Extreme             development banks.
weather events and natural disasters such as          In many areas, self-help groups are central to rural finance. These village-
droughts or floods can destroy crops, trap         based groups consist of approximately a dozen women who save money and
                                                   make small loans to each other within their group. In Indonesia alone, IFAD has
rural households in poverty, impede
                                                   established over 58,000 self-help groups, 1,900 self-help group associations,
development and drain a country’s financial
                                                   200 microfinance institutions, and 35 cooperatives, benefiting more than
resources. Smallholder farmers in developing
                                                   800,000 households.
countries are particularly vulnerable to the
                                                      If microfinance is to make a lasting difference in peoples’ lives, financial
harsh effects of these weather risks.
                                                   institutions must be sustainable, providing relevant financial services over the long
Affordable insurance can help improve their
                                                   term and continually increasing their outreach to poor people. IFAD always looks
financial security and protect their livelihoods   at the long term, working to build institutions that are able to allocate scarce
in the event of a crisis. IFAD has joined forces   resources efficiently, manage risk and reduce transaction costs.
with the World Food Programme (WFP) and               Sustainable poverty reduction requires political will, good governance and
other partners to promote index-based              sound policies. Governments have an important role to play, creating a conducive
weather insurance to mitigate these risks.         policy and regulatory environment in which microfinance institutions can thrive
Remittances. The money that migrant                and be effectively supervised.

workers send home – remittances – is a lifeline
for poor people. These funds, which add up to
more than US$300 billion worldwide, generally
surpass foreign direct investment and
development assistance combined. IFAD is
working to unlock the development potential
of remittances by linking them to other
financial services, such as savings, insurance
and loans. The Financing Facility for
Remittances, based at IFAD, seeks to improve
access to cost-effective and easily accessible
money transfer services in remote rural areas.
The Facility is funded by the European
Commission, the Governments of
Luxembourg and Spain, the United Nations
Capital Development Fund, the Consultative
Group to Assist the Poor (CGAP) and the
                                                                                                                                             IFAD/G.M.B. Akash

Inter-American Development Bank/Multilateral
Investment Fund.
The warehouse receipt system in
Tanzania: no ordinary piece of paper
Maimuna Omary Ikanga is a farmer in the       explained a marketing specialist at AMSDP,
Babati district of the United Republic of     “the lack of storage facilities in the district
Tanzania. For years she had to sell her       and the difficulty of obtaining credit.”
maize, peas, beans and sunflowers                The Rural Financial Services
immediately after harvest because she         Programme has helped create savings
had no place to store them. Crop prices       and credit cooperatives, formed by local
usually drop drastically during the harvest   communities, which allow poor rural
season, so Maimuna’s financial gains from     people to get much-needed credit at
her harvest were small. Now, thanks to        reasonable rates. When the harvesting
the introduction of a warehouse receipt       season begins, managers of the

                                                                                                IFAD/M. Millinga
system, Maimuna can store her products        cooperatives submit a loan application to
in a warehouse. With the receipt she          the bank. The warehouse manager issues
receives, she can use her stored goods as     a receipt to the farmer when the produce
collateral to get credit at reasonable        has been deposited in the warehouse. The
interest rates. When prices go up,            farmer can use this receipt to obtain a
sometimes doubling or tripling after three    loan from the cooperative of up to 70 per
to six months, she can then sell her          cent of the value of the deposited stock.
products, making a much better profit.           The warehouse receipt system has had
   The warehouse receipt system is the        an immediate and positive effect on
result of collaboration between two IFAD-     farmers’ incomes, and more and more
funded projects in the Babati district: the   farmers have been using it. As a result,
Agricultural Marketing Systems                the cooperatives have been able to obtain
Development Programme (AMSDP) and the         bigger loans on more favourable terms.
Rural Financial Services Programme. “The      The system has been so successful that
warehouse receipt system is an                the Government is now extending it
arrangement that solves two problems,”        throughout the country.

Self-help groups in India
For several years, Sarasu, a single mother    Now, years later, both loans have been
of seven children in rural India, struggled   repaid and two of Sarasu’s children have
to feed her family on just 20 Indian rupees   graduated from university.
a day (less than US$0.50). Saving money          In India, self-help groups are the
was impossible, and without collateral she    backbone of microfinance services. In
couldn’t qualify for a bank loan. Then, in    2003, the Government of India announced
1989, IFAD initiated the Tamil Nadu           that more than 2.5 million poor families
Women’s Development Project, which            had gained access to credit and other
promoted an innovative and informal           financial services through 150,000 self-
group-based system of lending and             help groups.
saving. The premise was simple: after            In the mid-1980s self-help groups were
women had paid into a communal                established as pilot projects in India by
account, they could access loans from         NGOs, particularly the Mysore
local commercial banks participating in       Resettlement and Development Agency
the scheme.                                   (MYRADA), in order to provide financial
   Sarasu, determined to improve her life,    services to poor people. MYRADA staff
met the minimum savings requirement           provided training on how to organize
and soon took out a loan to buy two dairy     meetings, set an agenda, keep minutes
cows. Sales from the milk raised her          and other skills vital to successful
income to 100 rupees a day. Another loan      business ventures. Self-help group
helped her start a firewood business.         members selected themselves on the
                                                                           basis of some common factor (such as geography, religion, economic level or social
                                                                           group). The resulting mutual trust and support enabled them to work well together,
                                                                           gradually gaining confidence in mobilizing savings, building and managing group
                                                                           resources and gaining access to external credit. The women found that their
                                                                           improved economic power also enhanced their standing within their communities
                                                                           and families.
                                                                              What started as a pilot programme has now become a movement for social
                                                                           empowerment – particularly for poor rural women. The number of self-help groups

                                                       IFAD/R. Chalasani
                                                                           linked to banks has increased from about 500 in the early 1990s to more than
                                                                           3 million in 2008.

Michael Hamp
                                                                           Respecting cultural sensitivities:
Senior Technical Adviser, Rural Finance
Technical Advisory Division                                                microfinance in Pakistan
Tel: +39 06 54592807                                                       The Dir district of Pakistan, a remote, mountainous and disadvantaged area, is
                                                                           culturally conservative. Women’s roles are limited by religious customs and traditions.
Francesco Rispoli                                                          In addition, many communities observe strict Islamic prohibitions against interest-
Technical Adviser, Rural Finance                                           based lending, making activity in the region difficult for the formal banking sector.
Technical Advisory Division
IFAD                                                                          The IFAD-funded Dir Area Support Project introduced a new system – Islamic
Tel: +39 06 54592725                                                       Microfinance, known locally as Murabaha – using an approach compatible with
                                                                           Islamic principles and acceptable to local communities.
Jamie Anderson                                                                Introduced after consultation with religious scholars, the bank and customer
Technical Adviser, Rural Finance                                           enter into a sale and purchase agreement. The lender is an active, risk-sharing
Technical Advisory Division
IFAD                                                                       partner in the enterprise, providing training in relevant topics, such as basic
Tel: +39 06 54592724                                                       accounting and marketing.
                                                                              For women participating in the project, the benefits have been considerable.
Pedro de Vasconcelos                                                       Bacha Khela, from the Shaikh Ahid women’s organization, is supporting five children
Coordinator, Financing Facility for                                        and a sick husband. With her first loan of US$227, she was able to set up a grocery
Remittances                                                                shop in her own home. Bacha was able to repay the loan within a year and now
Technical Advisory Division
                                                                           earns US$38-45 a month.
Tel: +39 06 54592012                                                          “Before I joined the women’s organization, I had no hope of having my own
E-mail:                                           income,” Bacha says. “Now I have my own business and my life has improved.
                                                                           I have bought a stove and a refrigerator. My goal now is to buy my own house
                                                                           and to pay for my other children’s education.”

                                                                           LINKS                                            MicroInsurance Centre
                                                                           IFAD and rural finance                           UI/Home.aspx
                                                                                                                            United Nations Capital Development Fund
                                                                           Rural finance innovations              
Enabling poor rural people                                                 1122821975489_RFI_worldbank.pdf                  Centre Internationale de Développement
IFAD is an international financial institution and a                                                                        et Recherche
to overcome poverty                                                        Rural finance for the poor
specialized United Nations agency dedicated to                                                                    
eradicating poverty and hunger in rural areas of                 
developing countries.                                                                                                       MicroSave
                                                                           Weather index insurance                
International Fund for Agricultural Development                            index.htm                                        Rural Finance Knowledge Management
Via Paolo di Dono, 44                                                                                                       Partnership
00142 Rome, Italy                                                          Weather index insurance brochure       
Tel: +39 06 54591                                                
Fax: +39 06 5043463                                                        brochure.pdf                                     World Food Programme
                                                                           Microfinance Centre for Central and,                                   Eastern Europe                                   Consultative Group to Assist the Poor
October 2009                                                                             

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