OFID – AGFUND Symposium, Vienna, 05-06 June 2012 The Role of Donors in Accommodating the Basic Needs of Poor People through Microfinance in Agriculture Michael Hamp Senior Rural Finance Advisor IFAD’s Role, Experience and Emerging Lessons in Rural Microfinance

IFAD – a Snapshot IFAD has lent and granted over $ 12 billion for agriculture and rural development programmes in developing countries. Project size varies from $ 200,000 grants to $ 70 million loans Traditionally targeted the poorest rural populations Has reached about 350 million poor rural people Major supporter of community designed and managed institutions and farmer organizations Makes use of government and local stakeholder systems rather than managing projects itself

Financial access in rural areas 2.7 billion people around the world have no access to formal financial services Over 90% of people in rural areas lack access to financial services

Rural Microfinance FINANCIAL MARKET Rural finance: Financial services used in rural areas by people of all income levels Agricultural finance: Financing agriculture-related activities, from production to the market Microfinance: Financial services for poor and low-income people FINANCIAL MARKET MICRO FINANCE RURAL FINANCE AGRICULTURAL FINANCE

IFAD’s Rural Finance Policy - key principles Support access to a wide variety of financial services, including savings, credit, insurance, leasing, remittances and payment systems Promote a wide range of financial institutions, models and delivery channels Support demand-driven, market-based approaches in collaboration with the private sector Develop and support long-term strategies focusing on sustainability and poverty outreach Promote an enabling environment for rural finance

Partner Financial Service Providers FORMAL INFORMAL Public, Private, Cooperative Banks Non-Bank Financial Institutions NGOs MFIs Community Based Financial Organizations Slide courtesy CGAP

Rural Finance as Part of IFAD Operations Programme Management Department Policy and Technical Advisory Division Financial Assets, Markets and Enterprises - FAME - Unit Rural Finance Core Business Rural Economic Development (VCD, Private Sector) Rural Finance Special Facilities (FFR and WRMF) Economic & Financial Analysis

IFAD Rural Finance Programme Policy and Technical Advisory Division Financial Assets, Markets and Enterprises - FAME - Unit Rural Finance Sector: Loans and Grant Programmes one of the world’s largest, lender in Rural Microfinance for poverty reduction net new commitments 2010: $705 m ($44m of total as grants = 6%; 5% of all funders) commitment by level of FS: $634 m retail, $35m market infrastructure,$35m policy commitments by region: 35% SSA; 40% APR; 18% NEN; 6% LAC commitment by purpose 80% on-lending; 20% Capacity Building approximately 16% of IFAD’s investment portfolio (CGAP 2011 Cross-Border Funder Survey, incl. 20 largest MF donors & investors) ODA according to OECD’s Development Assistance Committee (DAC), 29 donors reached an aggregate distribution of $12.0 billion in funding flows focused on Smallholder Farming for 2009 and Onward. Out of the $12.0 billion, $2.3 billion or 19%, is focused on providing access to markets or financing to smallholders in Africa, $1.0 or 9% in Asia, and $0.6 or 6% in Latin America.

33 Years Experience in Rural Microfinance Facing the challenges of financing small-scale agriculture Operating a self-sustaining rural MFI High information & transaction costs Private sector approaches crowded-out by subsidized & targeted lending Dispersed populations Poor infrastructure Seasonality of agricultural activities Few collateral assets Risks of farming (price, production, …) 30 m borrowers from IFAD assisted MFIs US$ 200 average loan size 15 m voluntary savers US$ 127 average savings women account for 83% (24 m pax)

33 Years Experience in Rural Microfinance a) focusing on agricultural lending challenges Reaching rural clients efficiently and cost effectively: taking banking services to the people via ICT applications Maintaining liquidity in agricultural dependent regions amid seasonal income cycles: building loan analysis and repayment schedules on revenue flows from all farm, labour and business activities, incl. remittances Mitigating covariant agricultural risk: using specific methodologies for micro-level index insurance applications Adapting loan products to meet the specialized needs of rural borrowers: securing loans by contractual agribusiness payments, warehouse receipt system, etc. Overcoming poor lending practices and improving repayment culture: fostering group-based savings and lending techniques, combined w/. financial education Developing technical capacity at the local level: devoting substantial resources to staff training, development of sound practices and procedures

33 Years Experience in Rural Microfinance b) focusing on IFAD’s competencies Banking beyond branches Replicating Targeting Ultra Poor Managing price risks (commodity exchange, warehouse receipt system) Enhancing the value chain financing methodology Promoting and consolidating decentralized community-based financial systems & linkages Flexible disbursement & repayment schedules (seasonality) R&D in weather and yield index insurance (WRMF) and productive use of payment services and rural remittances (FFR)

Emerging Lessons in Rural Microfinance Portfolio risk is highly diversified Delinking loan uses from repayment sources – treat the entire farming household Loan terms and conditions are adjusted to accommodate cyclical cash flows in bulky investments Character-based lending combined with technical criteria in selecting borrowers, setting loan terms and enforcing repayment Mechanisms to build assets, prepare for life events and emergencies Contractual arrangements reduce price risk, enhance production quality and help guarantee repayment Financial service delivery piggybacks on existing institutional infrastructure or is extended by using technology Member-based MFIs can facilitate rural outreach and financial deepening Index insurance can protect against the risks of agricultural lending To succeed, rural microfinance must be insulated from political interference

Weather Risk Management Facility Francesco Rispoli Policy and Technical Advisory Division (IFAD) f.rispoli@ifad.org Emily Coleman e.coleman@ifad.org

Weather Risk Management Facility Joint initiative of IFAD and WFP since 2008 Objective: increase access of small and vulnerable farmers to a wide range of risk management tools that improve rural livelihoods, promote agricultural development & food security WRMF activities to date 36 weather index insurance (WII) programmes evaluated and reviewed (analysis of opportunities, challenges and good practice with WII) Two pilots conducted in Ethiopia and China Technical guide on WII developed Evaluate/develop/use specific remote sensing methodologies*) for micro-level index insurance applications in W-Africa (B. Faso, Senegal) *)

Financing Facility for Remittances Promoting innovative remittance markets and empowering migrant workers and their families Promoting innovative remittance markets and empowering migrant workers and their families

Key figures US$ 22 million multi-donor programme Almost 50 innovative projects More than 40 countries 170 partners worldwide Europe Albania Kosovo Moldova Romania Near East and the Caucasus Georgia Asia and the Pacific Bangladesh Cambodia China India Indonesia Kazakhstan Kyrgyzstan Laos Malaysia Nepal Philippines Sri Lanka Tajikistan Uzbekistan Vietnam Latin America and the Caribbean Bolivia Colombia Costa Rica Ecuador Haiti Jamaica Paraguay Peru Africa Benin Burkina Faso Cameroon Ethiopia Ghana Madagascar Malawi Mali Mauritania Niger Senegal Sierra Leone Somalia Uganda

Scaling up successful models (example) The Diaspora Investment in Agriculture initiative Encouraging the global diaspora to invest in sustainable agricultural projects with real potential for impacting the lives of poor rural people Enabling diaspora investors, diaspora organizations, and actors on the ground to build the capacity necessary to undertake cross-border investments and gain access to markets for traditional products Stimulating agricultural production and reducing import dependency in order to enhance food security Secretary of State Hillary Clinton and IFAD President Kanayo F. Nwanze launched the DIA initiative at the Global Diaspora Forum 2011, at the US State Department in Washington D.C. on 17-19 May

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