Jennifer Isern European Forum on Rural Development Cooperation 6 September 2002 Experiences in Rural Microfinance: Africa and Asia

2 Rural Households: Diverse Financial Needs Microenterprise/ Agriculture loans Access to funds sent by relatives abroad/in towns Insurance against risk Education expenses Old age pensions Loans for emergency needs Safe place to save

3 Serving Farm and Non-Farm Households Rural populations: lSouth Asia: 970 million and 72% of total population lEast Asia and Pacific: 1.2 billion and 65% of total population lSub-Saharan Africa: 432 million and 66% of total population FAO 1998 Regions Non-farm income share Mean (%) AFRICA42 East and southern Africa 45 ASIA32 East Asia35 South Asia29 LATIN AMERICA40 Examples: Average Non- Farm Income Share Mali: 63% Mozambique: 18% India: 35% China: 24% Nepal: 13%

4 Challenges for Rural Financial Institutions lDispersion of clients lInfrastructure costs: communications, systems, offices lHigher potential risks: price and production risks, little insurance lSeasonality and covariance of rural client incomes lCollateral and contract enforcement lMoral hazard: past experience of loan defaults lHigher transaction costs

5 ASIA l BAAC (Thailand): 5 mil borrowers; RPD of 323 lRural Banks (Philippines): 786 banks, 2.6% national OS loans, RPD of 566 lBRI Unit Desa (Indonesia): 27 mil depositors, 2.8 mil borrowers, RPD of 700. lGrameen Bank (Bangladesh):2.4 mil clients, RPD of 1,200 lBRAC (Bangladesh) 3 mil borrowers, 3.5 mil depositors, RPD of 1,200 Examples of Rural Finance Institutions AFRICA lKafo Jiginew (Mali) 36,000 clients, RPD of 162 l CVECAs (Pays Dogon, Mali) 33,000 members, RPD of 162 lCMS (Senegal) 137,000 members, RPD of 222 lFCPB (Burkina Faso): 576,00 clients, RPD of 265 lCERUDEB (Uganda) 250,000 clients, RPD of 370 lSACCOs (Kenya) 3 mil clients, RPD of 499 RPD = rural population density per sq km of arable land

6 What About Remote and Marginal Areas? Examples of innovative approaches: lCVECA lMMD in Niger lFinancial services associations in Africa lWarehousing/Inventory credit programs: Technoserve-Ghana, and ACDI/VOCA lSKS in India RegionRural Popn. (mil) RPD (approx.) SAHEL SOUTHERN AFRICA NEPAL20686 PAKISTAN87403 WESTERN CHINA 285 (rural + urban) 691 (national)

7 Comparing Africa and Asia: Differences AFRICA lMore non-farm activity in some countries lLower population densities lMore infrastructure challenges lMore land degradation: only 42% agricultural land lInterest rate limits: WAMU lMore parastatal marketing boards esp. in W Africa lGreater prevalence of informal savings mechanisms lHigher transaction costs lMany rural and urban MFIs lSome medium-scale but majority smaller MFIs ASIA lGenerally higher population densities lFewer interest rate limits lLower transaction costs lMany rural and peri-urban MFIs; fewer urban-only MFIs lGiant institutions and many medium and smaller MFIs

8 Comparing Africa and Asia: Similarities Africa and Asia lSignificant subsidized rural lending lInterest rate pressures lRegular natural disasters increase rural risks: drought, famine, floods lGrowing number of successful institutions serving rural clients lMore competition encouraging financial institutions to serve new underserved markets lGreater diversity of financial products: savings, loans, insurance, remittances, housing lIncreasing attention from bank regulators

9 Rural Finance Approaches (1 of 3) Careful product design and delivery for clients in rural economy lRepayment schedules to fit client income cycles lFlexible seasonal staffing lFull-cost pricing: access to well-designed loans and safe savings is key client demand factor lNew products: savings products, crop insurance and remittances

10 Rural Finance Approaches (2 of 3) Technology to increase efficiency lCash points: PRODEM in Bolivia and explosion globally lMobile offices and palm pilots: Ghana’s rural banks and Compartamos in Mexico lSmart cards and farmer credit cards: SKS in India and Financiera Trisan in Costa Rica lClient information: credit bureaus and credit scoring lCell phones: Grameen Phone in Bangladesh

11 Rural Finance Approaches (3 of 3) Build on existing infrastructure lInput suppliers, processors, traders— CLUSA (Zambia, Mozambique), REAP (Kenya) lPost office branches – revival of Kenya Post Office Savings Banks and Tanzania Post Bank lSelf-help group links to existing financial institutions-- NABARD, India works 460,000 SHGs working with 7.8 million poor households lConsumer retail outlets

12 Moving Forward in Africa and Asia lUnderstand rural clients lDiversify financial products and build on recent innovations lImprove efficiency: methods, technology, delivery lAddress challenge of remote areas lLink with existing infrastructure lRemove interest rate limits lCommit to sustainable institutions