Background Information
                           IFAD Rural Finance Thematic Workshop
                                  D...
Background Information
                           IFAD Rural Finance Thematic Workshop
                                  D...
Background Information
                           IFAD Rural Finance Thematic Workshop
                                  D...
Background Information
                           IFAD Rural Finance Thematic Workshop
                                  D...
Background Information
                          IFAD Rural Finance Thematic Workshop
                                 Dat...
Background Information
                        IFAD Rural Finance Thematic Workshop
                               Date: 2...
Background Information
                     IFAD Rural Finance Thematic Workshop
                            Date: 26th -2...
Background Information
IFAD Rural Finance Thematic Workshop
       Date: 26th -29th July 2005
  P.O Box 783 00621 Nairobi,...
Background Information
                           IFAD Rural Finance Thematic Workshop
                                  D...
Background Information
                           IFAD Rural Finance Thematic Workshop
                                  D...
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  1. 1. Background Information IFAD Rural Finance Thematic Workshop Date: 26th -29th July 2005 P.O Box 783 00621 Nairobi, Kenya Contact E-mail: miriamc@unops.org Theme: Knowledge sharing for improved rural finance delivery systems, institutional development and policy making with emphasis on the role of knowledge management in East and Southern Africa. Introduction The rural population needs financial services such as deposit facilities for accumulating and safe keeping of savings for smoothing consumption and self financing activities; credit for consumption smoothing and external financing of activities; and insurance for social security and loan protection. In order to provide rural finance, sustainable institutions must consider four critical things: first, viability or being able to cover costs from margin; second, self reliance or being able to mobilize own resources; third, outreach or broadening and deepening financial services; and finally impact – help the rural people to help themselves are to provide financial services on a sustainable basis. “Can financial services be used to assist the poor in improving their lot?” The answer is “only when finance is allowed to do what finance is supposed to do”. This is, only:- • when finance allows a transfer of purchasing power from uses with low marginal returns rates of return to uses with high marginal rates of return; • when finance contributes to more efficient inter-temporal decisions about saving, the accumulation of assets, and investment; when finance make possible a less costly management of liquidity and the accumulation of stores of value; and • when finance offers better ways to deal with the risks implicit in economic activities. Many ingredients are needed for the poor to come out of poverty and financial service is only one of them. Financial services play the key role of facilitating the work of growth-promoting forces, but only when the opportunities exist. During this workshop we will consider four issues; first, the financial services provision and rural outreach; the institutional support; value chain financing; improvement of information access and finally regulatory issues that impede or enhance rural finance. Financial Services Provision with emphasis on Rural Outreach & Regulation Issues Presenters: K-Rep FSAs Kenya; UWESO, Uganda; Songa Mbele Managed ASCAs, Kenya & DUTERIMBERE SA, Rwanda It is generally recognized that the majority of poor people live in rural areas, thus any strategy to reduce poverty has to address the issues in rural areas. Financial services are a vital part of poverty reduction, enabling people to manage their consumption, life cycle events, savings and investment needs. The informal sector meets the majority of these needs in rural areas as formal providers find the higher costs of rural operations prohibitive. As a result this reduces options and limits the ability of rural people to benefit from the resources and services that urban entrepreneurs enjoy. Strategies have to be found to reduce the costs of operating in remote places, where clients are more scattered and largely dependent on agriculture. Case studies of K-Rep financial Services Associations (FSAs), Songa Mbele and others are some innovations that are widening rural outreach that will be featured during workshop. 1
  2. 2. Background Information IFAD Rural Finance Thematic Workshop Date: 26th -29th July 2005 P.O Box 783 00621 Nairobi, Kenya Contact E-mail: miriamc@unops.org In many countries, financial institutions are prohibited by law from accepting deposits because of a lack of either regulatory agency capacity to adequately oversee them or of government confidence in their ability to protect their clients’ investments. Standard accounting practices and effective documentation by all financial institutions would facilitate oversight mechanisms and better self-regulation through great transparency and efficiency. The case for K-Rep FSA and Songa Mbele show how community based institutions found a way to circumvent this regulation hitch. In Rwanda the case as presented by Duterimbere SA is different in that the regulation allows intermediation of savings for those institutions supervised by Central Bank. In Uganda, for example, the Bank of Uganda has developed the Microfinance Deposit Taking Institutions (MDI) bill which has provided tiers for regulatory purposes; this will be highlighted in the UWESO case. Institutional Development & Regulations Presenters: RFSP/MEDA, Tanzania; OTIV/CAVA, Madagascar; Care International, Rwanda, Cooperative Bank, Kenya, Decentralized Financial Services (DFS), Kenya and KUSCCO – SACCO Apex. Apart from rural and microfinance, the access to non-financial services (like market information, technical assistance, marketing support, packaging, legal advice, lobbying) provided by universities, business development service providers, producers’ organizations etc., are of crucial importance in order to enable rural poor households to engage more in market economic development. Therefore, the creation of an enabling market environment and development of effective delivery systems of financial and non-financial services are more and more considered to be complementary requirements for rural households to escape from poverty through market economic development. Institutional capacity alone, however, is not sufficient where policy restrictions prevent rural financial institutions from accepting savings. Beyond assisting institutions in gaining the capacity for sound financial management, projects/programme can become an advocate for expanding the number and type of institutions that are allowed to accept deposits. As part of this effort, the project/programmes could invest in expanded regulatory capacity, support appropriate adjustment of laws and regulations, educate policymakers on the ways in which financial integrity and security can be ensured without direct regulation and government oversight, and illustrate the potential contribution to economic growth that expansion of savings services can bring. Such an effort will be demonstrated by KUSCCO Apex for cooperatives in Kenya. Enhancing Value-chain Financing Presenters: Family Concern & GAPI, Mozambique Reading material: Agricultural Marketing Companies as Sources of Smallholder Credit in Eastern and Southern Africa Traders, processors, input suppliers and exporters are a major source of financial services to rural, agriculture dependent households. These buyers and suppliers provide credit to farmers as part of input supply and product purchase transactions. This inter-linking of credit with other services helps to reduce the risk associated with agricultural lending, particularly when the credit is tied to 2
  3. 3. Background Information IFAD Rural Finance Thematic Workshop Date: 26th -29th July 2005 P.O Box 783 00621 Nairobi, Kenya Contact E-mail: miriamc@unops.org subsequent sale of produce. The type of financial products provided by buyers and suppliers is usually limited to seasonal credit and short term advances but, nevertheless, it has been found to be at least as important to farmers as loans from specialist financial intermediaries. In many places, input suppliers and other non-financial enterprises are an important source of rural finance. Input suppliers, processors and other product traders often provide credit or in-kind inputs to farmers at time of planting, repayable upon harvest. In some cases, the intermediary accepts a portion of the producer’s output, often at a price agreed to when the credit is issued. While significant price fluctuation can make these contractual relationships less advantageous to the producer at times, they are still generally preferable in the absence of more conventional financial services. Often these relationships are an important source of information, as well as access to input and output markets. The presentation at the workshop will explore mechanisms that promote mutually beneficial relationships between non-financial entities and agricultural producers that improve the latter’s access to credit. Opportunities to expand these market chain relationships through the engagement of financial institutions were also explored. Input suppliers, processing firms, warehouses and other commercial actors in the agricultural and rural sectors provide critical financial services to small and medium rural producers. Enhancing existing, interlinked rural finance activities and facilitating new services by these actors can expand access and ensure competitively-priced financial services. Improving Information Access and Management Presenters: IFAD/ MIX Partnership – By IFAD Rome and Rural Finance Interactive site Reliable client information is a key to successful financial operations, and therefore a critical component of strategies for financial sector development. Currently, a lack of cost-effective information collection, management, and sharing challenges existing rural financial institutions and discourages entry by potential market participants. Improvements in information systems would lower intermediation costs and induce new institutions to enter, creating the possibility for lower cost financial services. Further, improved information systems can enhance the viability of rural financial institutions by improving both the quality of their lending portfolio and the overall efficiency of operations. However, there are large fixed costs associated with establishing information systems and certain components that would require public investment. The IFAD/Mix initiative will be presented at the workshop to address the problems associated with financial institutions’ access to information. The need for institutional development in the area of information systems and elements of desirable information systems and mechanisms to facilitate financial sector information sharing will be discussed. OBJECTIVES OF THE WORKSHOP The general objective of this workshop is to improve the understanding of rural finance knowledge management as a necessary condition for the rural poor to engage in and benefit from emerging market opportunities. The specific objectives are: 3
  4. 4. Background Information IFAD Rural Finance Thematic Workshop Date: 26th -29th July 2005 P.O Box 783 00621 Nairobi, Kenya Contact E-mail: miriamc@unops.org Provide a peer learning forum for the IFAD Programme Managers and service providers to share experiences with technical support in the implementation of the rural finance. The main areas of focus will include; first experiences of rural finance service providers in institutional development in terms of management of groups, governance (the role of board of directors and management) and oversight, literacy and financial management; secondly, financial service provision experiences looking at the different financial products and costing structure for sustainability; thirdly, the experiences on rural outreach – reducing costs to support livelihood development and finally challenges on regulations and supervision of rural finance institutions. The presentations are: • IFAD’s Rural finance implementation based on the Decision Tools for Rural Finance (IFAD, Rome); • Present and discuss the rural finance interactive site. This site is aimed at providing Programme Managers and their service providers a one stop shop for all rural finance information in a user friendly manner in order to improve rural finance implementation. This interactive site presentation will be done by Designer, Loksons Designs; • Complement the workshop discussion with field visit experience where the Programme Managers and Services Providers will interact with fellow rural finance implementers in Kenya in order to share their experiences and challenges. The proposal is to have four groups to visit a KWFT groups in Machakos, Financial services association (FSA) in Kitui, Equity Bank mobile units in Thika Branch, and Rural SACCO branch for the Catholic Diocese of Machakos ; • Share and discuss interesting issues in rural and microfinance that can be of interest to Programme Managers and Service providers. Here we will share the action research initiatives and partnership work with DFS (Training Tools Development); Songa Mbele Managed ASCA, IFAD/Mix Market initiative, Faulu Kenya leveraging funds from money markets; KUSCCO – Apex of SACCOs, K-Rep FSA initiative, and Family Concern – factoring for smallholder farmers. • We will conduct Programme Managers and services providers’ needs assessment interviews will run concurrently with the workshop. FIELD TRIPS 1. Equity’s Bank mobile banks are adapted four wheel drive vehicles that are based at a branch and visit market centres on designated days. In May 2003, they had slightly over 10,000 clients attached to six mobile units serving 21 locations in 4 districts. They have only provided savings facilities through the mobile branches; customers must go to branches for a loan. The units have an operational self-sufficiency ratio of 102% but appear primarily to be reaching the better off rather than the poorest. This is also true of Nyeri Farmers SACCO which uses mobile vans to bring savings services to remoter areas. 2. Kenya Women Finance Trust (KWFT) offers working capital loans to women using a standard group technology. Initially the staff traveled to groups in villages by motorbike but this proved too costly and now the approach is to provide services to clients in market centres on 4
  5. 5. Background Information IFAD Rural Finance Thematic Workshop Date: 26th -29th July 2005 P.O Box 783 00621 Nairobi, Kenya Contact E-mail: miriamc@unops.org market days. This technique reduces the costs of delivery for the NGO but it increases the costs for clients who would not normally travel to the market, and hence is likely to reduce their access. 3. Financial Service Associations (FSAs) have been promoted by K- Rep Development Agency (KDA) is by far the most innovative rural finance delivery methodology of reaching further into rural areas in Kenya. In FSAs, members buy shares and the capital raised is used for on-lending to them. Some have been established in very remote areas. Unfortunately a number have loan recovery problems and KDA have realized that they cannot just set the FSAs up and then withdraw. On going support is needed and KDA has intiated some management contracts for some. This has proved very significant in the performance of the FSAs. 4. Cooperative Bank Community Financial Empowerment Project (COFEP) and Catholic Diocese of Machakos - Linkage banking is a programme that helps to promote financial transactions between the formal rural financial institutions comprising of private and public sector commercial banks with self help groups (SHG) or community based institutions (CBOs) as the clients. These SHG or CBOs are financial intermediaries owned by the poor rural people. They usually start with voluntary thrift on a regular basis (contractual savings). They use this pooled resources (as quasi-equity) together with the external banks loans to provide interest bearing loans to the members. Such loan provides additional liquidity or purchasing power for use in any of the borrower’s production, investment or consumptive activities. The main objectives are: • To facilitate and mobilize savings by self-help-groups so that they can generate their own part collateral and loan guarantees; • Provide credit delivery channels to groups; • Recycle locally generated funds to the areas from where they derive; • Provide a framework for a permanent business relationship between the groups and the banks; • To minimize transaction costs between the banks and the groups. 5
  6. 6. Background Information IFAD Rural Finance Thematic Workshop Date: 26th -29th July 2005 P.O Box 783 00621 Nairobi, Kenya Contact E-mail: miriamc@unops.org WORKSHOP PROGRAMME PART A Programme/Project Managers, Ministry Representatives and Microfinance /Rural Finance Officers and Service Providers TIME ACTIVITY RESPONSIBLE TUES 26/07/05 ARRIVAL OF PARTICIPANTS WED 27/07/05 DAY 1 0800-0830 Registration of Participants 0830-0900 Opening of the Workshop Guest of Honour/IFAD Registration of Participants Remarks by Kenya Gatsby Trust Mr. Timothy Nzioka (KGT) Remarks by UNOPS Representative Mr. David Rendal Speech by IFAD Representative Mr. Edward Heinemann Note Speech by the Assistant Minister of Agriculture Hon. Kyalo Kaindi 0900-0915 Photo Session/Admin Matters/Field Visits 0915-0930 Purpose of Workshop & Scope Miriam Cherogony 0930-1000 IFAD Rural Finance Policy & Regional Initiatives IFAD, Rome 1000-1015 COFFEE/TEA BREAK Chair – Baira, Uganda 1015-1300 Implementation Experiences of RF & Issues Programme Managers Institutional Development & Regulations Issues 1015-1035 RFSP & MEDA Tanzania Mohele/Foster 1040-1100 Cooperative Bank of Kenya COFEP Project 1100-1120 OTIV/CAVA, Madagacar (PADANE) OTIV/CAVA 1125-1145 Discussion on Experiences Moderator Financial Service Provision & Rural Outreach Chair – Custodio, Moz 1145-1200 PPPMER, Rwanda PPPMER 1200-1215 UWESO, Uganda UWESO 1215-1300 Discussion of Experiences Moderator 1300-1400 LUNCH 1400-1415 UNOPS Observations in Implementation Issues UNOPS 1415-1445 Discussion on Implementation Experiences Moderator 1445-1600 Presentation of the RF Interactive Site Demo Developer /Miriam 1600-1615 Coffee/Tea Break 1615-1700 Plenary Discussion & Comments on RF Interactive Moderator Site 1800-1900 EVENING SESSION THUR 28/07/05 DAY 2 0800-1700 Four Groups Field Visit to Kenya Women Finance Groups Trust (KWFT) & Family Concern groups; Rural SACCO (Catholic Diocese of Machakos ); K-Rep Financial Services Association (FSA) in Kitui; and 6
  7. 7. Background Information IFAD Rural Finance Thematic Workshop Date: 26th -29th July 2005 P.O Box 783 00621 Nairobi, Kenya Contact E-mail: miriamc@unops.org Equity Bank (Mobile Units in Thika Branch) FRI 29/07/05 DAY 3 Chair – Rwanda 0800-0930 Reports from Field Visits Groups 0930-1015 Plenary Discussion on Field Visits Moderator 1000-1030 COFFEE/TEA BREAK Chair – Tanzania 1015-1300 Incorporating Ongoing, New Interventions Invited Presenters 1030-1045 Faulu Kenya, Leveraging funds from money markets Faulu 1045-1100 Family Concern – Using factoring to finance small- Family Concern scale farmers – linking to Uchumi supermarkets 1100-1130 K-Rep FSA (Rural Finance Initiative) Aleke Dondo 1130-1145 Songa Mbele Managed ASCA Purity Ngunjiri 1145-1200 KUSCCO – SACCO Apex KUSCCO 1200-1215 DFS, Training Tools DFS 1215-1300 Plenary Discussions Moderator 1300-1400 LUNCH 1400-1600 Group Work on Best Practices/Action Research issues Moderator to Improve Impact 1600-1630 COFFEE/TEA BREAK Chair – Madagascar CP 1630-1700 Plenary Presentations & Wrap Up Moderator/Miriam Cherogony 1800-1900 EVENING SESSION Farewell Dinner SAT 30/07/05 DEPARTURE OF PARTICIPANTS 7
  8. 8. Background Information IFAD Rural Finance Thematic Workshop Date: 26th -29th July 2005 P.O Box 783 00621 Nairobi, Kenya Contact E-mail: miriamc@unops.org 8
  9. 9. Background Information IFAD Rural Finance Thematic Workshop Date: 26th -29th July 2005 P.O Box 783 00621 Nairobi, Kenya Contact E-mail: miriamc@unops.org MICRO-FINANCE AND FARM FINANCE – IS THERE ANY CONNECTION? Malcolm Harper - Springfield Center United Kingdom “Old Paradigm” rural credit, with subsidized interest rates, mainly to individual men, for medium and long terms, with single balloon repayments and no link to savings, has been replaced by “New Paradigm” micro-finance; short term, initially in small sums, sustainable cost-covering interest rates, with frequent regular repayments, mainly to women in groups, with strict savings requirements and relatively high interest rates. Or, has micro-finance not replaced but merely supplemented old-style rural credit? The answer differs from place to place, but there is no doubt that in some places micro-finance has taken over, as the old development finance institutions have been wound up, have become moribund or have been converted to the new paradigm. There is no doubt that new style micro-finance has benefited many millions of people, particularly women. They have more assets, they have higher, more diversified and more regular incomes, and they have been substantially ‘empowered’, however that over-used term may be defined or measured. These women have used their small loans mainly to replace more expensive loans from money- lenders, for so-called ‘consumption’ needs such as health care and school fees, and to invest in micro-enterprises, such as vegetable vending, tailoring, snack foods processing, home-based grocery shops, dairy animals, goats, and so on and so on. So micro-finance has diversified rural livelihoods, in terms both of who controls the assets and of what is done. But, what about the original and still the most important rural livelihood, farming? Is micro-finance a suitable way of financing seasonal crop loans, or longer term farm investments such as tube wells or terracing? Farming is still mainly controlled by men, who tend not to work in groups as effectively as women. Many farm investments require sums which are well above at least the lower rung amounts of the loan ladders of most MFIs, and incomes from most short and long term on-farm investments are ‘lumpy’ rather than evenly spread. In those respects at any rate, there appears to be a mismatch between micro-finance and on-farm investments. There is one more fundamental and more measurable feature of any loan, and of any investment, where the source and the use of funds should match. The cost of the funds, that is the interest rate, must be far enough below the expected return from the investment to cover the risk of loss and to allow the owner a reasonable surplus.Micro-finance interest rates are much higher than the subsidised rates which used to be charged for loans under old paradigm rural credit ‘schemes’, because micro-finance clients need timely and convenient access to credit more than cheap credit; this access costs money. The average return on the loan portfolio of the MFIs reporting to the Micro-Banking Bulletin was 39.2% in 2002. Micro-finance borrowers can afford to pay these apparently high rates of interest, because they are still lower than the competition, which is the local money-lender, and because the returns on their small investments, petty trading and so on, are very high indeed. Surveys of 215 such micro-enterprises, in South Asia and Africa, showed that their average annual return on investment was 847%, even after allowing forthe opportunity cost of the owners’ labour. This apparently astronomic return does not mean that the owners were rich; it just means that the investment amounts were very small indeed, and that the owners’ alternative earning opportunities were very un-remunerative. The above sample of micro-enterprises did not include any farmers, however, because very few people take micro-finance loans for on-the-farm 9
  10. 10. Background Information IFAD Rural Finance Thematic Workshop Date: 26th -29th July 2005 P.O Box 783 00621 Nairobi, Kenya Contact E-mail: miriamc@unops.org investments. A much smaller sample of 13 small farm activities, in India and West Africa, showed an average annual rate of return of 78% on small farm crop investments, without allowing for risk, or the cost of land, or the capital cost of irrigation facilities. Might this much lower rate of return, less than a tenth of the percentage return earned on non-farm micro- enterprises, in part explain the fact that few farmers borrow from MFIs? If micro-finance is replacing rather than supplementing traditional rural credit, what can be done to reduce the mismatch between micro-finance and most on-farm investments? Competition between micro- finance providers, including the increasing number of commercial banks which are entering the field, is already increasing efficiency and leading to some modest reductions in interest rates. New technologies, such as micro-drip irrigation and integrated pest management, are reducing both the cost and the risk of onfarm investments. New loan delivery methods, such as informal joint liability groups of four or five borrowers, who are usually men, are reducing transaction costs for both lenders and borrowers. Nevertheless, the gap is enormous, and it is getting larger. Much remains to be done to make micro-finance as suitable for on-farm activities as it presently is for ‘consumption’ and for non- farm investments. Otherwise, investment in farming will continue to be reduced, and small farm land will either be left un-used for want of affordable finance or will be taken over by larger scale farmers and corporate plantations. There are already many reasons why people desert the land and migrate to the cities, but it would be unfortunate if the product features of micro-financial services should further encourage people’s movement away from agriculture. 10

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