View stunning SlideShares in full-screen with the new iOS app!Introducing SlideShare for AndroidExplore all your favorite topics in the SlideShare appGet the SlideShare app to Save for Later — even offline
View stunning SlideShares in full-screen with the new Android app!View stunning SlideShares in full-screen with the new iOS app!
Definition of Rural Finance...............................................................................................3
3.0 GENERAL EXPERIENCE WITH RURAL FINANCE ....................................................4
The African Experience....................................................................................................5
Explanations for the Poor Performance...........................................................................6
4.0. ADB’s RURAL FINANCE ACTIVITIES.........................................................................8
Traditional Objectives and Evaluation..............................................................................9
5.0. SWITCH IN PARADIGMS...........................................................................................11
Comparison of The Old and New Paradigms in Rural Finance....................................11
Subsidized Credit and Poverty Alleviation.....................................................................13
Subsidized Credit and Production..................................................................................16
6.0. MARKETING NICHES................................................................................................17
Three Potential Niches...................................................................................................18
7.0. GUIDELINES FOR DESIGNING RURAL FINANCE PROJECTS..............................19
Interest Rate Policies.....................................................................................................23
Loan Guarantee Schemes.............................................................................................24
Synopsis of Guidelines ..................................................................................................34
Appendix Number 1: CREDIT-IMPACT STUDIES.......................................................42
Appendix Number 2: TRANSACTION COSTS..............................................................44
Appendix Number 3: MARKET RATES OF INTEREST...............................................48
Appendix Number 4: LOAN GUARANTEE PROGRAMS..............................................49
Appendix Number 5: THE SUBSIDY DEPENDENCY INDEX.......................................52
Appendix Number 6: SUGGESTED STEPS FOR IMPLEMENTING............................54
THE NEW PARADIGM...................................................................................................54
Appendix Number 7: SOURCES OF INFORMATION ON MICROFINANCE...............59
POLICY GUIDELINES FOR THE
RURAL FINANCIAL SUB-SECTOR
1.1 The 1999 vision statement of the African Development Bank (ADB) emphasized
poverty reduction as its primary goal. Achieving this goal requires the bank to
expand the scope of its development assistance in rural finance beyond the
traditional agricultural lines of credit to employ a new paradigm in its rural finance
programs: a paradigm that concentrates more directly on poverty alleviation. The
new paradigm focuses more attention on building efficient, sustainable, and
subsidy-independent financial infrastructure that provides deposit and lending
services to people of modest means. Appropriate infrastructure might include
rural branches of banks that mobilize deposits, reformed postal saving systems
that handle deposits, savings and credit unions that both lend and mobilize funds,
and non-governmental organizations that specialize in micro-lending.
1.2 In the past, the ADB lent large amounts of money through lines of credit and
through credit components in rural development projects that were managed
mostly by government-controlled agricultural development banks. The results of
these efforts in: (a) boosting agricultural development, (b) reducing poverty, and
(c) in building efficient financial infrastructure were rather disappointing. It is only
in the late 1990s that the Bank begun to experiment with lending to non-
traditional financial institutions that specialize in microfinance. Experience in other
regions of the world suggests that microfinance can be done successfully using a
1.3 This paper provides general policy guidelines for designing microfinance projects
and also identifies supplemental sources of information that might be useful in this
process. The guidelines include, inter alia, the necessary preconditions in the
project area for a successful take-off of a rural finance project, determining
whether crowding out is a problem, and possibly conducting sub-sector studies to
supply the requisite background information for project design. Some of the
issues that must be considered in project design include reducing transaction
costs, establishing proper interest rate policies, managing short-term subsidies,
and avoiding loan guarantee schemes. Where deposit mobilization is a major
part of the project, attractive deposit products must be designed and prudential
regulation strengthened. The objectives of these new projects should be to build
and strengthen financial infrastructure that can provide financial services on a
sustainable basis to large numbers of poor people in rural areas. Carefully
designed projects should clearly state these objectives and specify how the
results will be measured.
2.1 Although they are often under-emphasized in development programs, rural areas
are important in most developing countries because they produce basic
necessities such as food and fiber and provide markets for goods produced in
urban centers. From a social perspective the rural areas are even more important
because of the large number of poor people who eke out livelihoods there. 1 In the
past, credit programs were mostly aimed at boosting agricultural production and
investments. Recently, development practitioners have increasingly refocused
finance programs on reducing poverty.
2.2 The 1999 Vision Statement of the African Development Bank called for the bank
to make similar changes by concentrating on poverty alleviation. In the section on
agriculture and rural development it states that: “…the Bank would facilitate rural
financial intermediation by supporting bottom-up, demand driven, micro and rural
finance schemes aimed at assisting the poor and vulnerable groups of society” (p.
10). Past ADB practices in agricultural credit are largely inconsistent with this new
objective because relatively little of the lines of credit funded by ADB has reached
the poor. The Bank, therefore, must make major adjustments in the way it
designs and evaluates rural finance projects to accomplish this new objective.
These adjustments ought to be consistent with the new dominant development
model that relies mostly on market forces to guide development, instead of central
planning and directed credit. Making these adjustments will necessitate a
fundamental switch in the basic paradigm used to design rural finance projects.
2.3 This paper is a follow up to two other ADB policy publications [see African
Development Bank, “Agriculture and Rural Development Sector Bank Group
Policy (2000)”: and African Development Bank, “Bank Group Financial Sector
Policy (2001)]”. It also takes account of the preliminary findings of the ongoing
study on Development Finance Institutions (DFIs). It provides guidelines on ways
to develop microfinance programs to more directly address poverty in rural areas,
a problem highlighted in the Agricultural and Rural Development Policy paper. It
also augments and supplements the discussion of microfinance introduced in the
more general Financial Sector paper. This paper provides guidelines on how to
expand and improve the sub-sector of the financial system that operates in rural
areas, in ways that will more directly benefit poor people -- through microfinance
programs in the rural areas.
Definition of Rural Finance
2.4 Rural finance is a relatively new term used to describe the portion of the financial
system that supplies financial services and financial products outside urban areas.
It includes traditional agricultural credit to small holder farmers, formal and semi-
About half of the 600 million people who live south of the Sahara are embraced by poverty and the bulk of
the poorest-of-the poor live in rural areas.
formal loans made to non-farm businesses in rural areas, various forms of
informal finance in small towns and villages, and formal deposit-taking from rural
clients.2 The use of the term “rural finance” results from an evolution in
development thinking. Previous concerns with producing more food through
agricultural credit programs have evolved to broader concerns about lessening
poverty, boosting employment, treating women more fairly, and using financial
markets more effectively to support development.
3.0 GENERAL EXPERIENCE WITH RURAL FINANCE
3.1 Rural financial intermediation is problematic everywhere. The small size of the
typical transaction, both loans and deposits, the dispersion of potential clients, the
risks associated with farming, and the lack of bankable land documents result in
rural finance being both costly and risky; it is the most difficult activity that financial
markets undertake. It is not surprising, therefore, that most governments and
many donors gave ample attention to expanding agricultural credit for several
decades after World War II. In numerous countries, Mexico and the Philippines,
for example, large increases in the volume of directed credit -- often provided
through government-owned banks -- were the main instruments used to promote
agricultural development during the 1960s and 1970s.
3.2 Donors supported these efforts with hundreds of agricultural credit projects.
Starting in the 1970s, however, these activities were seen to produce increasingly
unsatisfactory results. The effects of credit projects on agricultural production
were ambiguous; loan recovery problems were chronic; the purchasing power of
many agricultural credit portfolios were eroded by inflation; poor people received
few of the subsidies associated with these programs; and many of the
development banks administering these efforts collapsed. 3 These disappointing
results caused donors such as the World Bank, the U.S. Agency for International
Development, and the Inter-American Development Bank to reduce sharply in the
1980s their agricultural credit efforts and to refocus attention on helping poor
people in new ways that were more consistent with a new paradigm on rural
finance (see Section V).
3.3 During the 1980s and 1990s a number of specialized agricultural development
banks were liquidated or merged with other banks. Some development banks
The term formal finance here refers to the portion of the financial system that is supervised by a central
monetary authority. Semi-formal finance is provided by organizations that are officially recognized or
permitted to offer financial services, but which are not systematically supervised by a central monetary
authority. This includes financial activities in co-operatives, loans made by non-governmental
organizations, and licensed pawnbrokers. Informal finance includes all other forms of finance that occur
without official supervision or permission: e.g., moneylenders, self-help financial groups, and merchant and
The first comprehensive evaluation of these efforts was done by the U.S. Agency for International
Development in 1972-73 in its Spring Review of Small Farmer Credit Programs (Donald). This was
followed by a Colloquium on Rural Finance in Low-Income Countries held in Washington, D.C. in 1981.
The World Bank and the Agency for International Development sponsored the Colloquium where the
results of directed credit programs were criticized (Adams, Graham, and Von Pischke). Later, both the
World Bank and the Inter-American Development Bank issued policy papers on finance that led both banks
to abandon gradually most directed credit efforts.
shrank substantially in size but continued to operate without much donor support.
In only a few cases, Indonesia and Malaysia being prime examples, were
agricultural development banks successfully reformed along lines that were
consistent with a new paradigm. Increasingly, donors shifted away from
agricultural credit and supported the microlending provided mainly by non-
governmental agencies (NGOs). At the same time, the World Bank and the
International Monetary Fund helped to provide more hospitable environments for
all finance projects through structural adjustment programs.
The African Experience
3.4 Agricultural credit efforts in Africa have been even more problematic than similar
activities elsewhere. This is a conundrum. On the one hand, informal finance in
Africa provides sustained and subsidy-free financial services -- both loans and
deposits -- to large numbers of rural people. Research suggests, for example,
that self-help financial groups manage large amounts of money in countries as
diverse as Cameroon, Ethiopia, Ghana, and South Africa. In some countries,
including Egypt, Gambia, and Nigeria, informal money-keepers keep substantial
amounts of cash for rural people. In most countries, merchants, dealers, and
traders extend large amounts of informal loans to facilitate purchase or sale of
products and inputs (Meyer and others).
3.5 Most central markets in Africa have dense networks of informal financial
arrangements and many villages have one or more self-help financial groups (see
Bouman; Lukhele; Seibel and Marx; Shrieder and Cuevas; Shipton). In West
Africa (Ghana, Ivory Coast, and Nigeria, at least) susu or tontine collectors
mobilize surprising amounts of money informally from poor people (Steel and
Aryeetey). In some countries, including Algeria, Ghana, Lesotho, and Somalia,
substantial inflows of remittances to rural households dwarf donor and
government efforts in rural finance. These informal systems would not be
persistent if most Africans did not fulfill their informal financial obligations and
derive substantial benefits from these arrangements.
3.6 The experience with formal rural finance, on the other hand, has been much less
satisfactory. Millions of borrowers across the continent have failed to repay their
loans from development banks and from co-operatives. Most countries in Africa
have also endured episodic institutional fads: co-operative credit organizations
sponsored by the British, credit unions promoted by North Americans, rural private
banks and supervised credit programs promoted by the Americans, specialized
agricultural development banks supported by the World Bank and the French, and
more recently, a variety of non-governmental organizations that specialize in
microlending, especially for women.4
3.7 In many countries, governments or donors have also attempted to force
commercial banks to lend more to agriculture. Concessionary rediscount lines in
Institutional transplants in some Asian countries have been more successful. The Japanese transferred
their co-operative agricultural credit/deposit model successfully to both Korea and to Taiwan. Some of the
rural financial institutions started by the Dutch in Indonesia flourished and grew into efficient forms of rural
central banks, subsidized loan guarantee schemes, and lending quotas have
been elements of these efforts. Unfortunately, no aggregate figures exist on the
number of these efforts or their costs. Over the period 1967 to 1987, the World
Bank alone financed 167 projects in Africa with major agricultural credit or rural
credit components. The total value of these credit efforts was US$390 million. 5 If
it were possible to aggregate other government- or donor-sponsored agricultural
credit programs, the total likely would be many multiples of the World Bank’s
3.8 With few exceptions, the results of these programs have been disappointing.
Some of them may have had positive, short-run effects on agricultural production
and investment, but most of these effects were transitory. At the start of the
second millennium, few countries in Africa had a healthy agricultural sector, and
even fewer countries had durable and efficient rural financial infrastructure.
Probably more rural Africans had dependable access to formal finance several
decades earlier than in the year 2000. Many postal savings systems,
government-owned development banks, credit co-operatives, and credit unions
that once provided financial services in rural areas either have disappeared
altogether, have little outreach, are heavily subsidy dependent, or are moribund.
Aside from the African Development Bank, other major donors have terminated or
substantially reduced lines of credit through agricultural development banks to
promote agricultural development in Africa.
Explanations for the Poor Performance
3.9 Various explanations exist for the disappointing performance in Africa. In some
cases natural disasters such as floods or droughts undermined for a time the
performance of rural finance in Africa. However, man-made disasters in the form
of wars, bad governance, hostile macroeconomic environments, damaging
financial policies, and poorly designed projects are more general explanations for
these unfavorable results.
3.10 Rural financial markets can only expand and thrive where law and order exists,
where inflation does not discourage savings and continually erode the real value
of financial assets, where economic policies result in attractive investment
opportunities in rural areas, and where financial markets are not heavily repressed
by government controls. Repressive instruments include interest rate ceilings,
excessive legal reserve requirements, large numbers of directed credit programs,
loan guarantee schemes, defective bank regulation and supervision, and limits on
3.11 The designers of donor and government-funded credit programs also contributed
to the poor performance of rural credit projects. Most of these efforts, for
example, were based on the assumption that credit shortages were a major
constraint on agricultural production and investment. Based on this assumption,
donors and governments strove to augment the supply of agricultural loans
through lines of credit in government-owned development banks. Projects usually
A survey done in 1987 of these projects suggested that few of them would have been classified as
success stories (Thillairajah).
were designed to provide an infusion of funds to ease credit constraints in the
3.12 As a result, project outreach was often limited. In some cases this involved
repeated injections of funds without increasing the overall capacity of rural
financial markets to sustain financial services. Benefiting from hindsight, the
project designers might have asked more fundamental questions like Why do
rural financial markets lack the capacity or incentive to provide loans that donor
employees think are required for development? And, how can one design a
project that will enhance the sustained performance of providers of rural financial
services so that periodic insertions of outside funds are unnecessary?
3.13 Several other features of donor-sponsored credit programs negatively affected the
performance of these markets. In some cases, donors and governments applied
concessionary terms to agricultural loans. This made it impossible for lenders to
cover their costs and risks of lending, thereby, de-capitalizing lenders and
condemning them to subsidy dependency. Furthermore, in many cases, the rates
of interest allowed on agricultural loans were less than rates of inflation, thus
assuring that the purchasing power of the lender’s portfolio would further diminish
over time. Tolerance of massive loan defaults further shrunk the funds that
lenders had to re-lend. In most cases the infusion of funds at concessionary
prices also discouraged the financial system from mobilizing deposits, because it
was cheaper for lenders to process inexpensive donor and government funds for
agricultural lending than it was to mobilize small voluntary deposits in rural areas.
3.14 Large numbers of targeted credit programs sponsored by donors and
governments also increased the costs of participating lenders. Each of these
lines of credit typically had idiosyncratic lending and reporting requirements. In
most cases the types of information collected to satisfy the accounting necessities
of the funds provider were of little use to managers of the financial institution. The
information required by the providers of targeted credit funds warped
management information systems. In doing so, it crowded out more useful
management information such as timely loan recovery data and information on
3.15 With assistance from the World Bank, the International Monetary Fund and the
Bank, a number of countries in Africa implemented important macroeconomic and
financial market reforms during the 1990s that provided a more positive
environment for rural finance projects. Macroeconomic reforms include lessening
distortions in foreign exchange markets, reductions in subsidies and price
controls, and privatization of major industries. In the financial sector, some of the
useful reforms included liberalization and rationalization of interest rate policies,
bank restructuring and privatization, and bank liquidation.6
See African Development Report 1997 for further discussion of these economic reforms. The reforms
that were specifically aimed at financial sectors are described in ADB, “Bank Group Financial Reforms.”
4.0. ADB’s RURAL FINANCE ACTIVITIES
4.1 The ADB funded or co-funded almost 2,400 projects between 1967 and 2000.
Cumulatively, slightly less than one-fifth of the total funds disbursed by the bank
have been for agricultural purposes. In the late 1990s, agricultural projects made
up over one-quarter of the value of the active portfolio of ADB, indicating that
agricultural projects increased in importance over time. As much as one-third of
the total value of these agricultural projects was comprised of funds for rural
credit. Most of these projects can be assigned to one of three groups:
4.2 First, the bulk of the money lent by the bank for agricultural credit purposes
involved loans made through traditional agricultural development banks.
Examples of these projects can be found in Algeria, Egypt, Ghana, Morocco, and
Tunisia. In most cases these loans were made to provide foreign exchange for
imports and also to augment the supply of local funds available for agricultural
credit programs. (See box No. 1.)
Box Number 1, Line-of-Credit Loans in Tunisia.
In 1985 the ADB extended a loan of UA 18 million to the National Agricultural Bank of Tunisia. The
foreign exchange involved was used to finance imports required in agricultural sub-projects financed by
the agricultural bank. This loan was totally disbursed by 1991 and a second line of credit for UA 50 million
was extend to the agricultural bank by ADB that began to disburse several years later. The objective of
the second loan was to strengthen the operations of the agricultural bank and to expand its volume of
4.3 Second, a substantial amount of money was also channeled through agricultural
credit components that were included as part of more comprehensive
development projects. These components were designed to foster the adoption
of new technology, stimulate targeted farm enterprises, or facilitate a targeted
investment. Credit-component projects have a long history in the bank, and many
of the Bank's agricultural projects have included line items for credit
augmentation. Use of these components is an admission that the existing rural
financial system is unable to provide sufficient loans to support the activities
stressed in the project. (See box No. 2).
Box Number 2, An ADB project that includes a credit component: The Cashew
Project in Ghana.
Ghana requested an ADB loan of nearly UA 10 million in 2000 to promote cashew production. More than
40 percent of this loan was earmarked for a lending scheme to promote cashews. The Agricultural
Development Bank of Ghana administered the credit component. Both individual and group loans were
allowed under the project.
4.4 Third, in 1991 ADB began to experiment with microlending. Some of these
involved loans to non-traditional lenders in rural areas: credit unions, village
banks, other non-governmental organizations, and government parastatals. In
some cases, funds from these loans were channeled to the ultimate lender
through a second tier institution (see box Number 3). By 2000 ADB had programs
in 21 countries with microfinance components, some of which were formed
through the leadership of AMINA, a small unit in the Bank devoted to promoting
micro-finance7. A number of these programs were co-financed with the World
Bank and involved modest credit components for microlending, especially for
women. The total value of these micro-credit components in late 2000 was about
US$150 million, perhaps something less than half going into rural or peri-urban
Box Number 3, An ADB project that works through non-traditional rural lenders:
Irrigation Project in Zambia.
During the construction of the Kariba dam in the 1950s a number of families were displaced and relocated
in 60 settlements elsewhere in the Southern Providence of Zambia. An ADB loan for about UA 5.3 million
was proposed in 2000 to build small-scale irrigation schemes and to establish five new village banks in
these settlements. About 15 percent of the funds for the project were to be set aside to establish a credit
fund. These loan funds were to be channeled through a commercial bank, to a selected micro-financial
intermediary, and then to new village banks affiliated with existing or newly formed cooperatives. Farmers
received group loans with five members in each group. The village banks were to be capitalized by
withholding 15 percent of the value of each loan, which then became share capital owned by the
borrowers. Village banks were designed to accept voluntary deposits.
Traditional Objectives and Evaluation
4.5 Most of the Bank's projects with agricultural credit features had the objective of
promoting project activities such as selected crops or farm enterprises, new
technologies, or rural investments. Serious evaluations of these credit projects
require measuring the impact of credit use on the activities selected as goals for
the project. Credit-impact studies, however, are expensive to do and are laced
with methodological difficulties.8
4.6 These studies involve collecting substantial amounts of primary information from
borrowers who participated in the program (see Appendix Number 1). As a result,
it is not surprising that few of the evaluations of ADB-funded agricultural credit
projects include empirical information about credit impact. During project
implementation, a lot of weight is put on disbursement of loan funds and
compliance with the Bank's accounting and reporting requirements. Consequently,
AMINA stands for ADB’s Micro-Finance Initiative for Africa
A comprehensive World Bank evaluation of its agricultural credit activities illustrates these problems
(World Bank, 1993).
evaluation studies found that the issues of outreach and sustainability seldom
4.7 The primary lessons that can be gleaned from the Bank's experience in rural
finance include the following:
Hostile macroeconomic and macro-finance environments had powerful
negative impacts on rural finance projects. Nonetheless, recent reforms
provide more hospitable environments for new approaches in rural finance;
Until recently, few of the Bank's projects were directed at expanding and
enhancing rural financial infrastructure that primarily served poor people in
rural areas. Few of these new projects have been carefully evaluated.
As a result, the bank must mostly look elsewhere for best practices and
success stories in microfinance. Fortunately, the microlending industry has
ample experience in many countries that can provide useful guidelines for
ADB. There are many publications available on best practices, useful
guidelines, and examples of success and failure. Although ADB is a late
entrant to this field, it can benefit greatly from the experience of others.
The ADB has done very little lending to promote deposit mobilization. Although
an increasingly dense network of organizations in the microlending industry
exists worldwide, little experimentation in the mobilization of deposits in rural
areas has been done. As a result, few experts and even fewer publications on
this topic exist. A small number of successful programs in Asia and a handful
of interesting pilot projects in Latin America, nonetheless, provide useful
guidelines for deposit mobilization efforts.
Questions as to whether past ADB agricultural credit efforts were successful in
boosting agricultural growth are moot. Instead, the critical focus for the Bank
now is how to reduce poverty more directly, and in that context, how to employ
rural financial markets more effectively in these efforts.9
Aside from a few recent projects, most of the Bank’s efforts in rural finance
have paid only modest attention to creating additional financial infrastructure in
rural areas or been successful in enhancing the performance of existing
infrastructure.10 Adjustments in Bank practices to implement the New Vision
and the application of a new rural finance paradigm will require more attention
to building efficient financial infrastructure that is capable of providing
sustainable rural finance services to poor people.
If done well, some of the improved practices introduced through successful microfinance projects may
spill over into improving traditional credit practices.
Exceptions are new microfinance projects in some countries, such as Cape Verde, Senegal, and Malawi.
5.0. SWITCH IN PARADIGMS
5.1 The dismal performance of traditional agricultural credit programs, coupled with
the increasing reliance on market forces to guide development and heightened
concerns about poverty, have caused most major donors to sharply decrease
their commitments to targeted credit in all sectors, but especially in agriculture.
This has been accompanied by a major switch in the dominant paradigm used to
formulate rural finance programs. Under the old paradigm, subsidized and
targeted agricultural credit was often an important part of attempts to promote
agricultural growth. Under the new rural finance paradigm, more emphasis is
placed on strengthening rural financial infrastructure and improving its
performance, especially regarding those services used by poor people.
5.2 As is explained in more detail below, one of the most important lessons learned
from directed credit efforts is that due to the excess demand for agricultural credit
engendered by heavy subsidies, poor people are able to capture few of the
subsidies associated with these loans. Experience has also shown that new
technology and product and input prices are far more important than the price or
availability of credit in influencing production and investment decisions.11
Furthermore, there is ample empirical evidence to show that credit targeting and
credit subsidies reduce the ability of financial systems to assist with the efficient
allocation of resources.
Comparison of The Old and New Paradigms in Rural Finance
5.3 Differences in nine features distinguish the old and new paradigms in rural
finance.12 As can be noted in Table 1, these features include problem definition,
the role assigned to financial markets, and how users of financial services are
viewed. They also include the involvement of financial systems in administering
taxes and subsidies, the primary sources of funds used in the system, the nature
of associated information systems, views about sustainability and outreach, and
how activities are evaluated.
Table 1: Primary features of the old and new paradigms
Features Directed Credit Financial Market
1. Problem definition Overcoming market Lowering transaction
2. Role of financial -help the poor Intermediate efficiently
markets -stimulate production
During the 1970s several countries such as Brazil, Indonesia, the Philippines, and Sri Lanka sharply
increased the availability of formal agricultural credit. Subsequently, inflation, financial market reforms, and
changes in development policies resulted in sharp declines in the total real value of formal agricultural
credit in these countries – as much as halving earlier volumes of formal agricultural credit. Despite these
sharp reductions in credit supplies, the rates of agricultural growth over the same periods show few or only
minor fundamental changes in historical patterns of growth.
See Vogel and Adams, 1997b for further discussion of the two paradigms.
3. View of users Beneficiaries: borrowers Clients: borrowers and
4. Subsidies and taxes Lots of both Few of either
-subsidy dependent -subsidy independent
5. Sources of funds Vertical: governments Horizontal: primarily
and donors voluntary deposits
6. Associated Dense, fragmented and Less dense and mainly
information systems vertical – were targets horizontal – management
7. Sustainability Largely ignored Major concern
8. Outreach Mostly ignored Primary concern
9. Evaluations Credit impact on Performance of financial
beneficiaries – mainly institutions – mostly
primary data secondary information
5.4 The directed credit paradigm focuses on overcoming imperfections in financial
markets and assigns a robust role to these markets in addressing numerous
social and economic problems.13 Borrowers under this old paradigm are often
referred to as beneficiaries who receive loans that are subsidized either through
concessionary interest rates or through loan defaults. Because of these subsidies
a substantial portion of the funds involved in directed lending is provided by a
governments and donors. These programs, in turn, typically require lenders to
develop dense information systems that demonstrate compliance with loan
targeting provisions as well as collect information on the impact of loan use
among borrowers. Typically, under the old paradigm, little concern is given to the
sustainability or long-term outreach of the credit program.
5.5 The new financial market paradigm, in contrast, assigns a limited role to financial
markets. That role is assisting in the efficient allocation of resources through
mobilizing deposits from surplus clients and then lending the surplus funds to
clients with economic opportunities but with too few resources to capitalize on
these opportunities. The new paradigm stresses the importance of lowering
transaction costs in these markets and regards depositors and borrowers as
valued clients. Under the new paradigm, financial markets avoid taxing or
subsidizing market participants.
5.6 Because of the emphasis on deposit mobilization under this paradigm, deposits
eventually provide most funds for lending. Since financial institutions are not
involved in targeted lending their information systems are less dense than are
those managing directed debt. Instead of evaluating performance by trying to
measure loan impact among borrowers’ activities, the new paradigm concentrates
on measuring the performance of financial institutions using secondary data such
as lender profits, loan recovery performance, outreach, and subsidy-dependency.
Because of the emphasis on developing strong and efficient financial markets,
sustainability of lending and deposit mobilization efforts is a major concern.
Initially, market imperfections were vaguely defined by citing the high interest rates charged on informal
loans and the inability of poor people to access formal loans. Later, economists, particularly Joseph
Stiglitz, supplied a more rigorous definition of imperfections.
Subsidized Credit and Poverty Alleviation
5.7 The attachment of subsidies to loans and attempts to direct these subsidized
loans to groups or activities selected by policy makers is the feature that most
clearly distinguishes the old and new paradigms. The structures of financial
systems involved in directed lending are also distinctive. Typically, government-
owned institutions are in the midst of credit-directing efforts and several
techniques are used to channel funds into directed lending. Most commonly, the
central bank offers rediscount lines that permit financial institutions to access
government or donor funds at below-market rates for targeted purposes. Another
technique is to require financial institutions to lend a certain amount for targeted
purposes, or to deposit funds at concessionary rates in other institutions that are
able to comply with loan-target quotas. In practice, most of the countries heavily
involved in directed lending use both techniques.
5.8 Forms of loan subsidies: Three types of subsidy may be associated with loans:
an interest rate subsidy that might be captured by either the lender or borrower, a
default subsidy that is captured by the borrower, and implicit subsidies embedded
in loan guarantee programs that are usually captured by lenders. Interest rate
subsidies occur when borrowers are charged interest rates that are below market
rates for similar loan contracts with the rate of subsidy being the difference
between the two rates. This may involve lenders receiving concessionary funding
from governments or donors, or final borrowers receiving loans that carry
concessionaL terms. A default subsidy occurs when borrowers fail to repay all or
part of their loans with the amount of the subsidy being the loan principal and
interest due but not recovered by the lender.
5.9 The magnitude of the interest rate subsidy increases when nominal interest rate
policies are sticky and inflation increases. Likewise, the magnitude of the default
subsidy usually increases when: (a) loans are made quickly; (b) loans are
allocated on the basis of need and not effective demand; (c) the macroeconomic
environment deteriorates; and (d) when loans are made by organizations that lack
experience in creditworthy lending. Typically, loan guarantee programs that
support directed credit are subsidized by governments or donors, and this subsidy
most often is captured by lenders who shift part of their loan recovery risk to the
5.10 Someone ultimately pays for all subsidies. As a result, credit subsidies entail
implicit taxes. These taxes might be paid by foreign citizens who provide donor
funds to finance credit subsidies; by domestic citizens who pay taxes that are
used to fund credit subsidies; or by all holders of financial assets -- particularly
depositors -- whose real values of financial assets erode with the onslaught of
inflation. The overall social benefits of subsidized credit programs are partly
determined by who receives the subsidies and partly by who pays the associated
tax. If, for example, relatively well-to-do borrowers captured most of the credit
subsidy, while most of the associated taxes are paid by poorer depositors or by
poorer taxpayers, one might conclude the program yielded negative social
5.11 One of the strongest reasons usually advanced by those in favor of maintaining
subsidies is that subsidies represent the most direct way to assure an equitable
redistribution of income. They argue that small holder farmers pay high producer
taxes on the export crops they grow, and so the subsidies are meant to
compensate them for those heavy producer taxes. Another strong argument
advanced by proponents of farmer subsidies is that even the Western and
advanced countries spend billions of dollars to subsidize agricultural production
and protect the interests of their farmers, so what is wrong with developing
countries follow suit?
5.12 The case for/against subsidies: This policy guideline is not against the provision
of farmer subsidies aimed at supporting African agriculture. Rather, what it is
against is the type and mode of administering subsidies that never reach their
intended beneficiaries. When agricultural credit is priced below market-clearing
levels, the excess demand created engenders a rationing credit delivery system
that only tends to promote rent-seeking behavior and corruption among
government officials with the end result that the bulk of the funds get siphoned to
those with political clout.
5.13 The net effect is three-fold. First, the rationing system only adds to the already
high transaction costs of administering small amounts of credit to a large number
of scattered small holder farmers and rural operators. Second, as long as rent-
seeking behavior is used to justify subsidized credit, an infinite supply of funds will
be required to meet the “over-blown” demand for credit, throwing into question the
long term financial sustainability of the credit scheme. Third, channeling huge
amounts of cheap subsidized credit through the formal financial system introduces
distortions that can have adverse effects on the overall financial system.
5.14 This paper, therefore, advocates that rural finance programs should be designed
and administered in such a way that credit subsidies do not lead to distortions in
the overall financial system, and also that the subsidies are financial sustainable
over the long term. In practice, this implies that the use of credit subsidies should
be limited, clearly budgeted, time-bound, and linked solely to start-up activities
and training programs of indigenous credit and savings societies.
5.15 Why cheap credit did not reduce poverty: A subsidized credit program is only
effective in treating poverty if poor people capture most of the associated subsidy.
Two elements determine the distribution of credit subsidies: the access to
subsidized credit and the magnitude of the subsidy attached to the loan. Only
those who receive subsidized loans, for example, benefit from the loan subsidy,
with the magnitude of the subsidy captured by those with credit access
determined by a subsidy formula.
5.16 Who receives subsidized loans? At first blush, this appears to be a superficial
question since many subsidized credit programs are directed at pre-selected
target groups such as poor people, women, micro-entrepreneurs, or operators of
small farms. Research on microfinance, however, shows that the differences
between what the designers of directed credit programs intended and what later
actually happened may differ substantially because of the microeconomic
interests of dozens of lenders and thousands of borrowers whose actions take
place beyond the control of credit planners.
5.17 Loan access is determined by actions of both lenders and borrowers. Attaching a
subsidy to loans complicates analysis of these actions. As already argued, when
the subsidy component is relatively large, it may convert borrowers into rent
seekers who primarily wish to capture the subsidy rather than to apply borrowed
resources in a profitable economic activity. If the subsidy component is large
enough, the demand for subsidized loans may become essentially infinite, thereby
forcing lenders to ration loans through non-interest rate mechanisms. This might
include lenders imposing additional loan transaction costs on non-preferred clients
to discourage them from asking for credit, and loan officers’ participating in rent
seeking by soliciting bribes.
5.18 Lending small amounts to new clients, especially those in rural areas, is naturally
costly and risky for lenders. Credit subsidies make this type of lending even less
attractive for lenders. The net result of this is likely to be lenders favoring
previous clients over new clients, and lenders preferring large loans over small
loans, thereby further shrinking poor peoples' access to formal loans.
5.19 The subsidy formula: In most subsidized credit programs, the interest rate
subsidy and the default subsidy are always proportional to the size of the loan. If
the interest rate subsidy, for example, is equal to 10 percent of the value of the
loan, a borrower of $100 receives an interest subsidy equal to 1/10th the size of
the interest subsidy received by someone who receives a loan 10 times as large
(or $1,000). Likewise, a borrower who fails to repay a loan of $100 receives a
default subsidy that is only 1/10th the size of the default subsidy captured by
someone who fails to repay a loan of $1,000.
5.20 This leads to the following general conclusion that:
those who are unable to access subsidized loans receive no loan subsidy;
those who obtain small, subsidized loans receive small subsidies; and
those with access to large loans receive large subsidies.
Since loan access and wealth are highly correlated everywhere, subsidies
attached to loans are inevitably distributed regressively. In the end, those
borrowers who are more well off and politically powerful capture a larger
proportion of the total subsidy than do those who are less well off and who have a
weak political voice. If a uniform formula regarding interest rates and loan
recovery enforcement is applied to all borrowers, subsidies attached to loans
exacerbate, rather than ameliorate, income- and wealth-distribution problems.
5.21 To overcome this proportionality problem, policy makers may attempt to adjust the
subsidy formula in favor of the poor. This might include loan size ceilings on
subsidized loans, application of differential interest rates on loans, or application
of differential loan recovery standards depending on loan size. All three of these
policy options have important implication for the microeconomic decisions made
by affected lenders. If, for example, the loan-size ceiling is binding and attempts
to force lenders to make smaller loans than they would otherwise voluntarily
choose to make, lenders may meet the letter of the law by making multiple loans
that fit under the ceiling to single individuals or families that are normally favored
by the lender. The lender thereby evades the spirit of the law and avoids making
additional small loans to new clients.
5.22 Preferential interest rates and preferential loan recovery standards on loans to
poor people provide perverse incentives for lenders. In large part, formal lenders
avoid making small loans to new clients because the costs of doing so often
exceed expected revenues. Forcing lenders to charge even lower interest rates
on these loans and asking them to tolerate higher rates of default on these types
of loans than they would otherwise, makes lending to poor people even less
attractive. Lenders may feel compelled for public relations purposes to do token
poverty lending under these preferential subsidy formulas, but they will do so with
little enthusiasm or outreach. In the end, the ultimate objective of reaching large
numbers of the poor is defeated, with the subsidized funds going to politically
powerful interest groups with clout in the society.
5.23 The proportionality feature of loan subsidies and the perverse incentives provided
to lenders by preferential subsidy formulas have caused some students of
microfinance to conclude that subsidized loans are uniquely unsuitable for treating
poverty. Because subsidized credit is associated with even lower interest rates on
deposits, and since many of the potential users of deposit services are poor
people, cheap credit may have a triple negative effect on the poor. First, the poor
are unable to capture a significant portion of the credit subsidy. Second, because
of cheap credit policies they have no access to attractive deposit services, and,
third, in the long run, the processing of subsidizing loans is likely to weaken or
even destroy the very financial infrastructure that might otherwise provide financial
services to poor people.
Subsidized Credit and Production
5.24 Subsidized credit was used under the old paradigm as a tool to boost production,
investment, and/or technological change. Economic logic shows, however, that
the relationship between the price of a loan and the incentives to produce, to
invest, or to use new technology is ambiguous, especially in rural and
microlending. The prices and yields of the goods that borrowers produce have far
more powerful impact on producers’ decisions than do loan subsidies.
5.25 A simple example may help clarify this important point. In several countries in
Latin America, farmers with small units find it highly profitable to grow coca plants
whose leaves are used in the production of cocaine. These farmers live in remote
areas where the yields and prices of other crops they might raise are relatively low
and unstable. From an economic point of view, these farmers maximize their
profits by specializing in coca production; the income derived thereby is far higher
than from any other alternative.
5.26 These farmers are also rational in accepting subsidized loans directed at
alternative crop production, thereby capturing the credit subsidy. They continue
their rationality by only growing a token amount of the alternative crop and
diverting most of the borrowed liquidity into additional consumption, or into the
planting of more coca. The availability of the borrowed funds and the interest rate
attached to the loan does not alter the relative profitability (or desirability) of the
economic choices faced by the borrowers – coca production is always their best
5.27 The second-best argument: Attempts to compensate farmers through
subsidized credit is similarly ineffective. A government, for example, may have
price controls or exchange rate regimes that depress the price farmers receive
for their cocoa. As a supposed second-best solution, the government may
attempt to compensate farmers for some of the losses in income they suffer
because of the low prices by dispensing subsidized credit.
5.28 There are two primary problems with this. First, it is impossible to fairly match the
amount of “taxes” imposed on the cocoa growers by the price distortion with the
amount of the credit subsidies. All cocoa growers pay the price-distortion tax in
proportion to the amount of cocoa they sell at the depressed prices. Only those
who can access the subsidized credit, however, receive a compensating subsidy.
Since credit subsidies, as suggested earlier, tend to shrink the access of non-
preferred borrowers to cheap credit, a few large borrowers are likely to capture
the bulk of the so-called compensating credit subsidies, thereby violating the
fairness principle of the second best: all producers pay the tax, but only a few are
compensated through subsidies.
5.29 Production is the second problem with using cheap credit to compensate for low
cocoa prices. As mentioned earlier, receiving a subsidized loan does not affect
the relative attractiveness of the economic choices that are faced by the borrower.
If farmers view additional cocoa production as not worth doing, the availability of
cheap credit will not alter that perception. They may take the loan with
concessionary terms to capture the associated subsidy, but they have no
economic reason to direct these borrowed resources into an activity they perceive
will yield low returns. Credit subsidies may attract borrowers but will have little
effect on their decisions to produce, invest, or use new technology.
5.30 The fungibility of money allows borrowers to direct the additional liquidity provided
by loans to activities that offer the highest expected marginal returns, regardless
of whether these activities are the objective of the subsidized loan. If the targeted
activities are perceived as high return activities by borrowers, credit subsidies or
loan targeting is unnecessary.
6.0. MARKETING NICHES
6.1 Realizing the goal of poverty alleviation and employing the new paradigm would
require major changes in the Bank addresses rural finance. It also forces the
Bank to identify niches in rural financial markets that are within its capabilities.
6.2 Comprehensive reform of rural financial markets in the extremely diverse regional
member countries (RMCs) would require a lot more resources than the Bank has
or is likely to have in the future. The Bank must, therefore, carefully select a small
number of marketing niches for its rural finance programs that are consistent with
its resource outlay and with the new paradigm on rural finance. Selecting these
niches should also take into consideration what other donors are doing in Africa.
6.3 One way of identifying marketing niches for the Bank’s poverty alleviation efforts is
to study the informal financial products and services that are popular among poor
people. Informal finance involves small transactions, procedures that impose few
transaction cost on clients, large numbers of people who save through money-
keepers or in self-help financial groups, flexible loan procedures, and short-term
loans. As a starting point, therefore, the Bank’s micro-finance efforts must be
designed to provide financial products and services that at least partially compete
with informal finance. In some cases this will involve forming new organizations
that specialize in microlending. In other cases it may include strengthening and
expanding existing organizations that do microfinance. It will also require creative
work in reforming or building new financial infrastructure that can effectively
mobilize rural deposits. More deposit mobilization, in turn, requires enhanced
prudential regulation and supervision of deposit takers.
Box Number 4, Self-help Financial Groups in Cameroon
Self-help financial groups are widespread and important in Cameroon. It has been estimated that nearly
80 percent of the adults in the country participate in these groups and that they manage about half of the
total financial savings nationwide. An historical case study of one of these groups suggested that some of
these organizations may persist over long periods of time and may grow increasingly complex as they
evolve. These groups may manage multiple funds that rotate the distribution of funds among members.
Groups may also develop parallel, non-rotating funds that assemble money from group members that is
used for emergencies, or used as a loan fund. These groups may perform social as well as economic
functions. In some cases, members of the group may also meet periodically to share business
Source: Tonkou and Adams
Three Potential Niches
6.4 The niches that the Bank might fill to help poor people through rural financial
markets are the following:
• First, the Bank might support the establishment and growth of specialized
microlending organizations that operate mainly in rural or peri-urban areas.
These organizations should not be viewed as charities but rather as ways to
provide sustained financial services to people of modest means;
• Second, the Bank could also support the reform and establishment of financial
organizations that efficiently mobilize voluntary deposits in rural areas. Some
organizations might be NGOs that start out specializing in microlending, but
later develop the capacity to collect and manage voluntary deposits. Other
organizations, such as postal savings systems and credit unions and banks,
might be involved in projects primarily aimed at encouraging them to expand
savings opportunities for rural people; or
• Third, the Bank could reinforce the capability of central monetary authorities to
regulate and provide prudential supervision to those organizations that are
involved in mobilizing rural deposits. This may require regulatory innovations
where postal savings systems, credit unions, and other NGOs are doing
7.0. GUIDELINES FOR DESIGNING RURAL FINANCE PROJECTS
7.1 The huge diversity among member countries makes it virtually impossible to
provide detailed uniform guidelines – recipes -- that can be routinely applied to all
of the Bank's rural microfinance projects. Moreover, microfinance is a new
industry where best practices are still evolving. As a result, project designers
must tailor each project to fit local conditions and read recent literature14 on micro-
finance to keep abreast with new guidelines. ADB micro-finance project designers
should refer to recent publications that describe in detail how to formulate
microfinance projects, how to design financial products, how to establish
management information systems, how to set up accounting systems, and how to
7.2 Some general issues, however, must be dealt with in the design of every project.
These issues range from assuring that the economic environment will reinforce a
project, to designing appropriate evaluation criteria. Understanding why some
practices must be avoided and outlining new practices that should not be
overlooked are a major part of these guidelines.
7.3 Three general problems, namely: transaction costs, risks, and quality of services,
must be kept in mind when developing any microfinance project for rural areas.
The transaction costs that are typically imposed on financial market participants
and the associated risks of lending and making deposits are the primary
explanations for the scarcity of formal and semi-formal finance in rural areas.
Every micro-finance project must reduce these costs and risks if it is to have a
high probability of success. Neither lender nor borrower will eagerly participate in
a microfinance program if the transaction costs of doing so are onerous.
Moreover, lenders must be confident that they will recover most of their loans, and
depositors must feel that their deposits are safe.16 Equally important, clients will
See Appendix 7 for contact information about new publications on micro-finance.
At the time this paper was written, the state-of-the-art in this regard was the Microfinance Handbook
complied by Joanna Ledgewood. The Microbanking Bulletin published by CALMEADOW is also another
excellent source of information on microfinance. Periodic publications issued by the Consultative Group to
Assist the Poorest (CGAP) are other useful sources of new information about microfinance.
The risks of microlending are exacerbated by the paucity of bankable collateral among poor people, an
important point discussed by de Soto.
not sustain their participation in microfinance programs if the quality of the
financial products and services are unsatisfactory.
7.4 In substantial part, the success or failure of microfinance projects depends on the
environment in which they operate; hostile environments can damage even the
most carefully designed project.17 Conducive environments include law and order,
price stability, laws that allow flexible interest rate policies, and the absence of
competing lenders that are poorly managed; loan repayment discipline is more
difficult to cultivate among borrowers who have been conditioned to expect that
loans need not be repaid.
7.5 Deposit mobilization and successful lending are also more difficult in areas that
lack attractive investment opportunities. This may be because of natural causes
such as persistent drought or government policies. Distorted exchange rates and
other trade policies, for example, often effectively tax the agricultural sector and
thereby diminish both rural incomes and rates of return on rural investments.
Price controls on food commodities have the same effect. Where these types of
price distortions are severe, it is probably best to look elsewhere for project
7.6 In some African countries, such as Ghana, Egypt, and Lesotho, remittances
flowing into rural areas are substantial. Where these remittances occur, there
may be more opportunities for deposit mobilization than where these flows are
7.7 The success of a microfinance project may also depend on the presence of other
social infrastructure. Dependable electricity, a good and functional telephone
network into the rural areas, roads, and court systems all contribute to lessening
the costs and risks inherent in microfinance. It is also cheaper to make small
loans and mobilize small deposits in areas where populations are relatively dense
and where levels of education are relatively high. These factors help explain why
microfinance programs have been concentrated in urban centers.
7.8 A form of Gresham’s Law operates in rural finance. The Law states that bad
money replaces good money; people attempt to pass on to others units of money
they distrust or dislike and hold types of money they think are more desirable. In
rural finance, a variant of Gresham’s Law operates when inefficient finance
replaces or crowds out efficient finance.
7.9 Crowding out occurs when a lender provides subsidized financial services that
undermine or eliminate competition. Examples of this are the activities of highly
subsidized traditional agricultural development banks in many countries. These
See Lockwood, Chapter 1 for an expanded discussion of these issues.
banks often subsist on hefty subsidies, part of which they pass along to their
clients in the form of low interest rates on loans and in the guise of loan defaults. 18
Non-subsidized lenders find it difficult to operate in such environments for two
reasons. First, they cannot compete with the subsidized interest rates offered by
development banks, and second, they typically encounter difficulties with loan
repayment in the same areas where many borrowers from development banks
seem to avoid repayment and get away with it.
7.10 Similar crowding out occurs when one or several NGOs provide subsidized loans
in rural areas and thereby unfairly compete with other lenders who operate
without subsidies. Crowding out also diminishes the amount of informal finance in
7.11 Where crowding out is severe, it will be difficult for the ADB to develop
microfinance projects that will have high probabilities of success. In these cases
the lender(s) that is (are) causing the crowding out must either be liquidated or
substantially reformed to eliminate and/or minimize unfair competition. Experience
in several Latin American countries (in Peru and Bolivia, for example) suggests
that the financial vacuum created by liquidating Agricultural Development Banks is
gradually filled with time. Some of the filling is done by an expansion of informal
finance and some is done by formation of new financial institutions. Still more
filling is done by an expansion of existing financial institutions into rural areas.
7.12 Ideally, project design should be preceded by a study of the financial sector.19
The study should clarify the extent to which there is a market for the proposed
project and also conduct a diagnosis to explain why more formal and semi-formal
finance does not penetrate the rural area, thereby laying the groundwork for an
ADB project that will overcome these problems. The study should include an
overall assessment of the economic environment for microfinance in rural areas
and an analysis of the laws and regulations that might impede the expansion of
formal or semi-formal finance into the countryside. It should also document the
status of formal and semi-formal finance in rural areas, along with any major in-
flows of remittances. The status of usury laws, the coverage of prudential
regulation and supervision, and requirements of licenses or permission to lend or
to mobilize deposits should also be covered by the study.
7.13 In some cases it may also be useful to provide histories of any postal savings or
credit union activities in the country, along with an inventory of non-governmental
organizations that provides financial services in rural areas. Likewise, an inventory
and assessment of NGOs that provide financial services largely in urban areas
might identify organizations that are using interesting innovations or which have
potential to expand into rural areas. The study might also answer questions such
as the following:
Bank employees also often capture some of the subsidies in the form of bribes or redundant
Two examples of useful financial sector studies in Africa are World Bank, 1995 (Nigeria) and Fitchett
Are there financial organizations operating badly in the rural area that might be
crowding out more efficient forms of finance?
Could their activities adversely affect an ADB program?
7.14 The study should also collect information about common forms of informal finance
in rural areas. This information can be useful in two ways for designers of ADB
projects. It can show the extent of the competition that a project might face and
also identify the types of microfinance that are most popular in the countryside.20
7.15 Finally, the study should conclude with recommendations that are useful in
designing ADB projects and in selecting financial organization participants. 21 Will
it be necessary to create new institutions to implement an ADB project? Are there
existing institutions that might be reformed or assisted that could carry out ADB
sponsored programs? What are the policy or legal changes that will be necessary
to enhance the chances of success in an ADB project?
7.16 Micro-finance is often costly for both clients and intermediaries. Limiting or
reducing these costs must be a primary concern for those who design and
manage microfinance projects. Lenders will not make small loans if their loan
transaction costs are excessive. Likewise, individuals will not seek loans if they
are forced to navigate numerous administrative hurdles that impose hefty
transaction costs on them. Deposits involve the same problem, so savers will not
travel long distances or suffer administrative hassles to make small deposits, and
intermediaries will avoid taking modest deposits if the costs of managing these
accounts are substantial (see Appendix Number 2).
7.17 Project designers may address transaction costs in two ways. The first is through
supporting the establishment of management information systems that allow the
participating intermediary to process small loans or manage small deposits
efficiently. The second way is to be judicious in setting up project-reporting
requirements. Requiring the participating agency to collect and report data that is
not useful in managing an efficient financial intermediary only elevates transaction
costs. For example, information about the purported uses of loans is generally of
little use to managers. Instead, project designers should require reports that
document the progress made toward achieving sustainability, subsidy
independence, and outreach goals.
Box Number 5, Use of Smart Cards in Swaziland
Even though the banking industry in Swaziland is fairly well developed, the commercial banks generally
show little interest in the small businesses and the poorer segments of the market because of the usual
See Ledgerwood, Chapters 3 and 5 for further discussion of the design of microlending products and
See Ledgerwood, Chapter 4 for additional discussion of the problems of selecting participating
constraints. The Swazi Business Growth Trust of Swaziland (SBGT) was therefore established in 1992 as
a non-profit Swazi-directed NGO to facilitate the development and growth of Swazi small business. The
Trust introduced a SmartCard to minimize the transaction costs associated with extending and recovering
loans. The SBGT supplied participating commercial banks with the equipment that facilitated the use of
the SmartCard at participating banks, which allowed SBGT clients to draw funds and make loan
repayments and/or deposits. A SmartCard transaction takes only a fraction of both the time and cost of a
regular teller transaction; and helps both outreach (in terms of the numbers reached) and easy access by
clients to funds and loan repayments.
Source: Abstracted from Fitchett.
7.18 Managers of participating agencies should also be encouraged to make their
financial services and products more attractive by reducing the transaction costs
their procedures impose on clients. Many clients involved in small financial
transactions are more concerned about these costs than they are about the
interest paid on loans or received on deposits. Simplifying paperwork, opening
branches near clients, and requiring fewer visits to negotiate loans are some of
the ways of reducing these costs.
Interest Rate Policies
7.19 The interest rates paid on deposits and those charged on loans are vital elements
in microfinance programs. The former rate must be high enough to compete with
other sources of deposit services. The interest rates charged on loans must be
sufficient to eventually cover the costs and risks of making microloans.
Temporary subsidies may be used to bridge the initial gap between the costs of
providing small loans and what borrowers are charged. Plans should be made to
close this gap though scale economies and other efficiencies so that the interest
payments on loans cover the full costs and risks of making microloans in the
7.20 Two general criteria should be used in setting interest rate policies for
microlending programs. First, interest rates should not be used to subsidize
borrowers. Second, interest charges should be enough to allow the lender to
become subsidy independent, to protect the real value of its loan portfolio, and to
become sustainable when the organization reaches a projected scale of
7.21 No single market rate of interest can be used in microlending programs (see
Appendix Number 3). Instead, project designers and managers must calculate
unique rates for each program. Four major elements should be included in these
projected administrative expenses,
projected loan losses,
the cost of funds, and
the desired capitalization rate.
Where inflation is expected to be important, the cost-of-funds element must be
adjusted upward to protect the purchasing power of the lender’s loan portfolio.
(For a practical guide on how to calculate these interest rates see CGAP
Occasional Paper No. 1, 1996.)
7.22 If a project involves an institution that is new, has a small volume of lending, or
which is expected to expand its scale of operations substantially with project
assistance, interest rates likely will not cover all costs for several years. A subsidy
for the organization may be justified until the lender achieves its projected scale of
operations.22 That scale and the estimated time needed to achieve this goal
should be part of the project design. Project reports should include indicators that
measure the progress being made by the lender to become subsidy free.
7.23 It may be necessary for project designers to include some short-term subsidies to
support institutional development or expansion. The institution handling the
project, for example, may need new offices or branches in rural areas to achieve
outreach. Most participating institutions will also require investments in data
processing equipment and training. Some of these investments might initially be
subsidized through a carefully designed grants program (for example, see
Westley and Branch, pp. 115-128).
7.24 The guiding principle of the grants program should be to reward performance.
This might include allocating grants when management plans are complete, when
loan recovery targets have been met, or when deposit mobilization goals have
been achieved. The expectations of the managers of the program should be that
subsidies will end in a relatively short period and that the institution must plan for
Loan Guarantee Schemes
7.25 As mentioned earlier, microlending is constrained by the costs of making small
loans as well as by the associated risks. Small loans often involve substantial
risks because borrowers do not have bankable collateral and because the
borrowers are not well known by the lender (information asymmetry problem).
Subsidized loan guarantee schemes have been used widely to address these
problems. Typically, these schemes involve the lender transferring all or part of
the loan recovery risk to a third party who manages the loan guarantee program.
The primary objective of these schemes is to induce lenders to make more loans
to a target group than they would otherwise.
7.26 These guarantee programs have four major problems. First, they increase
transaction costs by introducing a third party into the lending process. Second, all
CGAP estimates that most economies of scale in microlending are achieved with 5,000 to 10,000 clients.
of these programs must be subsidized to start and persist. Third, no convincing
evidence exists that these schemes result in much additional lending for targeted
purposes (see Appendix Number 4). Fourth, the availability of the loan guarantee
scheme may lessen the incentive that lenders have to pursue loan defaulters
aggressively. Until more conclusive evidence is available on the costs and
benefits of these programs, it is probably best for ADB to avoid putting resources
into these schemes.
7.27 Deposit mobilization is important for three reasons. First, and foremost, under
normal circumstances, a much larger number of poor people will avail themselves
of deposit services than will use loans. Second, as mentioned earlier, a financial
system must mobilize deposits if it is to assist in reallocating resources more
efficiently. Third, deposit mobilization can force more discipline on financial
intermediaries than occurs in organizations that largely depend on funding by
donors or governments. Organizations that perform poorly generally experience
more difficulty attracting deposits than do those that perform well. Also,
depositors can discipline financial institutions by withdrawing funds from deposit
takers that perform poorly, thereby depriving the organization of funds.
Box Number 6, Deposit mobilization in Peru
Economic turmoil and hyperinflation in Peru during the late 1980s and early 1990s severely stressed all
banks in the country and made it difficult for them to mobilize deposits. Major economic and financial
market reforms during the 1990s, however, gradually provided a more hospitable environment for deposit
mobilization. During the later part of the 1990s several of the 13 Municipal Banks (Cajas Municipales de
Ahorro y Credito) in Peru were highly successful in mobilizing small deposits. One of these banks, in
Arequipa, was outstanding in these efforts. It was formed in 1985 and initially relied mostly on outside
funding for money to lend. The bank experimented with various ways to attract more deposits, including
doing lotteries that were tied to deposit accounts. Later, the bank placed more emphasis on providing
attractive interest rates on deposits, making it easier for depositors to withdraw funds, and offering
insurance that was tied to the deposit account. This included life insurance, burial insurance, and modest
These attractive deposit accounts allowed the bank to more than double its number of deposit
clients between 1996 and 1999. This resulted in the real value of deposits in the bank going up by about
150 percent in just three years and allowed the bank to reduce sharply its reliance on outside funds and to
increase lending substantially.
7.28 Any deposit mobilization project that the Bank sponsors should emphasize several
basic principles.23 Most savers are concerned primarily about the security and
liquidity of their deposits. They are also concerned about the transaction costs
involved in making deposits and in withdrawing funds. A postal savings system,
for example, that forces savers to wait several weeks after request for withdrawal
See Ledgerwood, Chapter 6 for further discussion of the design of microdeposit products.
to receive funds will be shunned by depositors. Likewise, waiting in long queues
to make small deposits or to withdraw small amounts discourages depositors.
7.29 Micro-savers are more sensitive to quality of service than they are to returns on
deposits. Nonetheless, they will not deposit significant amounts if the returns are
negative in real terms. The rates of interest paid on deposits must be higher than
the expected rate of inflation.
7.30 Providing attractive deposit services is not easy. Accepting deposits increases
the workload in financial institutions. Typically, there are a larger number of
transactions associated with deposit accounts than there are with loan accounts.
Combined with the substantial increase in number of deposit clients, this adds to
the data processing problems in deposit takers. Deposits must be posted quickly
and clients must be able to make immediate withdrawals from most of their
deposit accounts. These two requirements force the intermediary to have cash on
hand, which, in turn, leads to security problems.
7.31 Deposits also increase other problems for managers. Typically, there are
seasonal ebbs and flows in rural deposits that force managers of intermediaries to
deal with transferring excess liquidity in some periods and drawing on outside
liquidity in other periods. Matching term structures between loans and deposits is
a further problem faced by these managers.
7.32 Three general approaches might be used to mobilize deposits. The first is to
focus on reforming or expanding financial organizations that are already licensed
to accept deposits. This might include encouraging banks to open new branches
in rural areas or reforming postal savings systems. The second approach is to
add deposit taking in organizations that have experience in making rural loans.
The third approach is to promote new organizations that have the capability of
doing both lending and deposit taking, such as credit unions (see Westley and
Branch; de Stemper).
7.33 In some cases, banks are discouraged or prohibited from opening rural branches
by regulation or by hefty legal reserve requirements. These constraints might be
addressed through an ADB project. In other cases, reforming banks that have
substantial numbers of rural branches may be another way of boosting deposit
mobilization in rural areas.24
7.34 A number of countries in Africa have postal savings systems that once provided
useful deposit services in rural areas. An advantage of these systems is that they
have post offices and a mail delivery system that allows deposits to be mobilized
at little additional cost. Their main disadvantage has been the inability to provide
depositors with the liquidity they often desire. Perhaps helping to reform some of
these systems to make them more attractive sources of deposit services is an
area the Bank could look into. (See Box 7.)
Box Number 7, Savings Bank of Madagascar (SBM)
The reform of the Units portion of the Bank Bakyat Indonesia is an example of this approach.
The Postal Administration in Madagascar accepted deposits from 1918 to 1985; and it was then reformed
into the Savings Bank of Madagascar (Caisse d’epargne Madagascar) in 1985 with 46 postal offices.
Financial supervision was by the Ministry of Finance, while the Ministry of Post and Telecommunication
exercised technical supervision. By June 1996, SBM was operating out of 174 windows located in both
cities and small towns.
SBM provides its clients with savings services only, and based on the time of deposits, interest is
paid on these savings (accrued interest is calculated annually on the account balance for each depositor).
The bank focuses on poor clients, and its savings balance per client in1996 averaged US$32,
representing about 28 percent of GDP per capita. By June 1996, the total number of clients was more
than 370 thousand, of which almost half were women.
Source: Abstracted from Fitchett.
7.35 As discussed in the next section on prudential regulation, promotion of deposit
taking in non-traditional financial institutions is problematic. In most countries, only
institutions that are licensed to do so can legally accept deposits. Helping non-
traditional institutions to become licensed may require waiting until they are
creditworthy themselves, and this is usually a long-term goal. Nonetheless, where
feasible, the Bank could help regulatory agencies establish procedures for
institutions to qualify for deposit-taking licenses and also assist them to become
7.36 The credit union model offers a third approach. Some countries in Africa once had
credit unions or credit co-operatives that had a significant presence in rural areas.
At least in Kenya, floundering credit co-operatives have been successfully
reformed (Westley and Branch, pp. 129-134). The growth of healthy credit unions
recently in Benin and Togo is also an indication that credit unions have promise in
Africa (de Stemper; Tounessi). These small co-operatives have several
advantages in deposit taking. Members contribute most of the initial share capital
and this lessens concerns about prudential regulation and supervision. Members
are also expected to monitor the operations of the co-operative to assure that
their share capital and voluntary deposits are managed prudently. The Bank
could, therefore, consider promoting the reform and development of credit unions
in rural areas.
7.37 In most cases, allowing financial institutions to mobilize deposits when these
organizations are not prudentially regulated and supervised is an unwise policy. It
is one thing to dispense loans with some altruistic motives, but it is quite a
different thing to allow an organization to solicit poor peoples’ savings and then
tolerate careless management of these funds. Any Bank-assisted rural finance
project that includes deposit mobilization, therefore, should assess the capability
of the regulatory system and, if necessary, strengthen its capacity. This may
Regulatory agencies in Bolivia and Peru, with assistance from the Inter-American Development Bank,
have developed new regulations that allow qualified non-traditional institutions to qualify more easily as
involve doing co-projects with other donors who are working on the supervision
and regulation system.26
7.38 The regulatory problem might be divided into two segments (CGAP, 2000). The
first segment involves a central monetary authority granting permission for an
organization to accept deposits. The second segment involves prudentially
regulating and supervising the organization after it begins to mobilize deposits
from the public.
7.39 In most countries, there are minimum thresholds that financial organizations must
meet before they are licensed to accept public deposits. This includes minimum
capital requirements, maintaining elaborate loan files, and being subject to
independent external audits. Typically, only banks and other relatively large
financial institutions can meet these requirements. In some countries authorities
are allowing a few non-traditional financial institutions to mobilize deposits after
they have been licensed as banks or after they meet requirements specially
tailored for microfinance institutions. Understandably, banks and bank regulators
are seldom eager to adjust requirements downward for licenses to mobilize
deposits. Banks resist encouraging competition, and overworked regulators are
not eager to add to their workload.
7.40 There are two primary justifications for prudential regulation and supervision,
namely, first, to protect depositors, and second, to defend the overall financial
system. In large measure, finance operates on trust. If any significant bank fails,
it can threaten the survival of the entire banking and financial system. Bank
regulators, as a result, must concentrate their attention on the largest elements of
the financial market. In most low-income countries, bank regulators who are fully
occupied in dealing with stressed banks have little capacity or desire to regulate
small organizations that might mobilize deposits in rural areas.
7.41 The capacity to regulate is not the only limitation. In many countries the existing
regulatory system is tailored to deal with banks and is not well suited to
supervising organizations that are on the fringe of the formal financial system
(Von Pischke). Procedures used to regulate banks are often too costly and
cumbersome to extend to non-traditional deposit mobilizers. Innovations may be
needed to extend some measure of regulation to cover non-traditional deposit
takers. These might include giving an organization permission to accept deposits
from the public but also requiring a large amount of transparency in the operation
of the organizations in the form of understandable statements on interest
payments, regularly published audited financial statements, and published
information about insider borrowing. Another option is to license an organization
to accept payments for redeposit in a financial institution that is prudentially
regulated (see CGAP, 2000).
7.42 In some countries it may be possible to use an ADB project to encourage those
elements of the financial system that are already prudentially regulated to expand
into rural areas. Branching regulations, for example, may discourage banks from
It is difficult to enhance the capacity of agencies that do prudential regulation and supervision because
trained people often find more attractive employment elsewhere, including in banks that are being reformed
by the regulatory agency.
opening rural offices where the primary objective is to mobilize deposits.
Likewise, hefty legal reserve requirements may discourage banks from seeking
new depositors in rural areas. Similar attention might be given to reforming or
strengthening postal savings systems or credit unions in rural areas.
7.43 Finally, in remote areas where it is impractical to extend prudential regulation, it
may be necessary for regulators to ignore non-traditional organizations that
accept deposits. Although risky, depositors may prefer to hold their savings in
these types of organizations compared to other alternatives available to them.
7.44 Rural finance projects established under the new paradigm require justifications
and evaluations that are quite different from projects designed under directed
credit programs. Directed credit projects were justified by what they did to
borrowers. Accordingly, evaluations of these projects focused on measuring what
borrowers did after receiving loans.
7.45 Under the new paradigm, the attention shifts from what borrowers are doing with
their loans to how well the financial intermediaries, that provide financial products
and services to people of modest means, are performing. The underlying rationale
is that as long as the rural financial intermediaries are operating efficiently, there
is a greater likelihood that the rural financial services they provide can be
sustained over the long term.
7.46 In the old paradigm, there was a pre-occupation (too much emphasis) with access
to cheap credit to the relative neglect of the sustainability of the services provided
through the agricultural development banks. Thus, massive amounts of money
were channeled through these banks for on-lending to the poor at fairly low
interest rates, without addressing the question of how long such cheap credits
could be sustained. The shift in focus is, therefore, necessary to ensure a
“sustainable access”, of the rural dwellers, to credit and other financial services.
Proponents of the new paradigm also argue that borrowers indirectly indicate the
usefulness of improved financial services by repaying their loans, requesting for
new loans, and by augmenting their deposit savings.
7.47 Two major advantages of the new type of evaluations are obvious. First,
information used in the new evaluations is the exact information that has to be
collected by any well-managed financial institution as a normal part of their
business.27 Thus, the new evaluation method, unlike the old method, does not
impose additional costs on the financial intermediaries. In short, the type of
secondary information gathered is much less costly for evaluators to assemble
than the primary data needed to evaluate borrower activities. The second
advantage is that encouraging the participating organization to provide this type of
information reinforces good management practices. As was mentioned earlier,
under the directed credit paradigm, lenders were required to collect information
See Ledgerwood, Chapter 8 for guidelines on how to establish proper financial statements for
that was not useful in managing an efficient financial intermediary, thereby
increasing their transaction costs.28
7.48 Under the new paradigm, two broad measures of performance are paramount.
The first is the sustainability of the financial infrastructure being assisted. The two
key questions to be address here include:
Is it likely to endure, to become more efficient, and to be able to persist
without subsidies within a reasonable period of time?
Will the organization being assisted likely provide sustained financial
services to people of modest means long after the project is completed?
7.49 The second broad measure of performance is outreach. The key question here
Did the project assist the organization providing financial services to extend
a substantial number of new loans to people of modest means, or
Did it assist the organization in providing attractive deposit services to a
much larger number of people?29
It is, of course, important to know if the organization maintained its outreach after
the project terminated.
7.50 Sustainability can be measured in three ways, namely through:
(a) measures of loan recovery performance,
(b) measures of subsidy dependence, and through
(c) standard measures of financial institution performance such as CAMEL.
7.51 Loan recovery: Nothing shortens the life of a lending agency more quickly than
failure to recover most of its loans. A hallmark of a carefully managed lender is
the availability of up-to-date and accurate loan recovery information. A clear and
timely picture of loan recovery status must involve several measures. Depending
on the characteristics of the loan portfolio in question, some loan recovery
measures may be quite misleading. Increases or decreases in the overall loan
The primary problem with collecting this type of detailed information on the characteristics of borrowers,
their activities, and what loans were used for, is that it adds to the agency’s transaction costs. Typically,
each line of credit from a donor or government carried idiosyncratic information and reporting requirements.
It was not unusual for an agricultural development bank to collect separate information on thirty or forty
lines of directed credit.
Financial organizations that lend as well as collect deposits typically have 8 to 15 depositor clients for
each of their borrowers. This ratio holds in banks, credit unions, and even in informal self-help financial
portfolio, the term structure of the portfolio, and loan refinancing can all have
major effects on the usefulness of various loan recovery measures.
7.52 For example, a lender may be rapidly expanding its loan portfolio and extending
numerous loans that are relatively long term. In this case, the ratio of loans-not-
repaid-on-time to total-value-of-loans-made would likely substantially
underestimate future loan recovery problems. The usefulness of all loan recovery
measures are diluted where lenders are refinancing or rolling over loans that are
not repaid on time.
7.53 The reliability of loan recovery measures also may be compromised by employee
incentive formula or by the motivations lending agencies have to report high levels
of loan recovery. If the compensation of loan officers is tied to loan recovery
performance they may mask recovery problems by refinancing loans. Likewise,
lending agencies whose loan recovery performance is under scrutiny by donors or
government may hide difficulties by selecting measures that understate their
7.54 Historically, loan recovery problems are submerged in new or rapidly expanding
programs. The expansion and the presence of term loans may result in relatively
few loans coming due compared to the total number of loans outstanding. If the
lender has altruistic objectives, it may have strong incentives to refinance or roll
over loans not repaid on time. Typically, the severity of loan recovery problems
does not become apparent for several years until the growth in the portfolio slows
and the lender decides not to further refinance problematic loans.
7.55 The two most useful measures of loan recovery status are the ratio of loans-paid-
on-time to loans-coming-due and the aging of arrears. (See CGAP, 1999 for
more details on measuring loan recovery rates.) Serious lenders should be able
to generate information on these measures on demand. They should also have
management information systems that provide this type of information daily to
individual loan officers.
7.56 Subsidy dependency: Under the old paradigm, most lenders handling
subsidized loans depended on subsidies to sustain their operations. When
governments and donors alike realized that the bulk of the subsidy did not reach
their intended beneficiaries, and also that they could not keep up with the infinite
demand for cheap credit, their will to provide these subsidies decreased, and
many of these subsidy-dependent intermediaries imploded or became moribund.
Under the new paradigm financial intermediaries involved in helping poor people
are expected to become subsidy independent in a reasonable amount of time31.
Freedom from subsidies allows an organization to integrate into national financial
and capital markets. Subsidy independence also allows the organization to
At least one well-known microfinance institution uses an elastic loan recovery measure. It does not
classify a loan as overdue until payments are at least 12 months overdue. In times of natural disaster the
institution may lengthen this grace period to 24 months or more for accounting purposes. Using these
elastic measures of loan recovery allows the institution consistently to report loan recovery rates in the high
This is the time required to build up a financial intermediary to the point where it can sustain the services
for which they were set up. During this period, subsidies to the intermediary must show a declining trend
along with increasing financial viability of the intermediary.
become creditworthy in the eyes of other members of the financial system and to
borrow from local capital markets.
7.57 The Subsidy Dependency Index (SDI) developed by Yaron is an efficient measure
of the degree to which a financial institution depends on subsidies (see Appendix
Number 5). The SDI can be calculated from information that any well-managed
financial institution should have in its information system. The Index is useful to
both donors and managers of financial organizations. It can be used as a
management tool that measures the pace an organization is moving toward
subsidy independence. Individual components of the Index also identify specific
changes managers might make to decrease dependence on subsidies.
7.58 If a Bank project involves an ongoing financial institution, it may be appropriate to
calculate a SDI for the organization before the project begins. The design of the
project might include targets and timetables for reducing the dependency on
7.59 CAMEL: To become sustainable, a micro-finance institution must become a
respected financial intermediary that eventually conforms to the norms of other
elements of the financial system. In simple terms, it must become creditworthy. 32
Building a reputation for being a serious intermediary requires maintaining
transparency and being judged by standard measures. This is especially true for
intermediaries that are collecting deposits or that hope to mature to the point
where they may accept voluntary deposits or tap into regular capital markets for
funds. A popular measure for rating the performance of financial institutions is
CAMEL (and acronym for Capital, Assets, Management, Earnings, and
7.60 The CAMEL was originally developed in 1978 to measure the soundness of U.S.
commercial banks. Over time it has been increasingly used by regulators to
compare and rank the performance of financial institutions, by bank mangers to
evaluate their own performance, and by both bank managers and regulators to
measure changes in performance over time. Recently ACCION International has
used a modified CAMEL as a technique to help its affiliates to qualify for funds
from capital markets.
7.61 During the design phase of a microfinance project, guidelines should be
established to use the CAMEL34 to measure the ongoing performance of the
organization handling the project. These measures should be of use to both
managers of the institution handling the project and to the Bank’s Task Managers.
Use of these guidelines should foster habits that allow the institution later to
integrate into the regular financial system.
This section draws on the World Bank, “The World Bank and Microenterprise Finance: From Concept to
Practice,” Washington, D. C. Operations Evaluations Department, June 29, 1999.
For more details on CAMEL see Basle Committee on Banking Regulations and Supervision Practices.
Also see Saltzman and others for information on the modified CAMEL system used by ACCION
International in analyzing its Latin American affiliates. A slightly different evaluation system is used by the
World Council of Credit Unions (WOOCU) and is referred to by its acronym PEARLS.
See Ledgerwood, Chapter 10 for more details on this topic.
7.62 Definition: CAMEL is an organizing device that allows managers to address vital
questions that are part of the financial systems perspective. It allows
unambiguous answers to questions like the following:
Does the participating agency have any capital?
Is the agency making provisions for bad debt?
Does the agency have a management plan? And
Does the plan help direct the operations of the agency?
Does the agency have plans for how it will mobilize funds in the future?
Paying attention to the types of information contained in the CAMEL analysis will
enhance the chances that the agency handling the microfinance project persists.
The primary weakness of CAMEL, from the perspective of microfinance, is that it
does not include any measure of outreach.
7.63 The five areas examined by CAMEL are the most important ones in the operation
of a financial institution.35 These five areas capture the financial condition and
operating strength of the institution. The primary information in each of the five
measures in CAMEL is briefly summarized as follows:
Capital adequacy (C) documents the capital position of the institution, its
capacity to support growth in lending, and any deterioration in assets. It
also provides insight into the institution’s ability to raise additional equity in
the case of losses, along with its ability to establish reserves to cover
Asset quality (A) documents the overall quality of the loan portfolio and
other assets. This includes an analysis of the part of the loan portfolio-at-
risk and the amount that might be subject to write off.
Management (M) describes the institution’s human resource policy, quality
of management, quality of the management information system, internal
controls and auditing, and strategic planning.
Earnings (E) captures information on costs and revenues, operational
efficiency, interest rate policies, along with return on equity and return on
The liquidity (L) component reflects the ability of the institution to meet
future funding needs and credit demand. The liability structure and the
productivity of its current assets are also includes in this measure.
This section draws heavily on Saltzman and others.
7.64 A micro-finance project which recovers most of its loans and which becomes
subsidy independent but reaches only a few hundred clients does little to
ameliorate poverty. A project may start small, but if it is to realize outreach, it
must expand to have thousands of clients. If the project is to develop or
strengthen a specialized micro-lender, the first measure of outreach is the number
of borrowers. A second measure of outreach is the number of repeat borrowers.
Not all borrowers can benefit from a second or third loan, but the willingness of a
large percentage of borrowing clients to sustain relationships with the lender is a
strong indication that the lender is providing valuable services.36
7.65 If the project is to develop a combination of micro-loans and micro-deposits, or to
promote deposit mobilization alone, the number of depositors is the first indicator
that should be used to measure deposit outreach. In some cases, however,
agencies that provide both loan and deposit services may inflate the number of
deposit accounts by forcing new borrowers to open nominal savings accounts.
Borrowers may view these accounts as an added cost of borrowing and fail to add
to their account later unless forced to do so. It is, therefore, also useful to use a
second measure that documents the number of depositors who have active
Synopsis of Guidelines
7.66 The purpose of a rural finance project should be to build or enhance rural financial
infrastructure that provides sustained financial services to a large number of poor
7.67 Three steps should be taken before designing the project. First, determine if the
economic-cum-social environment is hospitable for a project. Second, determine
if there is any unfair competition that might adversely affect the project. Third,
where feasible, conduct a financial sector study that: (a) provides a rationale for
the project; (b) helps identify institutions within the country that can participate in
the project; and (c) identifies micro-financial products and services that might be
provided by the project.
7.68 The most important step in the design phase of the project is to select or to
develop financial institutions that have a high probability of becoming successful.
These institutions must be capable of attaining substantial outreach while
becoming sustainable without persistent subsidies. Outreach and sustainability
can only be achieved if: (a) transaction costs are minimized; (b) the bulk of the
loans are repaid; and (c) the costs of business are recovered by charging
adequate rates of interest on loans. If inflation is a problem, interest rates must
be high enough to protect the purchasing power of the loan portfolio.
A caveat should be kept in mind when looking at gross number of borrowers. If the agency involved in
the microfinance project is dispensing subsidies it may attract clients who are subsidy seekers. If the
subsidies are large, the agency may attract clients who were previously borrowers from other non-
subsidized microlenders. The number of borrowers attracted by subsidies to the project from other lenders
should be netted out of outreach figures.
7.69 Unfortunately, loan guarantee schemes do not appear to be an effective way of
dealing with the risks involved in microlending. On the one hand, they are
supposed to protect micro-lending institutions from loan defaults. But at the same
time, the guarantees they provide can serve as a disincentive to the collection
efforts of financial intermediaries Successful micro-lenders must, therefore,
develop collateral substitutes, efficient information systems, and high quality
services to overcome risk related problems. Borrowers are more likely to repay
loans when they place a high value on maintaining a relationship with the lender
than when they view loan services as mediocre.
7.70 Projects that involve deposit mobilization likewise must emphasize quality of
service. Deposit facilities must be located near depositors, offer quick services,
guarantee security, and provide attractive rewards to savers. Project designers
also should assure that prudential regulation and supervision is adequate to
protect the interests of depositors. If this is not the case, part of the project should
focus on enhancing these capabilities.
7.71 The final step in project design is a careful listing of the measures that will be
used to evaluate the success or failure of the project. The measures should
concentrate on the performance of the financial institution(s) that are participating
in the project. The indicators should show the extent to which sustainability and
outreach is achieved. Some of any short-term subsidies involved in the project
should be tied to reaching intermediate goals that eventually lead to sustainability
Adams, Dale W. 1995. “Transaction Costs in Decentralized Rural Financial Markets.” In
Agriculture in Liberalizing Economies: Changing Roles for Governments,
edited by Dina Umali-Deninger and Charles Maguire. Proceedings of the
Fourteenth Agricultural Sector Symposium. Washington, D.C.: World
Adams, Dale W, Douglas H. Graham, and J. D. Von Pischke. 1984. Undermining Rural
Development with Cheap Credit. Boulder, Colorado: Westview Press.
African Development Bank. 2000. “Agricultural and Rural Development Sector Bank Group
Policy.” Abidjan: African Development Bank.
__________ 1999. “Appraisal Report: Project for the Socio-Economic Promotion of the
Disadvantaged Groups, Republic of Cape Verde.” Abidjan: African
__________ 2001. “Bank Group Financial Sector Policy.” Abidjan: African Development
__________ 1999. “Benin: Proposal for an ADF Loan of UA10.54 Million to Finance The
Agoua, Monts Kouffe and Wari-Maro Forestry Management Project
(PAMF).” Abidjan: African Development Bank.
__________ 1999. “Burkina Faso: Proposal for An ADF Loan of UA 9.99 million to Finance The
Soum Province Livestock Development Project - Phase II.” Abidjan: African
__________ 1998. “Egypt: Second Agricultural Development Project: Project Completion
Report.” Abidjan: African Development Bank.
__________ 2000. “Ghana: Proposal for An ADF Loan of UA 9.89 Million to Finance The
Cashew Development Project. Abidjan: African Development Bank.
__________ 1998. “Ghana: Second Line of Credit to The Agricultural Development Bank –
Project Completion Report. Abidjan: Agricultural Development Bank.
__________ 2000. “Ghana: Second and Third Lines of Credit to the Agricultural Development
Bank: Project Performance Evaluation Report.” Abidjan: African
__________ 2000. “Guinea: Proposal for an ADF Loan of UA 10,000,000 to Finance The
Upper Guinea Rural Development Support Project (PADRGHG).” Abidjan:
African Development Bank.
__________ 1998. “Malawi: Proposal for an ADF Loan of UA5.02 Million for The Financing of
the Smallholder Irrigation Project.” Appraisal Report. Abidjan: African
__________ 1998. “Malawi: Proposal for an ADF Loan of UA 6.23 Million and TAF Grant of UA
1.26 to Finance The Horticulture and Food Development Project.”
Appraisal Report. Abidjan: African Development Bank.
__________ 1998. “Morocco: Lines of Credit II, III, and IV to The Caisse Nationale de Credit
Agricole (CNCA).” Project Performance Audit Report. Abidjan: African
__________ 1987. “Morocco: Postevaluation Report on ADB First Line of Credit to The Caisse
Nationale de Credit Agricole (CNCA).” Abidjan: African Development
__________ 2000. “Mozambique: Proposal for An ADF Loan of UA 12.46 Million and a TAF
Grant of UA 1.00 million to Finance The Family Farming Income
Enhancement Project.” Abidjan: African Development Bank.
__________ 2000. “Nigeria: First and Second Lines of Credit to The Nigerian Agricultural
Cooperative Bank (NACB).” Project Performance and Evaluation Report.
Abidjan: African Development Bank.
__________ 2000. “Senegal: Proposal for an ADF Loan of UA 10 million to Finance the
Livestock Support Project – Phase II.” Abidjan: African Development
__________ 1999. “Senegal: SME Development and Financing Project, Project Completion
Report.” Abidjan: African Development Bank.
__________ 1997. “Strengthening The Financial System.” In African Development Report
1997, pp. 128-142. Abidjan: African Development Bank.
__________ 2000. “Tanzania: Proposal for An ADF Loan of UA 5.56 Million and a TAF Grant
of UA 1.01 Million to Finance The Alternative Learning and Skills
Development Project in Zanzibar.” Abidjan: African Development Bank.
__________ 1997. “The Evolving Environment for Private Investment.” In African Development
Report 1997, pp. 86-102. Abidjan: African Development Bank.
__________ 1997. “Tunisia: First Line of Credit to BNA (Former BNDA): Project Completion
Report.” Abidjan: African Development Bank.
__________ 1999. “Tunisia: Second Line of Credit to the Banque Nationale Agricole –
Completion Report.” Abidjan: African Development Bank.
__________ 1999. “Uganda: Poverty Alleviation Project (PAP) Project Completion Report.”
Abidjan: African Development Bank.
__________ 2000. “Uganda: Proposal for an ADF Loan of UA 9.67 Million to Finance The
Area-Based Agricultural Modernization Programme (Feeder Road
Rehabilitation).” Abidjan: African Development Bank.
__________ 2000. “Zambia: Proposal for An ADF Loan of UA 5.29 Million and a TAF Grant of
UA 0.76 Million to Finance The Small-Scale Irrigation Project (SIP).”
Appraisal Report. Abidjan: African Development Bank.
Aryeetey, Ernest. 1992. "Mobilizing Domestic Savings for African Development and
Diversification: Case Study of Ghana.” Unpublished paper prepared by the
International Development Centre, Queen Elizabeth House, University of
Oxford, Oxford, England, May.
Aryeetey, Ernest and others, 1997. Financial Market Fragmentation and Reforms in Sub-
Saharan Africa, Washington, D.C.: World Bank.
Basle Committee on Banking Regulations and Supervisory Practices. 1988. “International
Convergence of Capital Measurement and Capital Standards.” Basle,
Bouman, F.J.A. 1995. “Rotating and Accumulating Savings and Credit Associations: A
Development Perspective.” World Development 23:371-384.
Canadian Cooperative Association. 2000. “Mid-Term Review of the Microfinance Initiative for
Africa (AMINA) of the African Development Fund: Final Report.” Ottawa:
Canadian Cooperative Association.
Consultative Group to Assist the Poorest (CGAP). 1999. “Measuring Microcredit Delinquency:
Ratios Can Be Harmful to Your Health.” CGAP Occasional Paper No. 3.
Washington, D.C.: CGAP, June.
__________ 1996. “Microcredit Interest Rates.” CGAP Occasional Paper No. 1. Washington,D.
C.: CGAP, August.
__________ 2000. “The Rush to Regulate: Legal Frameworks for Microfinance.” CGAP
Occasional Paper No. 4. Washington, D.C.: CGAP, April.
de Stemper, Gloria Almeyda. 1987. "The Role of Credit in Development Projects: The Credit
Union Movement in Togo." African Review of Money, Finance and
de Soto, Hernando. 2000. Mystery of Capital: Why Capitalism Triumphs in the West and Fails
Everywhere Else. New York City: Basic Books.
Donald, Gordon. 1976. Credit for Small Farmers in Developing Countries. Boulder, Colorado:
Fitchett, Delbert A. 2000. "Overview of Rural/Microfinance Best Practices." Unpublished
background paper prepared for the Ghanaian Ministry of Finance/World
Bank NBFI Project Rural Finance Review Study, by IMCC/Sigma One,
Washington, D.C., September 15.
International Fund for Agricultural Development. 2000. “IFAD Rural Finance Policy.” Rome:
International Fund for Agricultural Development.
Ledgerwood, Joanna. 1999. Microfinance Handbook: An Institutional and Financial
Perspective. Washington, D.C.: World Bank.
Lim, Joseph and Dale W Adams. 1997. “Interest Rates, Subsidies and Directed Credit
Programs in The Philippines.” Unpublished paper prepared for the
Secretary of Finance in the Philippines, Manila, Philippines, September
Llisterri, Juan Jose, and Jacob Levitsky. 1996. Sistemas de Garandias de Credito:
Experiencias Internacionales y Lecciones para American Latina y El
Caribe. Washington, D.C.: Inter-American Development Bank.
Lukhele, Andrew Khehla. 1990. Stokvels in South Africa: Informal Savings Schemes by Balscks
for the Black Community. Johannesburg: Amagi Books.
Meyer, Richard L. and others. 1992. "A Review of the Literature on Financial Markets and
Agribusiness Development in Sub-Saharan Africa: Lessons Learned and
Suggestions for an Analytical Agenda." Economics and Sociology
Occasional Paper No. 2008, Department of Agricultural Economics and
Rural Sociology, The Ohio State University, Columbus, Ohio, December.
Micro Save Initiative. 1999. “A Study of Postal Savings Banks.” Nairobi, Kenya: Micro Save
Pohlmeier, Lorenz, and S. Thillairajah. 1989. "Review of Rural Financial Services in Sub-
Saharan Africa." Unpublished reports prepared by the Agricultural Division,
African Technical Department, World Bank, Washington, D.C., June 30.
Saltzman, Sonia B. and others. 1998. “Performance and Standards in Microfinance: ACCION’s
Experience with The CAMEL Instrument.” Document No, 7. Boston:
Schmidt, Reinhart H., and others. 1988. "Cooperation with National Savings and Credit Bank,
Ghana." Unpublished report prepared for GTZ by the Interdisziplinare
Projekt Consult Gmbh (IPC). Frankfort am Main, Germany, January.
Schoombee, Andrie, 1998. “The Financial System Approach to Development Finance: Origin,
Evolution and Proposals.” Development South Africa 15: 379-378.
Schrieder, Gertrud R., and Carlos E. Cuevas. 1992. "Informal Financial Groups in Cameroon."
In Informal Finance in Low-income Countries," edited by Dale W Adams
and Delbert A. Fitchett. Boulder, Colorado: Westview Press, pp. 43-57.
Seibel, Hans Dieter, and Michael T. Marx. 1987. Dual Financial Markets in Africa. Saarbrucken:
Verlag Breitenbach Publishers.
Shipton, Parker. 1992. "The Rope and The Box: Group Savings in Gambia." In Informal
Finance in Low-income Countries," edited by Dale W Adams and Delbert A.
Fitchett. Boulder, Colorado: Westview Press, pp. 25-41.
Small Enterprise Development Journal Volume11 Number 4, December 2000.
Steel, William F., and Ernest Aryeetey. 1994. "Informal Savings Collectors in Ghana: Can They
Intermediate?" Finance and Development 31:36-37.
Swisscontract. 2000. “Estudio sobre La Movilizacion de Depositos en el Peru.” Unpublished
study prepared for COFIDE and the Inter-American Development Bank,
Lima, Peru, March.
Thillairajah, Sabapathy. 1994. "Development of Rural Financial Markets in Sub-Saharan Africa."
World Bank Discussion Paper No. 219, Africa Technical Department
Series, The World Bank, Washington, D.C.
Tonkou, Maurice, and Dale W Adams. 1995. "Sophisticated Rotating Savings and Credit
Associations in Cameroon." African Review of Money, Finance and
Banking, 1/2 (1995): 81-91.
Tounessi, M., 2000. “Microfinance for The Rural Poor in West Africa: Lessons, Challenges, and
Contributions to Innovative Approaches, Financial Services Associations in
Benin.” Rome: International Fund for Agricultural Development.
Vogel, Robert C. and Dale W Adams. 1997a. “Costs and Benefits of Loan Guarantee
Programs.” Financier 4: 22-29.
__________ 1997b. “Old and New Paradigms in Development Finance.” Savings and
Development 22: 361-382.
Von Pischke, J.D. 1991. Finance at The Frontier: Debt Capacity and The Role of Credit in The
Private Economy. Washington, D.C.: Economic Development Institute,
Wenner, Mark. 2000. “Rural Finance Strategy.” Washington, D.C.: Inter-American
Westley, Glenn D. and Brian Branch. 2000. Safe Money: Building Effective Credit Unions in
Latin America. Washington, D.C.: Inter-American Development Bank.
World Bank. 1995. “Nigeria: The Nigerian Rural Financial System: Assessment and
Recommendations.” Washington, D.C.: World Bank.
__________ Operations Evaluation Department. 1998. “Financial Sector Reforms.”
Washington, D.C.: World Bank.
__________ 2001. “Promoting Sound, Accessible, Development-oriented Financial Sectors in
Africa.” Washington, D.C.: World Bank.
__________ 1993. “Review of Bank Lending for Agricultural Credit and Rural Finance
(1948-1992).” Washington, D.C.: The World Bank.
__________ Operations Evaluations Department. 1999. “The World Bank and Microenterprise
Finance: From Concept to Practice.” Washington, D.C.: World Bank.
Yaron, J., M. P. Benjamin Jr., and G. L. Piprek. 1997. Rural Finance Issues, Design, and Best
Practices. Washington, D.C.: The World Bank.
Appendix Number 1: CREDIT-IMPACT STUDIES
Two methods have been used to evaluate the performance of rural finance
projects. The traditional approach focuses on the impact of loan use on borrowers'
activities, the topic discussed in this appendix. A newer, second approach concentrates
on changes in the performance of financial institutions involved in development projects,
a topic discussed elsewhere in the text. Most donor credit projects lead to impact
studies because these projects were initially justified by predictions of what the project
would do for selected target groups or to targeted activities. This might involve
measuring how much more wheat was produced, how many more animals were raised,
how incomes were changed, and how much more employment was caused by the
One of two methods is generally employed in credit-impact studies. One is a
before-and-after design where changes in borrower performance are measured over
time -- before receiving loans and sometime after receiving loans. The second method
uses a with-and-without design and compares the performance of borrowers with a
similar control group that receives no loans under the program.
Credit-impact studies have two advantages: they complement targeted credit
programs, and those funding development projects understand and expect impact
studies. As a result, it is easy to attract funds to do this type of analysis, and funding for
impact studies sometimes is built into rural finance projects. Nonetheless, these types of
studies also have major weaknesses. They are time consuming and costly to do
because researchers must collect relatively large amounts of primary information from
borrowers on a variety of activities. Even more important, these studies are plagued by
Those who do credit-impact studies face extremely difficult methodological
problems. For example, before-and-after studies suffer from the attribution problem
where borrower activities may be affected by variables other than the loans provided by
the project. An example is where borrowers' incomes increase because product prices
rose concurrently with the unfolding of the rural finance project. Studies that use this
methodology often overestimate the benefits caused by loan use when the researcher is
unable to control or isolate the effects of other factors that are also changing with loan
With-and-without studies also involve selection bias. If a credit program has
integrity, it screens applicants for creditworthiness with those being most creditworthy
receiving loans. Screening makes it difficult to form control groups that are identical to
the borrowing group. Ideally, a credit program should select individuals who have the
highest returns to investments and screen out those with the lowest. Done correctly,
credit programs lend to individuals who likely would perform better economically, even
without loans, than those who are screened out of the lending program. Part of the
difference in performance between borrowers and non-borrowers, therefore, may be
because of initial differences in capabilities. Ignoring the selection bias results in
overestimation of the benefits of loan use.
A further problem is that financial intermediation involves lending and deposit
mobilization. Credit impact studies focus only on lending. In an efficient financial market
a much larger number of individuals benefit from attractive deposit services than benefit
from borrowing. An ill-conceived credit project such as one that offers cheap loans, for
example, may seriously damage the ability and willingness of a financial institution to
mobilize deposits. The damage done to the interests of actual or potential depositors by
a targeted credit program ought to be part of the cost-benefit analysis of such programs,
but seldom is. Credit impact studies routinely ignore costs imposed on depositors.
Fungibility presents still more problems for credit-impact studies. Funds from
one's savings, from an informal loan, from a formal loan, or from remittances are
completely interchangeable. Any good that can be sold is also a partial substitute for
money, as is any good used in barter. Fungibility, as a result, makes it extremely difficult
to measure accurately the additionality in borrower activities caused by a project loan.
At the borrower level, it is also difficult to answer the counterfactual question: what
would borrowers have done without program loans? Would they have used some of
their own funds, informal loans, remittances, or sold assets to make most or all of the
investments made with funds provided by project loans? Any loan allows individuals to
substitute borrowed funds for other funds or for barter, and this is nearly impossible to
measure. Ignoring fungibility, substitution, and the counterfactual problem likewise
results in inflated estimates of credit project benefits.
Most credit impact studies ignore the wear and tear credit projects impose on
financial infrastructure. One NGO, for example, may provide cheap credit that
undermines the financial integrity of another organization that is attempting to attract
creditworthy borrowers who are required to pay market rates of interest. Likewise, a
credit project may impose administrative costs on the agency handling the loans that are
not covered by subsidies and revenues. These costs might include but would not be
limited to reports and evaluations, for example. Or, a credit program that tolerates loan
defaults may undermine the ability of other segments of the financial system to collect
Finally, credit impact studies also ignore non-borrower losses that some may
suffer because of borrower gains. For example, a credit project may provide loans and
new technology to poor individuals that allow them to sharply increase their production of
candles. This additional supply of candles, however, may drive even poorer candle
makers from the local market.
Appendix Number 2: TRANSACTION COSTS
Transaction costs have a major impact on the performance of financial markets,
especially regarding microfinance. These costs fall into two broad categories: the
opportunity cost of time spent by borrowers and depositors as they negotiate financial
contracts and the explicit expenses incurred by all participants to form, to fulfill, and to
enforce these obligations. Total transaction costs can be subdivided into the costs
incurred by the five major categories of participants in financial markets: borrowers,
depositors, lenders, deposit mobilizers, and supervison-regulators.
Costs for Participants
Borrowers' costs include the value of time spent soliciting, negotiating,
withdrawing, and repaying loan. They also include costs for trips to deal with the lender,
costs of providing suitable collateral, out-of-pocket costs for preparing loan documents,
gratuities for co-signers, possible bribes or broker's fees to influence lenders’ decisions,
the opportunity costs involved in compensatory balances, and other expenses incurred in
sustaining and enhancing the borrower’s creditworthiness. A borrower's cost to secure a
loan -- the perceived price of the loan -- is the sum of these transaction costs plus the
nominal interest payment made for the loan.
Depositors' costs involve the opportunity cost of time spent in searching for
savings alternatives, in making deposits and withdrawals, along with any associated
transportation expense. The net return that savers realize on their deposits is equal to
the interest received on deposits less the transaction costs incurred by depositors.
Lenders' transaction costs mostly stem from gathering and processing information
required to screen potential borrowers, processing loans and associated collateral,
monitoring loans, loan collecting or seizing collateral, and in meeting regulatory
requirements. Lenders incur these expenses largely because of the risks involved in
lending. The net returns from lending equals interest paid on the loan less the lender's
loan transaction costs, less the cost of funds lent, less loan losses, less the lender's
costs of submitting to prudential regulation.
Deposit mobilization also imposes transaction costs on deposit mobilizers: deposit
documents must be issued, transactions handled, records kept, and reserve
requirements met. For a financial intermediary that relies
on deposits and equity capital for lending the cost of funds equals the interest on
deposits, the dividend paid on equity, the transaction costs of sustaining this activity, and
the costs of submitting to any prudential regulation.
In financial institutions that mobilize deposits, there is a public interest in guarding
these funds from theft and malfeasance. This leads to deposit guarantees and
prudential regulation, both of which typically impose transaction costs on financial
institutions. Intermediaries may be forced to pay insurance premiums and also to incur
additional costs because of examination and regulation. The total regulatory costs are
equal to the regulatory costs imposed on the lender, the regulatory costs imposed on the
deposit mobilizer, plus the costs of operating regulatory organizations.
Transactions Costs and Rationing
Transaction costs are not allocated in fixed proportions among participants. New
and non-preferred clients usually incur higher transaction costs for a given financial
product than do previous or preferred clients. These costs per unit of transaction for
both the financial intermediary and the client generally decline when working
relationships mature, when the size of the financial transaction increases, and when the
financial system becomes more efficient.
Research has shown that the allocation of these costs among the four categories
of participants, among individuals in each category, and the sum total of all transaction
costs is strongly influenced by financial market policies and by other government and
donor actions. In many cases reallocated transaction costs partially substitute for
interest rates in the rationing of financial services. For example, governments may
impose interest rate ceilings on loans. These rates are often below commercial rates
and sometimes below the expected rates of inflation. This generates excess demand
and forces lenders to devise substitutes for interest rates to perform the credit rationing
function. One common alternative is for lenders to shift part of their normal loan
transaction cost to non-preferred clients, or to create additional hurdles that non-
preferred clients must overcome to access subsidized funds. Forcing new borrowers
and borrowers of small amounts to stand in line, to make numerous trips to the bank to
transact a loan, to pay for a bank technician to visit their farms, and to pay for loan
application forms are all signs of this reallocation of transaction costs.
Why do banks do this? Rather than being a nefarious plot to exclude poor people
from formal loans, it is the normal reaction of any firm that is trying to maximize its
returns by limiting its costs. The bank would have absorbed at least some of the
transaction costs for the non-preferred borrowers through hiring more loan officers, by
expanding the size of the branch, and by simplifying its procedures for non-preferred
clients if interest rates are allowed to play a larger role in loan rationing.
Costs Generated by Loan Targeting
Loan targeting occurs when donors or governments provide funds to lenders that
must be lent for specified purposes. To assure compliance with lending targets the
providers of funds usually require detailed reports on borrowers and loans and then later
require credit-impact studies. In some cases this might involve a bank maintaining
separate records on dozens of targeted lending programs. Loan quotas, loan size
ceilings, and loan guarantee funds are other techniques that governments use to force
lenders to allocate loans in particular ways. These programs increase transaction costs.
The relative importance of transaction costs in influencing behavior among
participants varies substantially. Because the normal costs for a lender to negotiate a
loan is more or less fixed, lenders prefer to deal mostly with large loans that involve a
small ratio of lender transaction costs to total value of loan. For both borrowers and
depositors the importance of transaction costs varies inversely with the size of the loan
or deposit. The transaction cost component of borrower's costs and the net benefit for
depositors usually decrease as the size of the transaction increases. Borrowers and
depositors of small amounts therefore will be quite sensitive to changes in transaction
costs, while borrowers and depositors of large amounts will be more strongly influenced
by changes in interest rates.
The behavior of the lender and deposit mobilizer is influenced by both interest
rates and transaction costs. A financial intermediary has weak incentives to provide
financial services to new rural clients who are poor because of the naturally high
transaction costs the intermediary incurs in dealing with these clients. Enforcing low
interest rates on loans along with extensive loan targeting that increases the lender's
costs exacerbates this tendency. Low interest rates generate an excess demand that
typically causes the lender to off-load additional transaction costs on non-preferred
borrowers. As a result, borrowers who are relatively well-to-do receive the bulk of the
cheap loans while the effective borrowing costs for poor people may be increased
because of the imposition on them of higher transaction costs. "Cheap credit" ends up
not being cheap for poor people under these circumstances because of the reallocation
of transaction costs.
Reducing Total Transaction Costs
Other things being equal, total transaction costs per unit of funds handled
decrease as the size of the transaction increases, as the distance from urban areas
decreases, and as the amount of regulation or targeting decreases. Transaction costs
are a major reason why it is so difficult to provide small loans to clients in rural areas.
They are also a major explanation for the tendency of formal financial systems to
concentrate activities in urban areas and among individuals who are relatively well-to-do.
This tendency can only be changed if significant reductions are made in total transaction
costs, especially those costs incurred by the financial intermediary.
Transaction costs can be reduced several ways. One important way is through
scale economies when the staff and facilities of the intermediary are used more
efficiently to handle a larger volume of business. Another way of reducing transaction
costs is through scope economies where an intermediary uses staff and facilities more
efficiently by providing multiple financial services. Because financial contracts depend
heavily on information, transaction costs are sensitive to technologies that alter the
efficiency of collecting and processing information. Computers play a key role in
reducing these costs. Dealing with groups may be still another technique for reducing
transaction costs, both in lending and deposit mobilization.
New financial technology can sprout virtually anywhere. Financial innovations are
also unique in that they are not always cost reducing. Formal financial intermediaries
are especially creative in designing ways to mitigate the impact of policy restrictions
when it is in their best interest to do so. These innovations, however, may increase the
total costs of financial intermediation. For example, a bank may avoid the intent of loan-
size limits by issuing multiple loans to the same firm or individual, thereby increasing
overall transaction costs. Unfortunately, in financial systems that are heavily regulated
and in which extensive loan targeting occurs, much of the innovative energy in formal
finance is spent in mining the loopholes in rules and regulations rather than in searching
for new procedures that reduce overall transaction costs.
Despite its undeserved, unsavory reputation, informal finance is a major hatchery
for cost-reducing financial technologies. In large part, informal finance succeeds in
providing sustained financial services to large numbers of poor people in rural areas
because of the cost-reducing innovations that are spawned by competition among
informal agents. Programs that are successful in providing financial services to large
numbers of poor clients also must control and reduce these important costs.
Source: Adapted from Adams, 1995
Appendix Number 3: MARKET RATES OF INTEREST
Although the term “market rates of interest” is widely used in ADB rural finance
projects, the meaning of the term is ambiguous. In part, the ambiguity stems from
confusion about the nature of financial products. Casual observers often assume that
all loans are essentially the same product and that if financial markets are working
efficiently, all debt should carry the same market-clearing interest rate, the so-called
"market rate of interest." The fundamental problem with this view is that it glosses over
the huge variety of loan contracts that are produced by these markets.
Analogously comparing the term loans to the term fruit may clarify the loan-
contract notion. The term fruit covers a large number of distinct crops as different as
tomatoes, mangos, and bananas. The price of each type of fruit is determined largely
independently by the interplay of supply and demand forces. Furthermore, there may be
a range of prices that consumers are willing to pay for sub-varieties of fruit or for quality
Similar differences exist in the varieties of loans. A small loan that is made
without imposing transaction costs on the borrower, that involves no physical collateral,
and which has highly flexible repayment terms is one of these varieties. A completely
different variety is a commercial loan that is large, which imposes substantial loan
transaction costs on the borrower, which requires significant physical collateral, and
which has inflexible repayment conditions. Likewise, loans obtained by using a credit
card are viewed by borrowers as substantially different loan contracts from a 30-year
mortgage involved in the purchase of a home. One could not logically expect that these
vastly different loan contracts -- different in costs to produce and different in borrowers'
satisfaction -- should carry the same price.
Instead of using the term “market rates of interest” when referring to the pricing of
loans to end users, one more appropriately may use the term “cost recovery rates.”
Applying this term forces program administrators to analyze more carefully their costs
and to compare these costs with their revenues. This, in turn, would allow policy makers
and administrators of these organizations to measure their movement toward, or away
from, subsidy independence.
Appendix Number 4: LOAN GUARANTEE PROGRAMS
Loan guarantee schemes have been used in many countries to stimulate lending,
especially for small-business operators. Although justifications of loan guarantee
programs typically begin with reference to one or more financial market imperfections,
there is rarely any detailed analysis along these lines. In the absence of documentation
of financial market imperfections and a cogent argument that shows the loan guarantee
scheme will overcome these imperfections, the merits of these programs must be based
on estimates of their benefits and costs.
Costs of Loan Guarantee Programs
At least three important questions should be asked about loan guarantee
programs in assessing their effectiveness and efficiency in reaching small-scale
• Do these programs significantly alter lender behavior in desired directions?
• Are the costs of these programs less than their benefits?
• Could the resources committed to loan guarantee schemes be more effective in
assisting disadvantaged groups if they were used in other programs?
Three categories of costs accompany loan guarantee programs: the costs of
setting up the program, the costs of funding the subsidy needed to energize and sustain
the program, and the additional cost incurred by the financial system to run and to
participate in the guarantee program.
Set-up costs: In many cases, establishing a loan guarantee scheme involves
setting up a new organization or a new office in an existing organization to administer the
program. Typically, donors or governments cover all or most of the costs of setting up
Periodic Subsidies: Most loan guarantee programs require hefty subsidies to
sustain their operations. The subsidies may come via grants or concessionary priced
loans to replenish the scheme.
Transaction costs: In addition to the obvious costs incurred by the guaranteeing
agency to operate its program, lenders and borrowers usually incur additional
transaction costs to participate in the program. In extreme cases, the guaranteeing
agency may insist on receiving copies of loan documents on insured loans and then
essentially duplicate the initial loan screening done by lenders. In some cases,
borrowers of insured loans may be required to provide additional information to lenders
over what is required on non-insured loans, and lenders usually have to prepare special
reports on their portion of their loan portfolio covered by loan guarantees.
Lenders also incur additional transaction costs when they make claims on loans
covered by guarantee programs. These transaction costs may be substantial in cases of
dispute with the guaranteeing agency and when the lender participates in several
guarantee programs and is processing information manually.
Benefits of Loan Guarantee Schemes
The benefits generated by a loan guarantee program are concentrated in the
additional lending induced by the transfer of part of the lender's loan recovery risk to the
guaranteeing organization. Both borrowers and society benefit from the increases in net
income realized by borrowers who were supposedly more severely credit rationed before
the help of the loan guarantee program. Unfortunately, these increases in net income
can be viewed only vaguely through loan recovery performance. Borrowers are more
likely to repay loans that help them significantly increase their incomes. Additional net
incomes can occur only if additional borrowers receive loans because of the incentives
provided to lenders by loan guarantee programs.
Additionality: Loan guarantee programs are justified on the basis of altering
lenders' decisions in directions favored by designers of the guarantee scheme. The
success of these programs, therefore, hinges on the extent to which guarantees cause
additional lending to targeted groups, additional meaning more lending than would have
occurred without the guarantee. If the program causes additionality, subsidiary issues
are the comparisons of the program's costs with estimated benefits, and whether similar
benefits could be achieved through less expensive methods. In the absence of
additionality, the subsidiary issues are moot.
In evaluations of credit guarantee programs, additionality often is measured poorly
or ignored. In most cases, the number of borrowers covered by the guarantee and the
total value of their guaranteed loans are used as gross estimates of program benefits.
These numbers, however, likely overstate the impact of loan guarantees on lender
behavior. In evaluating the merits of loan guarantees from this perspective, the primary
question to be answered is an empirical one, not one of theory: did the guarantee
scheme induce lenders to augment targeted lending and if so, by how much?
Additionality might be expressed either in terms of number of clients, number of loans, or
in terms of volume of funds lent for targeted purposes.
Simple examples may clarify the notion of additionality. Assume the purpose of a
loan guarantee program is to stimulate lending to microenterpreneurs. Further assume
that before the availability of the guarantee scheme, lender X was making loans to 10
microentrepreneurs for a total of $1,000. If, after participating in the loan guarantee
program, lender X lent to 20 micro-entrepreneurs a total of $2,000, one could conclude
that the loan guarantee was associated with additionality in both number of loans and
value of loans to the target group.
Counterfactual: It is impossible to know with precision, however, what the lender
would have done in the absence of the loan guarantee program. This is an event that
did not occur and is therefore impossible to measure. One might argue that lender X,
mentioned in the example above, would have increased its lending to micro-
entrepreneurs by the same amounts without the loan guarantee. Reforms, for example,
that created an economic environment more hospitable to micro-enterprises might have
induced the lender to expand micro-enterprise lending without additional guarantees.
One must be cautious in attributing all changes in lending behavior to loan guarantee
schemes when the guarantee program is nested in a bundle of programs that are
improving the environment for a targeted group or activity.
Substitution: Measuring the impact of loan guarantees on lender behavior is
further complicated by two types of substitution: that which occurs within the lending
institution and that which occurs among lenders. A loan guarantee program, for
example, may cause a bank to transfer part or all of the qualifying portion of its existing
loan portfolio to the guarantee programs, and then expand its lending in non-targeted
areas. This might be called intra-portfolio substitution. Large amounts of substitution
diminish additionality, and this is likely to occur when the objectives of the loan
guarantee are perceived by lenders to be undesirable or unprofitable activities.
The second form of substitution, inter-lender substitution, occurs among lenders.
For example, one organization may have access to a loan guarantee program that
allows it to provide loans on a more favorable basis to borrowers than is possible for
other lenders to do. The organization subsidized through the loan guarantee as a result
may draw clients from other lenders. If all of the borrowers covered by a loan guarantee
program were previously clients of other lenders, little or no additionality in number of
clients might result from the guarantee when net changes in the entire financial sector
Overlooking the problems of substitution and the counterfactual could lead casual
observers to conclude that a credit guarantee program had a major impact on lender
behavior when in fact the guarantee caused much less additionality in lending for
targeted purposes. Several studies in Canada and in the United Kingdom suggest that
loan guarantee programs there resulted in only one-quarter to one-third of the clients
covered by the guarantees being additional. Studies of loan guarantee programs in
Latin America and the Philippines found even less additionality.
Given the difficulties of measuring additionality, evaluations of loan guarantee
programs rarely present information on this vital measure of performance. Lacking
evidence showing loan guarantee programs caused additionality, one cannot determine
the benefits of these programs. Skeptics might go on to argue that only the costs of
these programs can be determined with any precision.
Four critical features stand out in this review of loan guarantee programs. The
first is that the assumptions about credit market imperfections -- on which loan guarantee
programs are often built -- and the design of these programs are seldom logically
related. The second is that few if any of these programs can persist without subsidies.
The third is that most evaluations of these programs report only part of the associated
costs. The fourth is that benefits of these programs seldom are documented carefully,
and additionality seldom is measured accurately. With only scraps of information
available about costs and even skimpier amounts of reliable information on benefits, it is
impossible to make informed judgments about the relationship between benefits and
costs of these efforts. Until this type of information is available, perhaps it would be best
for ADB to avoid loan guarantee programs.
Source: Abstracted from Vogel and Adams, 1997a.
Appendix Number 5: THE SUBSIDY DEPENDENCY INDEX
The Subsidy Dependency Index (SDI) measures the extent to which an
organization must raise the interest rates it charges on its loans to achieve
independence from subsidies. A ratio of 2.0, for example, indicates that interest rates
must increase 200 percent to achieve subsidy independence.
Calculating the SDI
In order to calculate the SDI for a rural financial intermediary (RFI), all the implicit
and explicit subsidies received by the RFI must be aggregated. Total subsidies are then
compared with the RFI's average on-lending interest rate multiplied by its average
annual loan portfolio (i.e., the interest earned as presented in the RFI's annual income
statements.) The ratio of the RFI's annual subsidies to its annual interest income
indicates the percentage by which that RFI's interest income would have to increase to
eliminate the need for subsidies.
The SDI can be expressed in terms of the following formula:
SDI = Total annual explicit and implicit subsidies received (S)
Average annual loan portfolio interest income (L*i)
= A(m - c) + (E*m) - P + K + R
A = Average annual outstanding concessionary borrowed funds
m = The interest rate the RFI would probably pay for borrowed funds if access
to concessionary borrowed funds were to be eliminated. This would generally be the
market reference deposit interest rate, adjusted for reserve requirements, and the
administrative cost associated with mobilizing and servicing additional deposits.
c = Weighted average annual concessionary rate of interest actually paid by
the RFI on its average annual outstanding concessionary borrowed funds.
E = Average annual equity
P = Reported annual profit before tax (adjusted for appropriate loan loss
provisions and inflation).
K = The sum of all other annual subsidies received by the RFI, such as partial
or complete coverage of the RFI's operational costs by the state.
R = A downward adjustment in the loan portfolio income to account for the
preferential reserve requirements imposed by the government on the lender.
L = Average annual outstanding loan portfolio of the RFI.
i = Weighted average on-lending interest rate on the RFI's loan portfolio.
= Average interest earned
Average annual loan portfolio
Source: Yaron, et. al., 1997.
Appendix Number 6: SUGGESTED STEPS FOR IMPLEMENTING
THE NEW PARADIGM
This Appendix outlines suggested steps that ADB might take in the short and
medium-run to shift from the old paradigm to the new one on rural finance. The steps
are presented in approximate order of time priority. Overall they focus largely on
generating staff and administrative support for microfinance activities that might later be
developed using the new paradigm on rural finance.
Even under the best of circumstances, large organizations and their employees
typically change practices slowly and resist adopting new paradigms. 37 The “tyranny of
the status quo” is a restraint on redirection of effort in any organization. Bank employees
may feel more comfortable working with traditional clients such as government
institutions and development banks than they do with small, new, struggling
organizations. It is far easier for employees to replicate previous rural lending practices
– lines of credit and credit components – than it is to design new types of rural finance
projects with non-traditional clients. Bank employees, therefore, must become
convinced that new approaches are better than old practices before they will embrace
the new paradigm. This involves acknowledging that projects designed using the old
paradigm did not produce results that are consistent with the New Vision Statement of
the bank -- helping to reduce rural poverty.38
To develop widespread for the new paradigm in ADB, the following steps might be
Steps to raise awareness and acceptance:
Employees are unlikely to change practices without the board and key bank
managers accepting and then sanctioning the new paradigm, followed by appropriate
policy directives. In the World Bank, for example, a strong policy directive (O.P. 8.30)
mandated major changes in the way the Bank addressed financial markets. Comparable
directives were issued by the Inter-American Development Bank and the U.S. Agency for
International Development. The ADB will need to issue something similar.
• Hold seminars with leaders in the ADB to inform them about the proposed new
policies. Solicit their formal approval of the new paradigm on rural finance.
• After the new approach is accepted, prepare a policy directive that outlines what can
and cannot be done under the new paradigm.
Steps to create institutional capacity:
Prior to the adventures of Columbus, for example, the flat-earth paradigm was used to understand our
planet. Even after more than 500 years, not all people have accepted the new paradigm that describes the
earth as a sphere.
Other major donors such as USAID, the World Bank, and the Inter-American Development Bank have
gone through this process of switching paradigms. Although the switch in ADB might proceed more
rapidly, other donors have taken up to 10 years to make the full conversion to the new paradigm.
Someone must be in charge of implementing the new paradigm. If this is done
through AMINA, then someone with experience in microfinance should be designated or
hired to head AMINA and the position should have some clout, resources, and
prominence in the organizational structure of ADB.
• Appoint new head of AMINA.
• Elevate the office of AMINA higher in the administrative structure
• Hire several specialists in microfinance to staff AMINA. At least one of these
specialists should focus on deposit mobilization.
• Place microfinance specialists in key operational offices in ADB
• Establish working relationships with international groups that specialize in
• Establish a budget for the office that supports microfinance efforts.
Designing and implementing model
Early in the process, the ADB must decide how it will identify, design, evaluate,
and manage new rural finance projects. One model is to do most of this internally with
bank staff. Another model is to rely on contractors to do most of the work with ADB staff
focusing on assuring compliance with contract agreements.
• Microfinance leaders in ADB might study the methods used by several major donors
such as the U.S. Agency for International Development or the EBRD in their
• ADB might also study some of the microfinance projects that were designed and
managed by major agencies that are specialists in this topic. Some of the agencies
that might be considered include ACCION International, several of the organizations
that promote credit unions, and private consulting firms such as IPC in Frankfurt.
• After discussions with other donors and implementing agencies, ADB should issue a
policy directive on how it will deal with new rural finance projects.
Steps to build staff capacity:
As quickly as possible steps should be taken to expose interested ADB staff to
successful microfinance programs. This can be done through staff visits to successful
projects, short-course training programs, and helping staff to access new sources of
information about microfinance. Providing staff with the opportunities to take brief leaves
to study programs in other countries or to attend short-courses on microfinance may
provide them incentives to make professional commitments to this area.
• Arrange staff visits to several successful microfinance projects such as the Bank
Rakyat in Indonesia, the Alexandria Businessmen’s Association in Egypt, KREP in
Kenya, the new credit unions in Benin, or ADEMI in the Dominican Republic. (CGAP
might help identify other useful sites to visit.)
• Present short-term courses in Abidjan on microfinance for ADB staff. This might be
done in the Joint African Institute. (Again, CGAP may be able to help with this.)
• Send several ADB staff to the microfinance course in Boulder, Colorado. (Contact
Robert Christen in CGAP for help with admissions)
• Send several ADB staff to Alexandria, Egypt to work in the microfinance program
there, especially on data processing and management information systems.
• Distribute new publications on microfinance to interested ADB staff and assist them to
access electronic sources of information on microfinance.
• Encourage staff to upgrade their English skills. (Unfortunately, a majority of the most
useful information on microfinance is only available in English, including the
discussions in electronic news groups.)
Steps to strengthen library:
A concerted effort should also be made to expand the ADB’s library collection on
• Designate a person in the library to collect microfinance materials.
• Provide funds for making library acquisitions on microfinance, including subscribing to
a few key journals.
• Maintain list of electronic addresses that may be useful for ADB staff who are working
on microfinance projects.
Steps to build support in member countries:
ADB cannot impose projects on member countries. It must find ways to
encourage opinion makers and policy makers in these countries to request, or at least to
tolerate, projects that are consistent with the new paradigm. Policy makers who are
committed to the old paradigm are seldom persuaded to change their views through brief
discussions about the terms of donor loans.
• Hold several regional workshops on the new paradigm for policy makers and opinion
makers in member countries.
• Reinforce these workshops by sending appropriate publications on microfinance to
those who attend.
• Establish and manage an electronic news group and associated web page on the
topic of microfinance in Africa.
• Design and do a pilot microfinance sector study. This model can then be used in
later studies elsewhere.
• Do several other microfinance sector studies that focus on semi-formal and informal
finance in areas outside of urban centers. Use the results of these studies to prepare
ADB projects in microfinance and as background material for courses and workshops
Steps in learning from pilot projects
There are two ways of gaining useful information about microfinance projects: one
way is to read about or visit successful projects developed by other agencies. Another
way is to learn-by-doing through carrying out a few pilot projects with ADB resources.
ADB has done a number of microfinance projects and these efforts should be considered
as initial steps in a broader effort to learn from pilot projects. Attempts should also be
made to redirect some of the resources already committed to traditional agricultural
credit projects to a few pilot projects in microfinance.
• The results of the small number of representative ADB-sponsored microfinance
projects should be evaluated. This should include adjusting the evaluation criteria so
they are consistent with the new paradigm, especially regarding sustainability and
outreach. The results of these evaluations should then be shared with bank staff.
• The bank has a substantial amount of resources in pipeline that are committed to
traditional agricultural credit activities. It will take a number of years for these funds
to disburse fully. Since the objectives of these projects are often inconsistent with the
new Vision Statement of the bank, it may be appropriate to redirect some of these
resources to a few microfinance pilot projects.
Steps to foster interest in deposit mobilization:
Early in the process of converting to the new paradigm, emphasis should be
placed on directing more attention to deposit mobilization. Donors and development
practitioners are prone to stress lending efforts because they are ways to move money
that is often easy, compared to other development options. Deposit mobilization is often
overlooked because of traditional assumptions about poor people lacking the ability or
capacity to save and because there is a large measure of self-help involved in deposit
• Establish professional contacts with MicroSave-Africa in Nairobi. Seek their
assistance in developing several pilot deposit mobilization projects in member
• Establish professional contacts with the International, U.S., Canadian, and European
credit union organizations.
• Do a survey of the status of credit unions, postal savings systems, and savings clubs
• Do an additional study of deposit mobilization in rural areas by commercial banks in a
few representative countries in Africa.
• Establish professional contacts with European organizations that have worked on
reform of postal savings systems in Africa (FINAFRICA, IPC and others).
• Commission several studies in representative African countries that focuses on the
constraints faced by commercial banks in offering more deposit services in rural
• Establish professional contacts with other donors that are working on reforming bank
regulation and supervision. Are there any reforms in Africa that include adjusting the
regulatory framework so it is friendlier to organizations providing microfinance?
• Help design regulation and supervision in several countries that is tailored to
accommodate deposit mobilization by non-traditional organizations.
• Develop several projects that focus on reforming postal savings systems in rural
areas, promoting or reforming credit unions, or stimulating banks to provide more and
better deposit services in rural areas.
Steps in building training capacity:
As the interest in microfinance increases in Africa it may be useful to develop
training facilities and courses in Abidjan where nationals from other African countries can
study best practices in microfinance. CGAP, again, may be willing to help with this.
• Work with Joint African Institute and CGAP to develop such courses
Steps to strengthen evaluations:
Application of the new paradigm requires the bank to adjust the way it evaluates
the performance of rural finance projects. It will also require people with more banking
and financial skills in the evaluation department.
• Hire several people with bank and finance skills in the evaluation department.
• Develop new evaluation guidelines for rural finance projects that are consistent with
the new paradigm.
• Hold training workshops on the new paradigm for those working in the evaluation
Steps to eliminate crowding out:
In some countries it may be difficult to develop new and successful microfinance
programs in rural areas without changes in other rural lending activities. Government-
owned banks or non-governmental agencies that are dispensing subsidies in rural areas
may crowd out more efficient forms of finance, including ADB sponsored projects under
the new paradigm. It may be necessary to eliminate, or at least substantially reduce, this
crowding out before starting new microfinance projects in many countries in Africa.
• ADB might take the lead in fostering discussions about government-owned
agricultural development banks. Should these banks be reformed, downsized,
liquidated, merged with other banks, or privatized?
• Can these development banks play a positive role in deposit mobilization?
• ADB might also take the lead in promoting discussions about non-governmental
organizations that are dispensing subsidies and that are likely to remain subsidy
• This may involve coordination with other donors to assure that crowding out is
minimized across projects and encouraging governments to discourage microfinance
projects that do not employ the new paradigm.
Overall, in applying the new paradigm, the bank must adopt a longer time horizon
for its rural finance projects than it has for most of its agricultural credit projects. Building
or strengthening non-traditional financial institutions that primarily service poor people in
rural areas requires a good deal of time and patience. It may take ten years or more, for
example, for a micro-financial institution to mature to the point where it becomes
creditworthy in the eyes of banks and qualifies to legally mobilize deposits.
Appendix Number 7: SOURCES OF INFORMATION ON MICROFINANCE
A number of organizations issue useful information about microfinance. Contact
information for some of the most prominent of these sources follows:
• The MicroBanking Bulletin is published by CALMEADOW. Electronic versions of the
Bulletin can be downloaded from the Website: www.pactpub.com. Hard copies can
be ordered through Email: firstname.lastname@example.org.
• The Consultative Group to Assist the Poorest (CGAP) also publishes a number of
useful items on microfinance. Their Email address is email@example.com. Their
web site is: http://www.cgap.org/.
• The World Bank also has other publications on microfinance. Their Email address is:
• The Sustainable Banking for the Poor project in the World Bank is another source of
publications on microfinance. Their electronic address is: http://www-
• The MicroFinance Network is a global association of leading microfinance
institutions. It holds annual conferences and issues publications on leading-edge
topics. For information on publications and other activities, see their web site at
• MicroSave-Africa is an international organization located in Nairobi, Kenya. It
concentrates on the problems of mobilizing deposits. It’s website is
• Planetfinance periodically issues electronic Library News. It includes a report of
events, news, sites and publications relevant to microfinance. It is available in
English and French. To subscribe write an email to firstname.lastname@example.org and
request the language of your choice.
• Khula is an independent, limited liability company in South Africa dedicated to
assisting Retail Financial Intermediaries (RFIs) such as banks, NGO's and provincial
development organizations in creating sustainable small, medium and micro
enterprises. It’s website is : http://www.khuyla.org.za.
• Planetfinance has an e-mailing-list for microfinance practitioners in Asia. It enables
them to share and discuss ideas online, and at the same time creates an Asia wide
network of professionals able to share the methods of best practices. If you would
like to be added to the list, send an email message to email@example.com.
• ACCION International is a leading organization in microfinance. Their web site is
http://www.accion.org. In The World of Microfinance section,
there are links to many other resources worldwide. In the Publications section web
visitors will find a complete catalog of ACCION and Microfinance Network
publications for practitioners.
• The Development Finance Network (devfinance) is an electronic news group
managed by the Ohio State University:firstname.lastname@example.org.
• AFRACA is a regional organization of agricultural lenders whose office is in Nairobi,
Kenya. They sponsor meetings and also issue periodic publications on rural finance.
Their Email address is AFRACA@users.Africaonline.
• The German development agency, GTZ, occasionally publishes papers on micro
finance, especially on the topic of regulation and supervision of microfinance
Institutions. Their website is http://www.gtz.de/arbeitsfelder/ebene3.asp?
z=41&ProjectId=4. The general Email address for those working on microfinance is:
• A range of information about microfinance in the U.S. can be found at www.
microenterprise works.org. This is the web site of the Association for Enterprise
Opportunity, a professional association of U.S. organizations working in this sector.
• FIELD (supported by The Aspen Institute) is a research and development fund
dedicated to the expansion and sustainability of micro-enterprises in the United
States. Email them at email@example.com.
• The Alexandria Business Association (ABA) was started in 1989 by local
businessmen and the USAID in Egypt. ABA offers consulting, training and technical
assistance in the field of microfinance. Their website is http://www.aba-sme.com.
• The Bank Rakyat Indonesia (BRI) International Visitor Program was established in
June 1996 under a partnership agreement between BRI and USAID. The program is
designed to allow visitors from overseas to learn about the BRI Unit banking system.
The International Visitor Program of BRI conducts various visitor programs, in-class
training programs and on the job training and consultancy services related to
microfinance practices. Contact firstname.lastname@example.org for more information. Also visit their
• AfriCap is a new investment fund for African microfinance institutions. For more
information on this fund contact: email@example.com.
• PRIDE located in Tanzania provides information on small enterprises. Their web
page address is: http://www.prideafrica.com.
• MYRAD in India provides information on alternative credit systems. Their web page
address is http://www.myrad.org.
• FINCA, the Foundation for Inter-national Community Assistance, does work on village
banking worldwide. Their web page address is http://www.villagebanking.org.