Small loans make a big difference
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CTA. 2005. Small loans make a big difference. Spore 118. CTA, Wageningen, The Netherlands.
Permanent link to this item: http://hdl.handle.net/10568/47875
Internet URL: http://spore.cta.int/images/stories/pdf/old/spore118.pdf
Access to microcredit can help farmers weather leaner times and enable rural entrepreneurs to seize economic opportunities. Many financial institutions are realising that small-scale customers are not only a large market, but a profitable one too.
Five years ago, Zambian chicken farmer Alice Jere took out a US$31 ( 26) loan from a microfinance NGO. Although the sum was miniscule by conventional banking standards, its effect on her household was massive. Jere diversified into Photo: C. Nesbitt © FIDAraising cows and selling cooking oil and sugar. She recently repaid her latest loan of US$2,082 ( 1,722), and her business is now valued at US$10,000 ( 8,000). Jere is one of a growing number of ACP producers who have radically improved their livelihoods thanks to the kind of financial services that people in the North take for granted. More than one billion people lack access to credit, depriving them of the means to invest in the future. Many live in rural areas, where long distances, poor infrastructure and seasonal incomes combine to make it even harder to obtain loans. Providing finance for small-scale agriculture poses a special challenge. In the lean pre-harvest months, farmers may need a short-term loan to tide them over. But they also need medium-term loans to buy equipment and long-term loans for major capital investment. New needs are emerging, such as finance for farmers organisations or rural enterprises too small to interest conventional banks, and these are likely to increase as government credit lines to the agricultural sector are dismantled. Microfinance the term given to small-scale financial Photo: © Terre nourricièreservices for the poor is going some way towards bridging the gap and helping those cut off from mainstream credit. Since its genesis, in the 1950s, the concept has come a long way, evolving from a fledgling system largely propped up by donor aid to a more market-oriented approach which is often self-sustaining. Today, a wide range of microfinance institutions (MFI) provide credit to low-income clients. They range from development, postal and commercial banks to financial NGOs, credit unions and rotating savings and credit associations (ROSCAs). Little by little Many schemes are based on mutual trust and responsibility. Typically, money is loaned to groups, often in rotation between members, and peer group pressure ensuresPhoto: R. Grossman © FIDA repayments. The average loan size is US$530 ( 438). But many are far smaller. In Benin, an awareness that the poorest women had trouble joining its regular village banks led one NGO, the Centre Béninois pour le Développement des Initiatives à la Base (CBDIBA), to design a special programme of mini-credits , averaging just US$17 ( 14). The World Bank estimates that there are now over 7,000 MFIs worldwide, serving 16 million clients. Overall, microfinance is growing at an annual rate of 30%. But while the sector has expanded rapidly in recent years, there is still a vast unmet demand and existing MFIs reach just 4% of the potential market. To help promote better financial tools for rural dwellers in the South, the UN declared 2005 to be the International Year of Microcredit. Borrowing to make beignets In the village of Sadjilambou, in Mali, Daya Moussa makes beignets, a type of doughnut, to support her four children. She launched the business with a loan from a savings and credit group of around 30 women who meet once a week, each contributing CFAF25 to 100 ( 0.04 to 0.15) to a pool. Members take turns to take out loans, with repayments helping to fund community projects. Moussa s group is saving to build a cereal bank. But not all microcredit clients are women. In Kenya, subsistence farmers have managed to begin selling their produce to the EU, thanks to an innovative microcredit scheme. The farmers in Makueni District are banding together to lease land along the Athi River. They have cleared the bush, created small farms and borrowed money to buy pumps and piping to irrigate the fields and grow exotic vegetables for export. One factor fuelling the expansion of microcredit is a growing perception that, contrary to conventional wisdom, the poor Photo: © Syfia Internationalare by no means a bad risk. In many countries of the South, repayment rates are as high as 97%. Indeed, providing financial services for the poor can be profitable and there is evidence to suggest that private sector diffidence of poor rural clients may be on the decline as commercial financial institutions, including the world s largest bank, Citigroup, move into the arena. There are currently over 60 investment funds incorporating microfinance in their portfolios and interest from socially responsible investors in affluent countries is also accelerating. In many ACP countries, MFIs have demonstrated they can combine excellent financial performance with a useful service to rural populations. In Kenya, the Equity Building Society has built a viable business serving 252,000 depositors and 66,000 borrowers. In 2003, it delivered a return on equity of 30%, and a respectable return on assets of 3.6%. Women, the driving force Many microcredit programmes target women because they tend to be more financially responsible and use loans to Photo : © Syfia Internationalbenefit their households and communities. Twenty years ago, the Foundation for International Community Assistance (FINCA) began providing financial services to the world s poorest households. In Haiti, where FINCA operates 477 village banking groups, 99% of the clients are women and on-time repayment levels are 99.6%. Microcredit has drawn many rural women into commercial activities for the first time. But the benefits go far beyond making money. One important side-effect is the new confidence and status that belonging to a credit group can bring. In a Foundation for Credit and Community Assistance (FOCCAS) microcredit programme in Uganda, 95% of clients engaged in improved health and nutrition practices for their children. New models are evolving all the time, some of them catering specifically to farmers, whose needs are often overlooked. Photo : © Syfia International Providing microfinance for agriculture remains a big challenge because of the risks involved and the type of credit that farmers need, said Henri Dommel of the UN International Fund for Agricultural Development (IFAD). In Benin, IFAD is supporting the Financial Services Association, a decentralised network which allows rural clients to invest in shares and take out loans. The scheme has low operating costs and is run by community members. A safe place for the nest egg Credit is just one of a range of financial services that rural dwellers need. Savings constitute an important service for producers and small business owners in the South, who often lack a reliable place to store their money, and miss out on the chance of earning a return on income. Few products meet the particular needs of agriculture, taking into account farming patterns and activities. Low-income households save all the time, although mostly in informal ways. They invest in assets such as gold and animals, and set aside crops from their harvest. Some bury money or pay local cash collectors to keep it safe. Others take part in small informal savings groups. But though widely used, all these mechanisms have serious limitations. In-kind savings are subject to fluctuations in commodity prices, destruction by insects, fire or livestock illness. Informal savings groups carry the risk of fraud or mismanagement. But formal savings institutions are often too far away, and may not welcome small-scale investors. Before the Binum Savings and Credit Scheme was launched in the village of Kieneghan, Cameroon, producers had to travel 48 km over mainly untarred roads to deposit their savings. For the village s maize farmers, that meant wasting a day s work and spending CFAF3000 ( 2.5) in expenses. Many MFIs now include a savings programme in their services for the poor. When repaying their loan, part of the sum is saved in a separate account and used as collateral to enable them to qualify for subsequent larger loans. These savings can sometimes be used by families to tide them over during difficult times or emergencies. In Madagascar, MFI networks have managed to extend outreach to some of the most remote regions of the rural south by offering crop-related credit. After harvest, the producer takes out a loan, using his crop as guarantee. He uses the money to pay farm expenses, or to diversify into new crops, safe in the knowledge that he can repay the loan at a time when prices are higher. In St. Lucia and Dominica, a micro-loan scheme is helping small-scale producers hit by the fall in banana prices to diversify and plant other crops such as ginger. The project has been so successful that it is being extended to Grenada. In Samoa, women are being given small loans to set up in business, pressing coconut oil and exporting it to Australia and New Zealand. Innovations in rural finance Weak financial infrastructure and communications are two of the biggest obstacles to providing credit in rural areas. Income from agriculture is unpredictable, and it is more expensive to extend loans to far-flung populations. In an attempt to overcome some of these hurdles, some MFIs are finding ways of tailoring their services to rural clients, Photo: © Syfia Internationalharnessing new technologies to cut down on costs. In Kenya, a project launched by the microfinance NGO Pride Africa is building a network of info-kiosks , that offer combined microfinance and market information for small-scale farmers. Each kiosk has a computer connected to the internet and a mobile telephone to link up with the central hub in Nairobi. Some MFIs equip their loan officers with palm pilots, so they can do on-the-spot analyses of a client s credit status. In South Africa and Nigeria, smart cards containing a digitised fingerprint are being introduced so that rural people have access to cheap, easy-to-use banking services. Information technology providers and software developers are waking up to the huge market for automation in the microfinance sector and microfinance practitioners are waking up to the huge efficiency gains they can achieve through technology, said Elizabeth Littlefield, director of the Consultative Group to Assist the Poor (CGAP), a World Bank-led body set up to promote microfinance. Photographic credits: C. Nesbitt © FIDA; © Terre nourricière; R. Grossman © FIDA; © Syfia International; © Syfia International; © Syfia International; © Syfia International.