Micro-finance for macro-results.

A small loan of US$200 to a poor rural woman in Indonesia, Benin or Paraguay may not seem much, but it can make the difference between continued chronic poverty for herself and her family and a chance of a better life. Whether she invests the money in a handloom and weaving materials, improved seeds and fertilizers, livestock and poultry, or to start up her own small business, this small loan can be the catalyst that enables her to become more productive and self-reliant.

What is micro-finance about?

Micro-finance institutions provide savings and credit facilities to establish or expand income generating activities of the poor. These small loans can also help raise investments by small farmers and catalyse the development of micro-enterprises. By helping poor families, and especially the women, to use their productive skills and resources, micro-finance can contribute to income and asset generation of poor people and increase their household food security.

How does it work?

Providing credit and savings services to the poor poses a number of challenges. Small transactions may entail high administrative costs. Lending terms may be inappropriate for a particular clientele, the result of applying "traditional" practices or an inadequate understanding of the borrowers' cash flow and investment opportunities. The absence of adequately trained micro-finance managers can pose problems, as does reaching people in isolated areas, who often need the services the most. There are also legal or cultural biases against women, barring them from taking advantage of services even when available. Client illiteracy and lack of financial experience are further obstacles.

These obstacles can be overcome, and micro-financing can be both profitable to the serving institutions and to the people they serve. Micro-finance institutions provide small, short-term loans, together with offering savings facilities for the poor. Conventional collateral which the poor cannot provide is replaced through innovative lending techniques; loans are granted on the prospect of expected income generated by the investment, and supplemented by compulsory savings or joint liability schemes as security. Women are either fully integrated in the customer clientele or serviced with specialized financial products.

In remote rural economies, this opens windows of opportunity for poor families left out of the traditional rural financial markets, and the investment capital provided can help people to help themselves. As the old saying goes, "Give the fishermen a pole, not a fish"; give the rural poor access to productive resources, not hand-outs.

IFAD's role in supporting micro-finance

For the past 20 years, the International Fund for Agricultural Development (IFAD) has been operating as a specialized financing agency of the United Nations, with a single mandate - that of alleviating rural poverty and hunger and supporting rural development. Since its inception, IFAD has designed a number of innovative micro-finance schemes to meet the financial service requirements of the rural poor.

The Fund was in the forefront in assisting the Grameen Bank (a micro-credit institution in Bangladesh) from its early experimental stages, and has assisted in the replication of the Bank's approach in a number of countries. More recently, IFAD also emerged as a major player in supporting decentralized village-level micro-finance institutions: self-help groups linked to banks, village-level cooperatives, innovative types of village banks, non-governmental organizations and other private sector institutions reaching out to the disadvantaged. We conceive financial services as a package, with client-oriented deposit, insurance and sometimes even hire-purchase facilities offered in line with credit to the poor.

In Indonesia, group credit to the poor was introduced through self-help groups and linked to a commercial bank. The loans to small farmers and the landless were accompanied by technology packages and extension services, and resulted in exceptionally high repayment rates throughout the project life. This project is known in the country as P4K, and the Government recommended its wider replication through local resources. In Benin, a recently completed project incorporated a highly successful IFAD credit component to small farmers through a regional savings and loan cooperative system. The IFAD line of credit has proved to be sustainable, and the rural poor have shown exceptional commitment to the micro-finance institution.

Another example comes from Paraguay where Peasant Development Funds (PDF) were designed to provide poor rural households with access to credit and savings facilities. Existing banks had rejected poor households as clients because they could not provide adequate guarantees. IFAD helped to create the PDF as a second-tier financial institution. The PDF gives loans directly to grassroots financial organizations such as savings and credit cooperatives and has been considerably more effective in reaching the very poor than agricultural banks. Loans for investments in smallholder agricultural production come in a package, together with training and business services to the borrowers. In a follow-up project, IFAD is expanding the approach to reach an additional 25,000 clients.

Our experience in these and other projects supported by IFAD shows that micro-finance works best through an integrated approach, addressing the various financial and other business needs of rural low-income households. Success stories like P4K, the Grameen Bank and other examples from the IFAD portfolio outlined above show that the rural poor can be "bankable" and that well-managed credit can make a major contribution to the economic and social advancement of our clients - the rural poor.

RELATED ARTICLE: Micro-loans to 100 Million Proposed

A plan to reach 100 million poor families by the year 2005 with small loans for self-employment projects was approved at the Microcredit Summit, held in Washington, D.C. from 2 to 4 February.

The Summit action plan calls for mobilizing $21.6 billion over the next nine years to strengthen existing credit facilities that extend loans to low-income people, especially women; create new institutions and train new loan managers; and promote policy changes that will facilitate micro-finance. Funds are to come from multilateral and bilateral donors, government agencies, banks and financial institutions and private citizens. Also helping the effort will be the interest payments and service charges from microcredit clientele, which will be ploughed back into the present networks. Approximately $11.6 billion is to be sought in the form of grants and concessional or low interest loans, according to the action plan. A further $10 billion will be borrowed at commercial rates.

Loans from microcredit institutions are typically less than $100 in developing countries, and less than $1,000 in the industrialized world. The main target group, according to the Summit sponsor - RESULTS Educational Fund, a United States-based non-governmental organization - are the poorest 50 per cent of those living below the poverty line in developing countries, and any poor person in an industrialized country.

Among the signers of the "Declaration of Support" for the plan of action were the World Bank, the United Nations Development Programme (UNDP), the United Nations Children's Fund, the United Nations Population Fund, and the United Nations Educational, Scientific and Cultural Organization (UNESCO). At the Washington meeting, UNDP Administrator James Gustave Speth announced the creation of a fund to give capital grants and technical assistance to existing microcredit facilities. UNDP is seeking $41 million to capitalize the plan.

Microcredit programmes have achieved wide acclaim for enabling families to lift themselves from poverty by starting small businesses, usually in the informal sector of the economy. But questions have been raised about relying on micro-finance as a primary anti-poverty strategy. Even in the Summit plan of action, there is a warning that an "indiscriminate" flow of new resources may cause institutions to take on more clients than they can properly service with support programmes. And UNESCO Director-General Federico Mayor cautioned Summit participants that investments in education, health and other essential services is vital if "microcredit is to be more than a micro-solution."