|Rural Finance and Poverty Alleviation - Food Policy Report (IFPRI, 1998, 32 p.)|
New innovative microfinance institutions have shown the potential to reach people who live below the poverty line. But many of the poorest of the poor remain excluded. To include this group, institutions must market financial products suitable to the poorest group and reduce other entry barriers faced by the poor.
IFPRIs impact assessment studies have mostly focused on the short-run effects of credit access on income, food consumption, and nutrition, which are positive for income, agricultural technology adoption, and level of food expenditure and calorie intake. However, because the poor face so many constraints, in some situations, investment in education, extension services, health care, and improvements in infrastructure may be more cost-effective ways of reducing poverty than provision of financial services. But, in other situations, financial services may have to be combined with other services and community action to make them effective.
Few impact assessment studies to date have attempted to compare the social benefits at the village, household, and individual levels with the social costs of supporting expansion of microfinance institutions.36 Research that compares the overall long-term effects of improved credit access with program costs is urgently needed.
Despite their success, it would be unwise to conclude that the new format of the micro-finance institutions such as the Grameen Bank can simply be replicated elsewhere. One lesson is becoming increasingly clear: there is no single blueprint for success. Recent experience indicates that programs should be designed to harness a communitys particular strengths - its local resources, agroecological characteristics, historical and cultural experiences, and occupational patterns - in order to reduce costs of screening participants, monitoring financial activity, and enforcing contractual obligations. Institutional design may vary even for similar target groups within the same country. In Bangladesh, for example, the Association for Social Advancement and BRAC provide loans to clients themselves, while Rangpur-Dinajpur Rural Services forms and trains groups, which then obtain agricultural loans from banks.
Designing, experimenting with, and building financial institutions for the poor require economic resources and adequate consideration of longer term social returns. Whether an institutional arrangement that is suited to local conditions will also be accepted by the banking sector cannot be known until it is tried. Since the market, by itself, has not been able to stimulate much research and experimentation, public support in the institutional experimentation and development phase is critical. Once viable prototypes are identified, they will eventually be adopted by the private sector.
In the last two decades, NGOs have taken the lead in developing innovative financial institutions partly because the subsidies they receive from donors and government organizations make it feasible for them to allocate resources to innovations. In their infant stage, cooperatives, village banks, or groups are dependent on technical as well as financial assistance. For example, technical assistance is needed to train members to read and maintain savings and loan records; training is also needed to establish management and control functions of newly formed groups. Financial assistance, on the other hand, supplements initial savings deposits from clients to provide start-up capital for lending. Only when these new institutions prove their creditworthiness over a series of loan cycles are they likely to be accepted by commercial banks as viable partners. In fact, banking laws may be required to accommodate, regulate, and supervise new member-based financial institutions. Indonesia, for example, has undergone a number of proactive regulatory changes in the financial sector that have allowed member-based financial institutions to provide savings and credit services to smallholders and microentrepreneurs.37
In a broader sense, just as public policy should play a role in promoting technological innovations that generate social benefits, it should also help promote institutional innovations that assist the disadvantaged or address intrinsic market failures. As policymakers seek to make rational policy choices, they must weigh the social costs of designing and building financial institutions for the poor against their social benefits. Well-directed support, including subsidies, to promising microfinance institutions is likely to have payoffs in both services to the poor and reduced cost of services in the long run. This is a point of view that those who argue for a complete removal of subsidies should not ignore. Of course, some experiments in institutional innovations will succeed, while many others will fail. Public policy will need to support and evaluate this experimentation process and nurture those designs or institutions that hold promise of future success. Governments, donors, practitioners, and research institutions must work together closely to pinpoint the costs, benefits, and future potential of emerging financial institutions.
In the long run, the payoff to public investment in institutional innovations will lie in the transformation of now nascent microfinance institutions into efficient and full-fledged financial intermediaries that offer savings and credit services to smallholders, tenant farmers, and rural entrepreneurs, thus alleviating poverty. Evidence of this transformation is already emerging in countries such as Bangladesh, Indonesia, and Thailand. The payoff will also come from the development of viable lending methodologies that private commercial banks can readily adopt to profitably provide savings and loan services to the poor. Like the development of new high-yielding crop varieties in agriculture, institutional innovation generates public goods that can be readily used by those who did not contribute to the cost of development. The rapid growth in credit groups within and outside of Bangladesh that replicate Grameen Bank principles is one example. Still another example is found in Latin America where private commercial banks have started to adopt group-based lending methods developed and tested by nonprofit organizations that initially depended on public support. Another example is in Kenya where the microfinance institution K-REP is now seeking permission to operate as a bank.
In the final analysis, judging whether such institutional innovations - generated by public action and through domestic or foreign resources - pay off requires a critical look at the benefits that improved access to financial services bring to the poor. It is therefore both welcome and necessary that recent research has increasingly examined the impact of credit programs on income and employment generation, food security and nutrition, and poverty alleviation. With the right combination of public policy, private initiative, and objective research, public investments in financial institutions designed to serve the poor in rural areas of Africa, Asia, and Latin America are likely to bear fruit as well.