IFPRI Report
Volume 19, Number 2
June 1997
Credit Services Linked to Food Security in New Food Policy Review
When families in developing countries face both shortages of food supplies and lack of access to financial services such as credit, savings, and insurance, the result can be chronic hunger and malnutrition. Households anticipating a food shortage may deal with the problem by diversifying their income sources, selling their assets, or borrowing from relatives, moneylenders, or formal banking institutions. Commercial banks, however, are reluctant to lend to the poor because they seldom have collateral to pledge against the value of the loan. Also, banks are often reluctant to make loans for consumption rather than investment purposes—to tide farmers over the lean period just before a harvest, for example.In Rural Finance for Food Security for the Poor: Implications for Research and Policy, Food Policy Review 4, the authors—Manfred Zeller, Gertrud Schrieder, Joachim von Braun, and Franz Heidhues—examine the potential for improving food security in developing countries by providing access to financial services. After reviewing theory and empirical evidence on the borrowing and saving practices of the rural poor, they examine the concept that providing financial services helps prevent both transitory and chronic food insecurity in three ways: (1) by enabling households to acquire inputs, labor, and equipment to invest in enterprises that will boost income; (2) by increasing the capacity of the poor to bear risk, thus encouraging them to attempt newer, riskier, but higher-paying enterprises; and (3) by stabilizing consumption, smoothing annual and seasonal fluctuations.
The review finds that many of the innovative member-based financial institutions that have been successful in recent years, such as the Grameen Bank in Bangladesh, blend some of the best attributes of informal lending systems of moneylenders or groups with those of commercial banks and cooperatives. For example, they substitute a variety of locally adapted criteria such as peer pressure, obligatory saving, and character references for collateral requirements.
Usually run by nongovernmental organizations, with the help of subsidies from donors, community-based institutions such as credit groups, cooperative societies, and village banks can promote lasting gains in income, food security, education, and nutritional status. Although most require subsidies, at least during their early years, the authors conclude that modest, long-term support is justified if rural financial institutions that serve the poor have a higher benefit-cost ratio than other subsidies, such as food subsidies. More research assessing the welfare effects and social costs of public support for rural financial institutions is required. (ISBN 0-89629-503-6, 140 pp.)
