IFPRI Report
Volume 20, Number 2
July 1998
Recent Publications
Changes in Rural Credit and Savings Institutions Crucial to the Poor
Provision of financial services is a potent tool for poverty alleviation. The role that government should play in financial services is the topic of a new Food Policy Report, Rural Finance and Poverty Alleviation, by Manfred Zeller and Manohar Sharma. The report’s findings are gleaned from a series of detailed household surveys conducted in nine countries of Asia and Africa: Bangladesh, Cameroon, China, Egypt, Ghana, Madagascar, Malawi, Nepal, and Pakistan. Most of the poor in these countries could benefit from credit, savings, and insurance services, but what is available varies greatly from country to country.Formal financial services such as banks are often not available to those below the poverty line because of restrictions requiring that loans be backed by collateral. As a result, the poor usually turn first to informal sources such as friends, relatives, or moneylenders, who loan small amounts for short periods.
In recent years, microfinance institutions designed to serve the poor have received wide attention, but these institutions depend on subsidies from national governments and international donors. Zeller and Sharma argue that when these subsidies are used for supporting innovations to reduce service delivery costs, they represent good investments of public funds.
Although excessive government interference and rigid regulations have suppressed innovation in financial services, liberalization of financial markets—removal of subsidies alone— has not been able to trigger the kinds of innovation that reduce transaction costs for the poor. Rural financial markets in developing countries have inherent problems that make investments risky and costly: clients are too scattered, rural clients all want to borrow at the same time (in the preharvest season) and save immediately after the harvest, and the poor own few assets to secure loans. Private-sector financial institutions are reluctant to take on these risks. In the long run, however, innovations that improve the usefulness of these institutions to the rural poor will also improve the efficiency and sustainability of rural financial programs.
Access to credit or participation in a credit program positively affected household income in four out of five countries assessed, the report finds. Access to financial services improves income and opportunities for the rural poor, and provides support to tide families over in difficult times. And poor households strive to repay loans so that they will be able to borrow another time. For the poorest of the poor, the report indicates that financial services may be offered in combination with other programs such as training in basic literacy, enterprise management, and education in nutrition, health, and family planning. In the end, however, decisions have to be based on the cost-benefits of credit-based programs compared with other poverty alleviation programs (such as food-for-work).
In looking at the lessons that can be learned from studying the relationship between informal lenders and their poor clients, the report finds that (1) a credible long-term relationship is the key to enforcing loan repayment: the borrower will repay the loan if he or she expects to be able to borrow again in the future. (2) Financial services should be tailored to the demand patterns of the borrowers: restrictions on loan use reduce the flexibility of the household to make the best use of the loan. (3) Decisionmaking should be made at the local level. (4) Institutions have to have clear plans for loan recovery before lending begins. (5) Group-based transactions hold promise but more research is needed to compare group lending and saving activities with other member-based institutions such as credit unions and village banks. (6) Saving services should be provided. (7) Incentives for program managers should be built in.
