Rural & Micro Finance

by Claude Guillemain

We know that private initiatives possess a far greater degree of flexibility than public initiatives. In a perfect world, we should be able to combine sustainability, concerned investors, community concerned investors, and public agency investors in a more "organic" solution that meets our needs in a way that is neither abundant nor insufficient. We call this "associative economics". It really means people helping people. While it sounds idealistic, it actually works in our experience. Confidence is the basis of traditional economic theory. All we do is to make this phenomenon visible to the groups we work with.

Rural finance and micro finance are my areas of interest.

I strongly support the concept of micro finance, instead of micro credit. Microfinance needs to broaden its scope, going beyond pure micro-credit. This is particularly true for poor people, which need appropriate savings, insurance and payments schemes.

Microfinance represents a broader concept of that of micro-credit, being referred to the provision of financial services - loans, savings, insurance, or transfer services - to low income households. The notion of micro is often referred to the average size of loans awarded. The typical size of a micro-credit can vary according to the level of development of a country and, more specifically, to the level of financial development. Typically, the loan balance tends to be below per capita national income. While the minimum size can be considered $50, the maximum can vary between $2,000 for Sub-Saharan Africa and $10,000 for Eastern European countries. Indeed, talking about micro-credit or microfinance involves a quite different methodology, and in general a specific characteristic of the demand, the supply and the environment in which it takes place.

I strongly support the reinforcement of existing MFIs, and particularly mutual banks and cooperative systems. The supply side is increasingly diversified. This diversification must been acknowledged and considered a strength of the sector. While in the past NGOs represented the main actor, there is now a need of professionalism that not all NGOs can meet. Microfinance should be extended to cover also capital investment needs, ensuring a match between the time perspective of the initiatives to be financed and the source of financing.

I am a specialist on how to circulate savings and credit through a financing vehicle that is a private rural finance cooperative, supporting small local farmers and agricultural enterprise. I know that to create an effective finance vehicle, we will need to draw on the knowledge base of many local, regional, and national agencies.

Microfinance services need to be managed by specialised, professional, transparent institutions and professional managers. The governance structure of these institutions must evolve consequently.

Microfinance should be increasingly integrated into the overall financial system;

All of this only works if we all participate fully.

We need not only nice assessments of the micro finance situation in general. We need real capacity building on the ground in the villages, in the rural productive and service sectors as emerging rural finance cooperative sector with equity and inclusiveness combined with up to date rural finance cooperative business management and linkages.

Outreach is compatible with sustainability. Indeed, data show that only beyond a certain scale of activity an institution can become operationally efficient;

Savings mobilisation and lending are the two pillars of rural finance;

1. Sensitize the farmers about the need for credit facilities and the importance of savings as the source of credit, since their needs outweigh their financial capacity.
2. The most sustainable and reliable way of accessing financial services is through savings mobilization and this creates a sense of ownership and commitment.
3. The practice of pegging loans to members' savings
4. External loans should be perceived as supplement to internal initiatives

Subsidised interest rates distort the market and create bad habits. While subsidies make sense for investment and long term lending, they should be used for specific cases (start-up phase, capacity building, long term investment);

While capacity building represents a key need for microfinance institutions, an improved access to liquidity (through equity, credit lines, guarantees, savings deposits) is still required for many MFI;

Provision of stand alone credit lines can be risky and counterproductive for donors, both for management reasons and reasons of effectiveness;

Always foresee a politically acceptable strategy.

I continue to look at and promote a number of initiatives in this area.