REGIONAL STRATEGY FOR RURAL FINANCE

W E S T E R N A N D C E N T R A L A F R I C A

Of the 24 countries, there are on-going projects in Benin, Burkina Faso, Cape Verde, Cameroon, Central African Republic, Chad, Cote d’Ivoire, the Gambia, Ghana, Guinea, Mali, Mauritania, Niger,Nigeria, Sao Tome and Principe, Senegal, and Sierra Leone. Currently, there are no projects in Congo, the Democratic Republic of the Congo, Equatorial Guinea, Gabon, Guinea Bissau, Liberia or Togo.

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Foreword 2

Socio-Economic Situation in the Region 3

General Situation of Rural Finance in the Region 4

Microfinance Developments in the Region 5

Developments in Interventions 7of Main Funding Agencies

IFAD Rural Finance Interventions in 10Western and Central Africa

Future Challenges: a Vast Market to Develop 13

IFAD’s Regional Strategy In Rural Microfinance 16

The International Fund for Agricultural Development

(IFAD) was established in 1978 with the mandate to

increase food production and to improve the nutritional

level of the poorest populations in the food-deficit

countries. IFAD has devoted considerable resources to

agricultural and rural development in Africa. At

present, IFAD has a loan portfolio of approximately

USD 3 billion in 96 countries. The Western and Central

Africa Division currently manages a portfolio of

52 loan projects totalling USD 622 million in 17 of

the 24 countries of the region. The vast majority of

past and on-going projects have attempted to address

issues related to rural finance. It is estimated that –

IFAD-wide – approximately one third of IFAD resources

have historically been devoted to this area.

However, as experience has been gained, there has

been a substantial evolution in approaches to rural

finance in IFAD projects. The purpose of this strategy

is to outline the challenges involved in increasing the

access of the rural poor to sustainable financial

services in the region and how IFAD, in partnership

with key stakeholders involved in rural finance in the

region, intends to respond to these challenges. A

medium-term (2003 – 2006) Rural Finance Action Plan

is presented to ensure that strategic orientations are

translated into action on the ground.

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The International Fund for Agricultural Development

(IFAD) regional strategy for rural finance in Western

and Central Africa builds on more than 25 years of

experience of the Fund and its partners. It fits closely

with IFAD’s strategic framework and overall regional

strategy for Western and Central Africa, particularly

the strategic objectives of increasing rural incomes

through better access to capital and markets, and

strengthening the capacities of the rural poor and

their organizations. The strategy also recognizes that

a focus on women, participation and local knowledge

are pivotal to developing sustainable rural finance.

The strategy stems from an initiative in 2002 to draw

the lessons from the design and implementation of

18 projects in 12 countries in the Western and

Central Africa region between 1996 and 2002. A draft

of the strategy paper was reviewed at a workshop in

Rome in June 2003 that was attended by stakehold-

ers from within and outside the region, including

field partners (project staff and rural and micro-

finance organizations), other international donor

agencies and IFAD staff. Elements of an action plan

for implementing the strategy from 2003 to 2006

were also formulated at the workshop and the final-

ized plan is included as part of this strategy paper.

The intended audience of the strategy includes:

microfinance practitioners in the region; other types

of public, private and civil society organizations that

work with poor rural people; government officials

(including from central banks); researchers and aca-

demics; donor agencies; staff of field projects sup-

ported by IFAD; staff members and governing body

representatives of IFAD; and all those who subscribe

to the strategy’s goal of increasing the access of poor

rural people to sustainable financial services.

IFAD wishes to thank all those partners who partici-

pated in the formulation of the strategy. In particu-

lar, we wish to thank the Government of Switzerland,

which financed this effort and actively supported the

process.

FOREWORD

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Western and Central Africa has undergone profound

changes in recent years. Several countries have initi-

ated a democratization process, with new openings

for national dialogue, accompanied by rapid develop-

ment of civil society. Adjustment programmes have

led to major macro-economic change and alterations

in sector policies. The role played by the State in pro-

duction activities, including agricultural production,

processing and marketing, is much smaller than in

the past, and privatization is developing quickly. The

results are contrasting: economic growth is uneven,

which is disappointing overall, while food production

is increasing in a reasonably satisfactory manner in

relation to demographic growth.

With respect to population, the most remarkable

phenomenon is an annual growth rate of 6% in the

urban population over the last 30 years. Large cities

such as Lagos, Ibadan, Kinshasa, Douala, Abidjan

and Dakar have appeared, as well as many very large

secondary cities. The number of towns with a popu-

lation of over 100 000 inhabitants is estimated to

increase from 90 in 1990 to 300 in 2030. This trend

will create very substantial market opportunities,

representing a major challenge for agricultural pro-

duction in the future.

Poverty in Western and Central Africa is a predomi-

nantly rural phenomenon. In the 16 countries where

figures are available, 41% of the overall population

is classified as poor, and 74% of these are rural.

According to estimates, there are some 90 million

rural poor in the region. They have little or no say in

the major decisions affecting their lives, and they are

rarely consulted on major policy orientations or

investments.

SOCIO-ECONOMIC SITUATION IN THE REGION

1 IFAD Strategy for Rural Poverty Reduction: Western and CentralAfrica, December 2001

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One of the main obstacles to improving conditions among the rural poor is their lack of access to the capital

required to fund income-generating activities, whether agricultural or non-agricultural, to pay for schooling,

to cope with emergency situations and important social obligations, and to assist close family members.

Informal savings and credit mechanisms exist, but the resources invested in them are restricted to the amount

of savings available and serve solely to fund immediate consumer expenditure or working capital. They are

insufficient to fund any authentic rural or agricultural development.

As elsewhere, the commercial banks in Western and Central Africa cannot adapt their financial products to the

needs of poor and isolated clients, and it is not in their interests to move into the area of microfinance, or

the funding of agriculture in general. The long history of official agricultural credit institutions and their well-

known problems of political interference and low repayment rates is so discouraging that it will be difficult

to re-launch any such enterprise in the future.

Integrated development projects that include provision for agricultural credit have also met with disappoint-

ing results in terms of repayment, sustainability and impact.

As a result, a consensus is emerging among the main funding agencies and several governments in the region

regarding best practices in the field of rural finance. The practice that is generally accepted consists in set-

ting up competent, specialized institutions that emphasize mobilizing local savings, offering non-targeted

loans, and focusing on development of financial products that are suited to the poor populations to be

reached. It has become clear that the development of microfinance institutions (MFIs) requires a lot of time

and support, but that any subsidies should be used for institutional development and technical assistance,

not to lower interest rates. Experience has consistently shown that subsidizing interest rates is neither viable

in the long term nor useful or necessary to poor people, whose main problem is not the cost of credit but

actual access to financial services. Indeed, when credit is subsidized, the likelihood that poor people will gain

access is often diminished, as such credit tends to go to better-off people who are politically connected.

GENERAL SITUATION OF RURAL FINANCE IN THE REGION

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At the end of 1999, BCEAO2 in Western Africa listed

272 MFIs (including 227 savings and credit institu-

tions, 21 practicing direct credit and 24 incorporat-

ing a credit scheme) reaching 2 351 800 clients. The

penetration rate in the West African Economic and

Monetary Union (UEMOA) zone is 7.5% of the work-

ing population. Twenty percent of households have

access to MFI financial services.

In 2000, COBAC3 in Central Africa listed 1 034 micro-

finance structures in CEMAC countries (including 12

apex structures with 762 affiliated entities and 260

independent entities) reaching 414 000 clients or

members. The penetration rate in the CEMAC zone is

3% of the working population. Eight percent of

households have access to MFI financial services.

With the increase in the number of MFIs, and the

volumes of deposits and loans processed (on average

4% of the national finance systems), the monetary

authorities began to take an interest in the sector

and decided it needed regulation and supervision.

In Western Africa, a framework defining the legal

set-up for MFIs in the sub-region was adopted by

UEMOA ministers in December 1993 in Dakar. This

applies to “savings and credit unions and co-opera-

tives, and their unions, federations or confedera-

tions”, which need to apply for accreditation from

the ministries of finance. Non-mutualist–type MFIs

can apply for an outline agreement from ministries

of finance.

In Central Africa, BEAC and COBAC initiated the list-

ing of MFIs in 2000. A “preliminary project for

CEMAC regulations with respect to conditions for

operation and control of microfinance activities” is

being discussed in all the member countries.

MFIs in Western Africa have a strong rural tradition

and their start-up locations are most often rural. Of

the 15 main MFIs in the sub-region, at least ten still

operate primarily in rural zones. However, there is a

concentration of cash crop production or secure

cropping (irrigated zones) in “wealthy” rural areas

rather than in areas that are more underprivileged,

whether for reasons of rainfall, or remoteness and

isolation, as in Sahelian zones. Moreover, in order to

reach financial self-sufficiency as quickly as possi-

ble, many mutual-type systems (credit unions) have

centred on small to medium towns and market

towns, at the expense of villages.

The same trends exist in Central Africa, but with an

even more marked urban-rural differentiation. The

very large majority of microfinance structures are

concentrated in the cities, towns and urban areas.

Microfinance structures established in rural areas

and village environments are few. Thus, villagers and

small farmers in Central Africa have minimal access

to formal financial services.

MICROFINANCE DEVELOPMENTS IN THE REGION

2 Banque Central des Etats de l’Afrique de l’Ouest – data bank ofthe decentralized financial systems of UEMOA – PASMEC - MRDM3 The microfinance structures listed by the COBAC (central Africabanking commission) are not comparable to the BCEAO MFIs,these being more institutionalized and organized into networks

M I C R O F I N A N C E D E V E L O P M E N T S I N T H E R E G I O N

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MFIs in Central and Western Africa, with an average

amount for loans standing at 251 000 FCFA (or 100%

of per capita GDP), generally work with middle and

upper-middle categories of the population. Solidarity

credit MFIs and the credit-with-education pro-

grammes in the mutualist systems reach poor or fairly

poor women. CVECA-type village funds reach villagers

in underprivileged rural areas. Very poor and very iso-

lated populations are probably excluded.

Overall, the demand in towns and in the “wealthy”

rural areas is fairly well covered in Western Africa.

Outside these contexts, the demand is only partially

met, since MFIs operating in such contexts are rare.

In countries where the sector is dynamic, a large part

of these “limited” areas is involved to some extent,

although the offer needs to be more concentrated.

In Central Africa, the offer is still relatively new,

with a large demand that has not yet been met, and

more markedly so in rural environments which thus

far are virtually without access to microfinance

structures. Scope for development is enormous.

An analysis of MFI resources in Western Africa shows

that of a total of 157 billion FCFA, 64% came from

deposits and 20% from shareholder capital. In

Central Africa, of a total of 77 billion FCFA, deposits

represented 69% while shareholder capital was only

11%. It would therefore appear that the main factor

slowing growth and extension of outreach is not

access to capital.

According to the CGAP calculation4, few MFIs in the

two sub-regions have reached financial self-suffi-

ciency. Many MFIs are still subsidized for operating

costs and investments. However, it does appear

that about 40% of the MFIs listed for Western

Africa have achieved operational self-sufficiency5.

Unfortunately, the survey conducted in the CEMAC

zone does not allow for significant comparisons to

be made. It seems that the situation in Central

Africa is even more precarious.

In the two sub-regions, savings and credit union

structures or co-operatives are the dominant model

in terms of legal status, although the two

approaches differ considerably.

In Western Africa, savings and credit co-operatives

have a fairly broad and homogeneous membership

base, comprising small farmers, artisans and women

with small commercial activities. The main problems

of governance are related to:

� traditional conflicts of interest in savings and

credit co-operative structures, where decision-

makers are also the users;

� lack of competence among elected bodies in

managing financial structures that are constantly

expanding in size;

� lack of incentive on the part of elected bodies,

who have only small personal amounts at stake in

the structure (dilution of shares), compounded by

their legal status as voluntary workers; and

� power struggles between elected bodies and

salaried staff, in a framework in which functions

and responsibilities are not clearly laid out.

This problem of governance has reached a point in

Western Africa where it has given rise to deadlocks

and failures in several of the largest networks. A

legal and regulatory solution is needed to overcome

this situation.

In Central Africa, and in particular in Cameroon, the

social base is at once narrower (i.e. many users

alongside a few members) and better educated. This

is due to the more urban nature of the savings and

credit co-operatives, as well as the profiles of their

promoters (businessmen, public- and private-sector

professionals, former banking personnel). These

structures function more like small banks, with

counters, draining off popular savings in favour of

lucrative private investments. The risk is that small

rural or working-class savers may be at a distinct

disadvantage through their lack of knowledge.

Regulations, involving classification into categories

of establishments, should provide for better supervi-

sion of these aspects.

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Overall, the MFIs in the two sub-regions have serious

shortcomings in accounting, financial management,

management and information systems (MIS), internal

control and operational organization. Appropriate

tools are available at international level, but they

require adaptation to local contexts. Specialized serv-

ice providers in the microfinance sector (e.g. audit

firms, training organizations, computer maintenance

services, consultancy firms) are fairly few, and still

need to gain knowledge and hence improve their

practice. National microfinance operators that have a

track record are virtually non-existent.

Thus, the principal need in the sector is for techni-

cal assistance through capacity building. The need

far exceeds the need for capital, whether equity or

capital for loans.

4 Financial self-sufficiency = operational self-sufficiency adjustedon inflation and a subsidy index + hidden costs (external supportin the form of technical assistance, training, equipment andoffice provision, etc.)5 Operational self-sufficiency = covering all the costs by all theincome

“TRADITIONAL” FUNDING AGENCIES: BILATERAL CO-OPERATION/AID

The main forms of bilateral aid that have traditionally become involved in micro-finance in Western and

Central Africa are: AFD and MAE (France), ACDI/CIDA (Canada), GTZ and KFW (Germany), SDC (Switzerland)

and USAID (United States).

These funding agencies have financed projects and individual MFIs: technical assistance, equipment, oper-

ating costs, direct credit lines or credit lines invested in a local bank.

The concerns of bilateral funding agencies, which initially focused on outreach (i.e. the degree of penetra-

tion and the volume of transactions), have moved on towards a greater emphasis on performance: loan

repayment rates, financial self-sufficiency, budget structure. This has led to programmes designed to restruc-

ture and consolidate existing MFIs, and in some cases has resulted in the cessation of funding to MFIs with

a high-risk profile (large MFIs mobilizing savings and presenting alarming levels of default). This has had

consequences on growth in the sector.

DEVELOPMENTS IN INTERVENTIONS OF MAINFUNDING AGENCIES

D E V E L O P M E N T S I N I N T E R V E N T I O N S O F M A I N F U N D I N G A G E N C I E S

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Bilateral funding agencies do not appear to have

given support to starting up new projects or MFIs in

the recent period (1998 to 2001). While the early

MFIs are experiencing difficulties, there has been no

“new blood” in the sector, bringing new challenges

and innovations. There has been a degree of with-

drawal on the part of “traditional” bilateral aid

(France, Germany, Switzerland) and increased

involvement on the part of others (CIDA, USAID) in

the micro-finance sector. At the same time, rela-

tively little innovation has emerged in intervention

approaches and development of new tools.

Bilaterals have also entered into national microfi-

nance programmes developed through national

strategies, by taking part in consultative processes.

The funding provided is still primarily devoted to

individual MFIs. Several contributions have been

made in support of professional associations and

ministry of finance supervision units.

THE “NEW” FUNDING AGENCIES:

MUTILATERAL CO-OPERATION/AID

Apart from IFAD, the main multilateral micro-

finance funding agencies in the two sub-regions are

UNDP, UNCDF, the European Union, the African

Development Bank, the World Bank, and the multi-

donor system CGAP.

With the exception of a few operations working

directly with individual MFIs (e.g. Sasakawa 2000 for

UNDP; PADME and PASI for the World Bank), multi-

lateral aid is tending to focus on supporting the

extension of existing MFIs, or the development of

the sector at national level through training and

institutional strengthening (as is the case with

AMINA/ADB or MicroStart/UNDP). The World Bank

and the European Union have assumed leadership in

supporting national strategies and action plans for

microfinance (Mali and Burkina Faso). CGAP has cre-

ated a sub-regional training structure for instructors

in microfinance known as CAPAF, based in Dakar.

Finally, the World Bank and UNDP (with technical

assistance from WWB) have both supported the

emergence of pan-African MFI networks, for the dis-

semination of “good practice”.

Thus, it is multilateral aid that has provided the

most innovation over recent years in terms of inter-

vention strategies and the structures and facilities

set up to strengthen and organize the sector.

If the areas for intervention chosen by mutilateral

aid appear relevant from the point of view of the

sector needs, the level and quality of intervention

require serious assessment. Indeed, national, sub-

regional and, all the more so, continent-wide

spheres are very far-removed from the day-to-day

realities of MFIs. What “participants” in these pro-

grammes are able to bring home to their institutions

seems minimal in relation to the challenges facing

them, which are sometimes urgent. Furthermore,

mutilateral aid is often new to the sector, and has

not always been able to develop the relevant spe-

cific know-how. Recourse to consultants and consul-

tancy firms brings limitations that could well affect

the results of intervention.

INSTITUTIONAL “INVESTORS”, PUBLIC AND PRIVATE

Another new phenomenon in the microfinance land-

scape is the arrival of institutional investors, some

public (e.g. IFC, Proparco) and some private (e.g.

Blue Orchard, the Luxemburg Fund, AFRICAP and COR-

DAID). These institutional investors are interested in

viable MFIs, converted or in the course of being con-

verted into credit or banking establishments; they

offer them a range of products at commercial rates,

ranging from loan guarantees in local currency, to

medium-term loans, to equity financing. It is these

bodies that have generated the enthusiasm for “rat-

ing” MFIs in the field of micro-finance.

However, it is obvious that the micro-finance sector in

Western and Central Africa has not reached this stage

in its development, and this type of tool is currently

not appropriate. Viable MFIs that are liable to be

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converted into banks are very few in Africa in general,

and in particular in Western and Central Africa. In addi-

tion, generally they are fairly well capitalized and can

easily find refinancing facilities at concessional rates.

The supply in this area is likely to overstep the

demand among the MFIs targeted.

MICROFINANCE AT A CROSSROADS

Microfinance in Western and Central Africa – and

how donors support its further development – is at

a crossroads. In the face of institutionalization and

competition, some MFIs (among the most solidly

established) will survive and continue to offer their

services to the populations. Others, weakened by

this evolution, will disappear because they have

expanded too quickly or they have not been able to

adapt their products and services to the market, or

they have been unable to develop a practical, effi-

cient system. It is uncertain whether within several

years the present penetration rate will be main-

tained, let alone increased.

It would be unfortunate if, in the course of this

process, the discovery is made too late that through

misunderstanding or misinterpretation of the mes-

sages, the way in which funding agencies provide

support has led to the exclusion of the majority, and

in particular the rural poor, from the financial serv-

ices initially offered by the MFIs. It would also be

unfortunate if the “good practice” of micro-finance

institutions should remove proximity financial serv-

ices from rural areas of Africa, where they are needed

to promote self-sufficiency and development.

Intervention at national level is certainly worthwhile

in order to create a favourable context for strength-

ening the structuring of the sector and its integra-

tion into the financial landscape, but this cannot

replace the technical assistance required directly at

the level of the MFIs themselves.

Best practices: Uses and Abuses

Best practice messages, which have been widely disseminated, have had

both positive and negative impacts on the sector.

The positive impact is on donors or funding agencies, some of which have

become stricter in the monitoring of programmes that they fund. However,

projects with social or revolving funds that damage the microfinance market

are still numerous, showing that theory is still difficult to put into practice.

The negative impact can be seen in the pressure put on MFIs to expand and

rapidly achieve financial viability. Many crises among MFIs arise from this

pressure, which is exerted indiscriminately. Similarly, the abandonment of

the poorest populations or underprivileged areas is often the consequence

of the rush towards financial viability.

The negative impact on funding agencies is abandonment of small MFIs,

despite their ability to innovate, and of start-up programmes, despite the

fact that these are needed to renew institutions.

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PRESENT IFAD STRATEGY

IFAD has evolved considerably in the way in which it

has intervened in recent years, by proposing inno-

vative approaches and supporting sustainable rural

financial services. This evolution is on-going, and

IFAD programmes currently comprise a combination

of diversified approaches. The projects that are mov-

ing towards “best practice” in microfinance will be

pursued and reinforced, while those still based

exclusively on support for agricultural development

within integrated development projects will be

redesigned or abandoned.

In IFAD-supported projects, the following approach-

es can be found:

Credit provision within agricultural projects

This first approach consisted in establishing credit

facilities to accompany an agricultural development

project. This clearly poses the problem of financial

viability, in view of the disastrous repayment rates

on loans, and very high structural costs inherent in

this type of distribution; it also poses problems of

technical and institutional viability, given the way

project funding was designed.

Other projects are looking for ways to render the

credit facilities independent by converting them into

credit unions, with all the difficulties inherent in

such a change, in terms of project agents and bene-

ficiaries. Few have succeeded in the conversion.

Using existing financial networks as distribution

channels for financial services

To avoid the pitfalls of the integrated approach, a

new approach was defined that endeavours to ensure

technical and institutional self-sufficiency of the

project by using existing formal financial institu-

tions, such as banks (agricultural development

banks, rural banks, commercial banks).

These banks have shown little interest in develop-

ing these services; they have not become widely

involved in the analysis of loan applications or con-

ducted any follow-up. Moreover, products on offer

are too standard and not well suited to the rural

poor, and repayment rates remain very poor. The

IFAD RURAL FINANCE INTERVENTIONS IN WESTERN

AND CENTRAL AFRICA

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sustainability and the impact of this type of

approach are extremely dubious.

Support in forming or developing self-managed

MFIs aiming at sustainability

This approach is the most widely disseminated inno-

vation at present, and its purpose is to ensure that

the system established enjoys social viability

through fuller beneficiary ownership, and financial

viability through a better cost structure, while still

meeting IFAD’s objectives of improving the living

standards of the poorest populations.

National support programmes for rural finance

system development

Finally, in some countries IFAD has developed

national programmes to address micro-finance sector

development issues at different levels. At national

level, the focus is on design of appropriate regula-

tory frameworks and supervision capacity in order to

assist in professionalization of sector operators.

Support is also offered for MFI consolidation and

development. In some cases, an important action-

research component is included to develop financial

products suitable to the poorest rural populations.

LESSONS LEARNED

Credit provision within a project

Because of the serious problems encountered when

projects directly administer credit programmes, this

approach needs to be abandoned.

Existing financial networks

Despite the fact that supporting existing networks

has the advantage of ensuring institutional viability

(assuming the right partner institutions are chosen),

IFAD’s experiences with commercial banks have gen-

erally not been satisfactory. Procedures are lengthy

and costly, the release of funds is uncertain and the

commercial banks take few if any risks. They merely

play the part of an extra link in the funding chain,

without contributing expertise.

The approach using rural banks and credit union net-

works has not met with much success either, in par-

ticular when these institutions are located in urban

and peri-urban areas, and when their previous expe-

rience has involved relatively wealthy populations

rather than IFAD’s target populations.

Thus, the use of formal financial institutions as a

channel for distribution of direct credit to poor rural

populations does not seem very promising and

should be pursued only with great caution.

However, IFAD can seek to develop links between

MFIs and development banks or commercial banks to

develop refinancing mechanisms.

Support for self-sufficient MFIs

This approach has proved promising. Although no

microfinance system supported by IFAD has yet

achieved technical, financial and institutional self-

sufficiency, MFI support projects have been at work

in villages, very close to the IFAD target population,

and they have achieved high degrees of participa-

tion and ownership.

The development of financially viable rural microfi-

nance systems in Western and Central Africa is very

difficult because of the low population densities,

the small margins achieved by agricultural activities

and the unfavourable environmental conditions.

Therefore, innovative solutions are needed to

encourage high repayment rates while at the same

time maintaining a low cost structure.

IFAD’s main aim in developing rural finance in the

region should be to promote the emergence, devel-

opment and strengthening of self-sufficient, sus-

tainable rural MFIs.

Back-up for rural finance systems at national level

Support to national rural finance systems is an inno-

vative approach that has good potential. At the

same time, it entails certain prerequisites at the

macro-economic level and within the socio-political

environment. These prerequisites are:

�macro-economic stability of the country - mone-

tary stability (inflation under control) and polit-

ical stability (absence of civil or trans-border

warfare);

� a regulatory and political environment that provides

incentive for MFIs, state support of the sector;

� grassroots MFIs that are efficient and innovative

and respond to demand;

� real incentive and willingness on the part of MFIs

to co-ordinate in order to professionalize and reg-

ulate the sector; and

� real incentive and willingness on the part of

funding agencies to work together.

Pitfalls to be avoided:

� The technical and institutional strengthening of

the microfinance sector in a given country should

be accompanied by a consolidation of the grass-

roots financial entities in terms of financial and

institutional viability, so as to avoid creating

imbalance in the field.

� The implementation of this sort of programme

should be entrusted to a specialized technical

partner capable of providing relevant specialist

assistance to supervisory bodies in charge of the

project. This back-up should be provided as early

as the pre-assessment stage.

RE-FOCUSING THE PROJECTS

IFAD’s current project and programme portfolio in

the area of microfinance is focused primarily on the

following:

Progressive abandonment of non-performing projects

Since 1996, IFAD has devoted considerable effort to

restructuring and reorienting earlier projects, which

are often rural development projects comprising

credit provision, or projects using local banking

channels to distribute direct credit to target groups.

In these projects, IFAD intervened mainly in the form

of credit lines, revolving funds or guarantee funds.

Since many projects have proved difficult to reorient

or reform, they have had to be terminated and

replaced by projects using the new approaches. It

would appear that there are no longer many projects

of this type in the IFAD portfolio. Thus, it can be

said that IFAD’s current portfolio of rural microfi-

nance projects has been rehabilitated and renewed.

Support for the emergence and development

of self-sufficient MFIs

This type of project aims to establish or develop sus-

tainable MFIs in rural areas, ensuring their social via-

bility through fuller ownership of the system by the

beneficiaries, and their financial viability through

stricter and more professional management tech-

niques, while still maintaining IFAD’s objective of

improving the living conditions of poor populations.

In this category of project, the models implement-

ed are the financial services association (FSA) model

developed in Guinea, Benin, Gabon and Mauritania,

and to a lesser degree the credit unions model in

Ivory Coast and the village fund model in Gambia

and potentially in Mali, Chad and Cameroon.

These models have the common characteristics of

being member-based, of collecting local savings,

and of granting small, local loans. Beneficiaries are

involved in management and decision-making pro-

cedures. They require considerable effort in terms of

transferring know-how to local level, and require

extensive training programmes in management. As

they are based on processes of transfer and owner-

ship, they can only achieve sustainability after a

fairly long period.

Support for national development of the rural

microfinance sector

These projects aim to reinforce the MFI environ-

ment, thus contributing to improving the develop-

ment context of the MFIs. They include: contribu-

tion to the definition of a national microfinance

strategy and policy; reinforcement of the supervi-

sion capacity of finance ministry control units;

activities aiming at the professionalization of MFIs

through training and counselling operations in pro-

fessional associations; support for creating formal

links between MFIs and the banking sector; and the

promotion of action-research operations.

In Western and Central Africa, there are five such

national projects. They operate in Benin, Cameroon,

The Gambia, Ghana and Niger.

12

13

After a rather chaotic expansion period, in which new actors attempted on all fronts to reach those seg-

ments of the population that were excluded, using products and services that were not markedly differen-

tiated from classic forms, there now appears to be a trend towards market consolidation and segmentation.

This is likely to become more predominant.

In the next ten years, two categories of institutions which still belong to the microfinance sector will

become banking and specialized credit establishments: credit unions and the credit systems specializing in

funding micro-enterprises.

The savings and credit unions, with their fast growth in terms of numbers of members and volume of trans-

actions, and with the governance problems that are frequently encountered, will only be able to develop by

establishing one or several co-operative banks at national level, regulated by the banking law and super-

vised by the banking commissions. The unions will be the main shareholders. These co-operative banks will

receive surplus from the union networks, will pay interest on this, and will be able, where needed, to refi-

nance cashflow requirements of the union networks during times of seasonal shortages.

At grassroots level, the unions will be concentrated in towns and suburban areas, where they will serve their

traditional clientele of employed workers, small retailers and economic agents working in the informal sec-

tor. In rural areas, a few unions will be maintained in their traditional area of agricultural cash crops, but

they will endeavour to diversify with respect to the member profiles by integrating salaried workers, trades-

people and artisans in small urban centres.

Direct credit systems, providing individual or solidarity group loans, will tend to convert into specialized

credit institutions, coming under the banking laws and supervised by banking commissions. Their main tar-

get will be micro-enterprises. To broaden their market, which in the field of micro-enterprise is still very

restricted in many countries, they will also seek to serve micro and small enterprise upstream, and down-

stream individual micro-entrepreneurs in the informal sector. These lending institutions will be based pri-

marily in towns and peri-urban areas.

FUTURE CHALLENGES:

A VAST MARKET TO DEVELOP F

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This still leaves a large sector of the market that

requires provision, abandoned by “quick-profit”

microfinance in the 1980s and 1990s: the rural work-

ing population that is not in towns and peri-urban

areas, nor in the small towns of cash crop zones.

An economically viable market

These populations live mainly in staple crop zones,

where production is not secure. Depending on the

year, production can result in surplus or deficit.

These rural populations are economically active and

are often engaged in multiple seasonal activities to

guard against climatic vagaries; they know their

markets and opportunities and are capable of devel-

oping viable economic strategies within a context in

which they have expertise. They live and operate in

remote and often isolated areas with inadequate

infrastructure; however, the population density and

grouped village structure are sufficient to envisage

providing services for them in a viable manner.

Proximity financial services, which are an essential

factor for the support of economic initiatives arising

from the population, can contribute to creating

income and employment locally, thus avoiding a

massive exodus to towns and neighbouring countries

for economic reasons, which is increasingly a source

of social unrest. They can also contribute to creat-

ing regional economic poles in the local area, which

is well within the scope of decentralization and

development of territorial projects. These two com-

plementary dynamics can achieve genuine synergy.

Further penetration of the financial sector,

and filling the gap

With the foreseeable extension of the banking sec-

tor via the arrival of co-operative banks and spe-

cialized lending institutions, the financial sector

could manage to potentially serve 40 to 50% of the

population in an African country, (20 to 30% of the

urban populations, 20% of the cash crop zone pop-

ulations), By extending microfinance services in this

market sector, a further 30 to 40% of the population

could be reached, corresponding to an overall finan-

cial and economic integration of between 70 and

90% of the population.

In such a scenario, all economically active populations

and all economically viable zones will be reached. For

Western and Central Africa, this represents a potential

14

market of a working population of 50 million. Even

with a penetration rate of 5% of this market, the

outreach of this new microfinance would double that

of MFIs today.

Ten to 20% of fringe populations will remain mar-

ginalized, too widely dispersed to benefit from for-

mal services, and probably living in an insufficient-

ly monetarized economy, in which savings and cred-

it facilities are not really relevant. Other forms of

support need to be found to satisfy their needs.

15

Microfinance challenges in the next decade

The challenge for rural microfinance in Western and Central Africa for the next ten years will be to

establish quality and sustainable microfinance in the region. Quality microfinance does not define a

model, or a particular “school of thought”, but rather a set of ethical requirements and standards in

terms of professional performance that sets it apart from purely commercial microfinance. Its aims are

to achieve the following:

� a significant penetration rate to provide adequate cover for the existing demand, while at the

same time endeavouring to deepen this penetration so as to facilitate the access of poor and

underprivileged rural populations to financial services;

� financial products and services suited to the needs of clients, designed to satisfy their

expectations while taking into account their constraints and economic strategies;

� impact on the social capital of individuals, on household living conditions, on strengthening ofsocial links within the community, and on economic development and employment in the zones

concerned, within the on-going processes of local development and decentralization;

� financial, social and institutional sustainability, built from self-help processes and ownership of

the system by all stakeholders concerned; and

� innovation and action-research in recognition of the fact that progress needs to be made in

bringing microfinance and the funding of agriculture closer together, in the context of liberalization

of markets and the trend among agricultural banks to become straightforward commercial banks. The

problem of financing agriculture is particularly complex given the inherent risk associated with the

sector and the dispersion and remoteness of the rural population in much of the region.

The challenge in the coming years resides in the implementation of this new generation of projects,

establishing IFAD more firmly in the “good practice” sphere of microfinance.

16

Consistent with the overall IFAD Strategic

Framework and the Fund’s Vision Statement of

“enabling the rural poor to overcome their

poverty,” IFAD's regional strategy in Western and

Central Africa has four objectives: (i) strengthen-

ing the capacities of the rural poor and their

organizations and refocusing rural development

policies and institutions on the poor; (ii) increas-

ing the productivity of agriculture and natural

resources and improving access by the rural poor to

technology; (iii) increasing rural incomes through

better access to capital and markets; and (iv)

reducing vulnerability to the main threats to the

rural poor’s means of subsistence, especially con-

flicts and HIV/AIDS. The regional strategy also

identifies three cross-cutting approaches to be

introduced into the design and execution of pro-

grammes: (i) promoting investment targeted at

women; (ii) strengthening participation; and (iii)

drawing on local knowledge.

The regional strategy for rural financial services

development flows directly from these orienta-

tions. It responds most directly to the third strate-

gic objective of increasing rural incomes through

better access to capital and markets, but also to

the first objective of strengthening the capacities

of the rural poor and their organizations. With

regard to the cross-cutting themes, the imperative

of focusing on women, increasing participation and

using local know-how also are pivotal to develop-

ing sustainable rural finance.

The goal of the regional rural finance strategy is to

increase the access of poor rural people to sustain-

able financial services. It includes three strategic

objectives:

1 To increase outreach and viability of rural

finance;

2 To strengthen implementation capacity at all lev-

els (IFAD staff, project staff, regional collabora-

tors, target group/clients) for more effective

rural finance interventions; and

3 To improve MFI monitoring and reporting and

impact assessment of rural finance interventions.

A number of specific actions have been identified

and consolidated into a Rural Finance Action Plan

for 2003 to 2006 to ensure that these objectives

translate into concrete activities and investments.

IFAD’S REGIONAL STRATEGY IN RURAL

MICROFINANCE

IF

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17

STRATEGIC OBJECTIVE 1

TO INCREASE OUTREACH AND VIABILITY

OF RURAL FINANCE

IFAD will support the institutional development of

MFIs. It will de-connect credit from specific invest-

ments (targeted credit) and will instead promote the

development of financial products suited to MFI

savers and borrowers. IFAD will endeavour to accom-

pany proximity rural finance services, which should:

i) establish numerous local branches; ii) organize

themselves into national networks offering training,

monitoring and control functions for the base-line

units; iii) establish connections with the formal

banking sector; iv) fit into a relevant legal and reg-

ulatory framework; and v) develop new financial

products such as micro-insurance and equipment

loans. IFAD recognizes that this is a long-term

investment, and is prepared to plan for long-term

support, including investing in action-research on

innovative approaches and products.

In countries where the general rate of penetration is

still low, IFAD will encourage existing MFIs inter-

ested in expanding to rural areas, or, failing this,

will encourage confirmed national or international

operators to start up pilot operations in rural zones.

In countries where the penetration rate in urban and

peri-urban zones is already high, IFAD will concen-

trate on promoting access to financial services for

the rural poor or underprivileged zones, by encour-

aging the extension of MFIs established in

“wealthy” rural zones along these lines, or by fund-

ing specialized schemes aimed at underprivileged

populations (“fourth dimension”, small loans for

women, village funds). Failing this, IFAD will

encourage confirmed international operators in this

type of finance to establish MFIs targeted at the

rural poor or underprivileged zones.

To meet this ambitious agenda, strong emphasis will

be placed on promoting a professional and business-

like approach to financial services development and

delivery. Elaboration of realistic business plans will

be supported so that eventual sustainability is a

driving force of IFAD investment and MFI opera-

tional approaches.

Indicators for responding to Strategic Objective #1 by 2006

� For all future project designs in which rural financial services are

tentatively proposed, use Rural Finance decision tools (already developed

by IFAD) early in project design to determine where to and NOT to invest

in rural financial services.

�Where potentially viable markets exist, invest in establishment of at least

three new MFIs.

�With assistance from CGAP and other appropriate partners, assist at least

five MFIs in three different countries in preparing business plans for

achieving eventual sustainability (to include clear strategies for financial

soundness, outreach to the rural poor, and design of new financial

products, as appropriate).

� Sign performance contracts with at least five IFAD-supported MFIs in

three different countries based on an explicit set of objectively verifiable

indicators.

� Restructure rural finance components of IFAD project portfolios in at least

three countries where this is deemed appropriate.

� Undertake at least three initiatives to support research and development

of innovative approaches to rural financial services delivery and new

product development.

18

STRATEGIC OBJECTIVE 2

TO STRENGTHEN IMPLEMENTATION CAPACITY AT ALL

LEVELS FOR MORE EFFECTIVE RURAL FINANCE

INTERVENTIONS

Facilitating the development of sustainable rural

MFIs and increasing outreach will require capacity

strengthening of a variety of actors, including IFAD

staff, project staff, regional collaborators, and tar-

get group clients. It will require deepening of exist-

ing partnerships, as well as creation of new ones.

To co-ordinate and back up this research action and

innovation in an effective and coherent manner,

IFAD, in collaboration with other funding agencies,

will finance a Regional Action-Research Centre ded-

icated to improving microfinance methods and prac-

tices in Western and Central Africa. This centre will:

disseminate the newly acquired knowledge and

know-how; train practitioners and researchers;

assist MFIs wishing to innovate in integrating

action-research into their organizations; and organ-

ize exchanges with similar centres in other parts of

Africa and the world. A strong emphasis will be

placed on improving effective implementation of

on-going projects and programmes engaged in rural

finance development.

IFAD and field project staff will also need to

improve their skills in managing these processes and

designing better projects and programmes. CPMs

and project managers require training that will help

Indicators for responding to Strategic Objective #2 by 2006

� Create an Implementation Support Facility (ISF) under a technical assistance

grant (TAG) to provide technical support (back-up, trouble shooting, etc.) on

a sustainable basis to IFAD-financed rural finance operations in WCA

(effective 2005). This TAG would also be used to foster networking and

strengthen linkages along the RF institutional continuum (SHGs, MFIs, MFAs,

Central Banks, etc.).

� All Africa I Division professional staff of IFAD attend at least one financial

services-related training programme.

� At least 25 IFAD project staff receive relevant training.

19

them to better understand general rural finance

issues related to project design, follow-up and

assessment. Also needed are improved understand-

ing of specific issues related to legal and regulatory

frameworks, financial products, MIS and audit, insti-

tutional assessment and monitoring of impact.

After having received such training, CPMs and proj-

ect field staff should have a greater appreciation of

the following fundamental issues:

� Choosing the type of project to design according to

the macro-economic context of the country and the

development status of microfinance in that country;

� Choosing the right microfinance institution(s) and

local bank(s) to support, and selecting the right

local or international technical partner(s) to pro-

vide the required technical services and advice;

� Associating operators and beneficiaries in the

feasibility and design of projects, to reinforce

ownership from the outset;

� Defining the final institutionalization model,

including steps to reach financial self-sufficiency,

from the outset; and

� Defining performance indicators to serve as a

contractual basis with all parties involved.

STRATEGIC OBJECTIVE 3

TO IMPROVE MFI MONITORING AND REPORTING

AND IMPACT ASSESSMENT OF RURAL FINANCE

INTERVENTIONS

Support for regular reporting and performance mon-

itoring is critical for ensuring that MFIs are sustain-

able, well-managed and able to establish realistic

and appropriate plans for their development.

Developing such systems is central to capacity

building within these organizations, strengthening

internal governance mechanisms, and ultimately

guaranteeing that clients are well-served.

Consequently, the indicators related to this strategic

objective are essential for meeting the first two

strategic objectives.

Support to impact assessment is also essential for

improving strategic planning by governments in the

region and IFAD, to ensure that resources are allo-

cated to those activities (both within the area of

rural finance and between rural finance and other

priority areas for investment) that contribute most

effectively to rural poverty alleviation and economic

growth.

CONCLUSION

The agenda above is ambitious and IFAD can only

accomplish it in partnership with a range of regional

stakeholders and other specialized agencies operat-

ing in the region. Fortunately, a number of effective

partnerships are already functioning, but these need

to be deepened, extended and improved. There is a

need to work especially closely with cooperating

institutions (the most important in the region being

UNOPS, BOAD, the World Bank and the African

Development Bank) to ensure that project supervi-

sion is effective in overseeing IFAD rural finance

investments, and especially effective in monitoring

MFI performance in achieving financial sustainabil-

ity. This may require systematic development of spe-

cialized technical partnerships to supplement the

work of the cooperating institutions.

As regional capacity strengthening is central to the

regional strategy, partnerships for training and

technical support will be important. Existing organ-

izations and networks (e.g. Micro-Finance Guichet,

CAPAF and AFMIN) will be supported to enable them

to more effectively deliver these types of services.

IFAD projects and programmes should become

important clients of these regional entities. In the

area of action research, partnership will continue

with specialized analytic entities (e.g. IRAM, CIDR

and the FAO/GTZ Agricultural Finance project).

Continued collaboration with CGAP will be important

to ensure that IFAD interventions are coordinated

and consistent with those of other CGAP member

agencies in the region, and that IFAD staff remain

abreast of the evolution of micro-finance best prac-

tices and lessons learned.

Indicators for responding to Strategic Objective #3 by 2006

� At least 10 MFIs are assisted in developing appropriate monitoring and

reporting systems.

� At least 15 IFAD-supported MFIs from at least five countries introduce a

minimal set of indicators into the Microfinance Information Exchange (MIX)

system.

� Fifteen IFAD-assisted MFIs are regularly reporting on a mutually-agreed

minimum set of performance indicators.

� At least five impact assessments are completed on rural finance activities in

IFAD projects.

IFAD RURAL FINANCE ACTION PLAN FOR WESTERN AND CENTRAL AFRICA

20

IFAD RURAL FINANCE ACTION PLAN FOR WESTERN AND CENTRAL AFRICA

Strategic Objective

1 Increase outreach andviability of rural finance in WCA

2 Strengthen implementationcapacity at all levels (IFADstaff, project staff, regionalcollaborators, targetgroup/clients) for moreeffective rural financeinterventions

3 Improve MFI monitoring and reporting and impactassessment of rural financeinterventions

Time-bound indicator (by 2006)

1 For all future project designs where rural financial services are tentatively proposed,use RF decision tools early in project design to determine where to and NOT toinvest in rural financial services.

2 Where potentially viable markets exist, invest in establishment of at least three newMFIs.

3 With assistance from CGAP and other appropriate partners, assist at least five MFIsin three different countries in preparing business plans for achieving eventualsustainability (to include clear strategies for financial soundness, outreach to therural poor, and design of new financial products, as appropriate).

4 Sign performance contracts with at least five IFAD-supported MFIs in three differentcountries based on an explicit set of objectively verifiable indicators.

5 Restructure rural finance components of IFAD project portfolios in at least threecountries where this is deemed appropriate.

6 At least three initiatives undertaken to support research and development ofinnovative approaches to rural financial services delivery and new productdevelopment.

1 Create an Implementation Support Facility (ISF) under a TAG to provide technicalsupport (back-up, trouble shooting, etc.) on a sustainable basis to IFAD-financedrural finance operations in WCA (effective 2005). This TAG would also be used tofoster networking and strengthen linkages along the RF institutional continuum(e.g. SHGs, MFIs, MFAs, Central Banks).

2 All PA professional staff attend at least one financial services-related trainingprogramme.

3 At least 25 IFAD project staff receive relevant training.

1 At least ten MFIs are assisted in developing appropriate monitoring and reportingsystems.

2 At least 15 IFAD-supported MFIs from at least five countries introduce a minimal setof indicators into the Microfinance Information Exchange (MIX) system.

3 Fifteen IFAD-assisted MFIs are regularly reporting on a mutually-agreed minimum set of performance indicators.

4 At least five impact assessments completed on rural finance activities in IFADprojects.

G O A L : T O I N C R E A S E T H E A C C E S S O F P O O R R U R A L P E O P L E T O S U S TA I N A B L E F I N A N C I A L S E R V I C E S

All photos ©IFAD by:

J. P. Audinet, N. Brodeur, R. Chalasani, R. Grossman, J. Hartley P. Maitre, G. Maurette, F. McDougall, C. Nesbitt, S. Nimeh C. Rycroft, P. Tartagni, L. Taylor, H. Wagner

Printed by Palombi, Tivoli

Rome, February 2004

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