What Microfinance for Agriculture in Developing Countries? by Agence Française de Développement

n° 04

exPost ExPost

Evaluation and Capitalisation Division Summary Notes Series .

September 2008

What Microfinance for Agriculture in Developing Countries? Summary Notes is a series based on specific themes or operations and presents lessons learned from the agency’s evaluation and capitalisation experiences. They particularly address AFD teams and their partners in the North and South, but also more generally target the professional spheres involved in development actions that have similar features to the operations under analysis. This issue was produced by Frédéric Gorse, Alain Riès and Grégoire Chauvière le Drian.

Between 2005 and 2007 the Evaluation and Capitalisation Division (EVA) conducted several ex post evaluations of

microfinance institutions (MFIs) operating in both urban and rural areas. A specific focus for these missions – based on

MFIs established in Cameroon, Mali and Madagascar – was

placed on financing for the rural and agricultural world which remains widely excluded from banking systems, whereas there is an increasing demand for financing to meet their

needs. Only 5 to 6% of the agricultural world in Africa has access to banking services.

This paper aims to learn lessons from AFD’s experience via case studies based on different contexts and projects with different levels of maturity.

These ex post evaluations of AFD operations aimed to

analyse how MFIs are organised – in terms of governance,

the appropriateness of their range of products and financial services, their refinancing methods, their development

strategies and the type of donor support they benefit from – in order to help them to meet the specificities of the

agricultural world and achieve their financial viability and Agence Française de Développement Research Department 5, rue Roland Barthes 75012 Paris www.afd.fr

sustainability.

exPost ExPost • Summary Notes Series • n° 4 sseptember 2008

1. Microfinance Actors 1.1 Different organisations coexist

who consequently handle management,

grammes to support the implementation

1.1.1 Mutualist networks and individual financial products

of decision-making. This type of organisa-

tem (PASECA) developed in Cameroon

Mutualist networks have developed on

the basis of individual financial products. They are supported by locally-elected

members that represent farming popula-

tions. They are assisted by staff members on the payroll of the MFI headquarters

Twenty years of experience AFD’s first microfinance operations

date back to 1998 when it launched two solidarity credit projects – the

CRG in Guinea and the PPPCR in Burkina Faso – with support from

AFD agents, NGOs working in the field, and managers from the

Grameen Bank. AFD has since

allocated over €267M – two-thirds in grants – to over fifty different

organisations in order to help them

to organise their institutional set-up and their governance methods.

AFD prepares around a dozen

projects every year, representing a total amount of some €30M. Its

strategy in the microfinance sector has evolved and now integrates a new generation of projects. AFD’s approach is today based on

developing MFIs that are capable of managing their operations over the long term, and of offering new services to their clients.

while the elected members are in charge

tion requires the adhesion of mutualist members before any decision is made

and can sometimes lead to cumbersome decision-making processes. Managers and elected members may also take dif-

fering views. This underscores the limits of

of a savings and self-managed credit sysand Mali by the Centre for International

Development and Research (CIDR) are now based on a regional structure (area

gathering several hundred thousand people) of “unions”.

These unions ensure that the member

networks in times of crisis.

banks function well, check that they

1.1.2 Non-mutualist networks and mutual guarantees

common rules, provide support and

Different types of non-mutualist net-

works exist: financial establishments, local or foreign associations, NGOs.

comply with national regulations and

advice, and play the role of financial intermediary with local partner banks by realising the solidarity guarantee.

The organisations studied in Mada-

gascar (Vola Mahasoa and Mahavotse)

base their operations in rural areas on mutual guarantees set up within groups.

1.2 Apex bodies

Individual loans are also granted to peo-

ple who have already contracted several

solidarity credits or – this mostly concerns urban areas – to people who have sound

guarantees. However, for these nonmutualist organisations, the bulk of credits in rural areas is based on solidarity

groups. This allows them to obtain more

information about their beneficiaries and minimise their management costs.

Tiavo village bank in Madagascar There is a strong need to make net-

A trend has been observed whereby

works more professional and - once they

these groups in order to gather them

ment - this leads them to consider creat-

“sovereign structures” are set up above

within a solidarity organisation that does not necessarily have a legal status. This

is the case for the intergroups in Vola Mahasoa.

After several years of activity for the first

banks, the village savings and self-managed credit banks (CVECAs) and the pro-

have reached a certain level of developing an apex structure. The technical need

for this type of structure may be generally accepted – despite reticence in terms of the transfer of power that this implies –

but the problem remains of its cost and

the capacity of the network to bear this cost.

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• Summary Notes Series • n° 4 sseptember 2008

Most networks in Madagascar are either

supported by – or seek to be supported by

– an apex structure which has both a tech-

nical and financial mission (INTERCECAM for the savings and mutualist agricul-

tural credit banks, FITIA project for the

Tiavo network). In these conditions, a certain volume of activities is needed in order

to ensure the equilibrium of these organi-

sations, and donor support is required to cover part of their costs at start-up.

In Mali, AFD is contributing to financing a

feasibility study for this type of organisation for the CVECAs and PASECAs. The

Nyesigiso and Kafo Jiginew mutualist net-

Caisse villageoise au Mali

works are also studying the possibility of

grouping together within a single apex

structure.1 In Senegal, the Credit Mutual of Senegal (CMS) has set up the Confederation of West African Mutual Banks.2

2. Best Practices

a long-term perspective and several

2.2. Involvement of elected members

remedy this.

devote part of his/her time to managing

diversify does carry risks for MFIs that

2.1. Governance

honours of election and representation?

structure may evolve towards more prof-

the key aspects of good governance:

In order to reach a critical size, one

MFIs in rural areas remain fragile from

that would not be dedicated to one MFI

conditions will need to be met in order to

possibility is to set up a “service centre” in particular but would offer tailored

services to several MFIs. This choice to would use the centres because the apex itable areas and eventually become a classic bank. It would consequently lose

its original objectives – to facilitate MFI financing – who explains why most MFIs are clearly in favour of dedicated organ-

isations. This does not, however, remove the constraint of financial equilibrium.

– clearly stated management rules

and procedures;

– a reliable information and manage-

ment system (IMS) that can rapidly monitor activity. This allows them to be

reactive, efficient and to make appropriate decisions in order to anticipate risk,

1 The aim is to create a regional alliance between two networks operating both in rural areas, mainly as lenders, and in urban areas, as savings collectors and lenders, in order to reach financial autonomy and sustainability in rural areas. 2

In order to be viable, MFIs must adopt

The CCMAO gathers the CMS (98 %) and JEMENI (2%) in Mali.

adopt relevant strategies, pilot their

implementation and protect the institu-

Why should an elected member

a bank in a rural area? Is this one of the Why should a solidarity group leader

feel he/she has a mission within a village intergroup? Experiences studied reveal varying practices, as well as a real interest in organising and managing these networks and supporting their local development.

Some banks pay the managers on the

basis of a percentage of receivable

interest, outstanding loans, recovery, controls made or results…

Other organisations simply reimburse

tion’s assets;

incurred

inspection;

in Senegal) and rely more on voluntary

– an efficient structure for control and – competent elected members and/or

staff members.

expenses,

notably

travel

expenses (this is the case for the CMS

support and the attractive nature of the training that is provided with it. These

exPost ExPost • Summary Notes Series • n° 4 sseptember 2008

elected members and managers are also members of other organisations such as

Means of transport in Mali. MFI operations in rural areas involve high structural osts that arise from decentralisation processes and transport costs.

farmers’ organisations (FOs). 2.3 The issue of training

Human resources are a strategic issue

in view of the scarcity of skilled employees and the increasing competition to hire

them. In the two types of organisation studied, the recruitment of competent staff is a major problem. The market is

somewhat distorted as a result of staff

long-term perspective and deserves to

is adapted and that integrates the wide-

new actors with differing strategies and

system designed to implement and

expressed by agricultural households

poaching practices, and the arrival of targets also presents risks.

Due to these conditions, networks that

operate via projects tend to pay more and manage to recruit staff, while networks

with an institutional strategy offer lower pay but promote in-house training and

career building opportunities. However, training budgets are often the first to be reduced in times of financial difficulties.

Mutualist organisations have a major

be supported by an appropriate national finance vocational training tailored to the needs of microfinance (technicians and

elected members). Such sizeable investments carry risks in the event of staff poaching.

2.4 Financial services tailored to the rural world

Despite the hope that stems from the

ranging needs for financial services with varying profiles. (Wampfler and Lapenu, 2002).3

MFIs need to innovate and develop an

appropriate range of products if they are to survive:

– productive credit in order to increase

production (to finance inputs, seeds, labour, livestock breeding, processing, production …);

– inventory credit or “warehouse receipt

problem in that they must train their elect-

emergence and growth of MFIs, microfi-

financing” loans and crop prepayment in

underestimated – cost has the value of

prove to be marginal and/or inappropriate

possible conditions;

ed members. This recurrent – and often being a public good. Indeed, these

trained elected members will go on to

participate in – and they are encouraged

nance services for agricultural activity

in a number of contexts. This is due to the specific nature of this sector of activitiy.

Several well-identified factors hamper

to do so – leading and managing other

the development of accessible financial

fore the issue of the amount of resources

remote areas with low population density,

bodies or organisations. There is therethat will be required to implement this

training. Sponsorships are limited (due to their cost: missions from France/partner

countries), and there is a lack of availability of competent actors who are, by defi-

nition, few and far between and therefore expensive.

Training is a real issue for microfinance

in Madagascar. It must be seen from a

services for family agriculture: location in lack of infrastructure, dependence on cli-

mate conditions, temporal nature of production cycles, seasonality of income and, more generally, the limited amount

of monetary income, volatility in the price

of agricultural products, legally and economically unreliable guarantees…

These aspects are specific to agricul-

tural activities and require financing that

order to promote production in the best – leasing or hire-purchase leases;

– medium- and long-term loans to

finance equipment, perennial crops, herd

reconstitution, and land acquisitions. This type of credit is often lacking.

This range of loans for economic activ-

ity can be backed by loans designed to

meet social and housing needs, as well as by savings and insurance products,

fund transfer systems and non-financial services (training, technical support).

3 Source : Solène Morvant-Roux (Summary of the symposium organised by FARM on 4th, 5th and 6th December 2007 on microfinance for agriculture in developing countries).

exPost ExPost

2.5 Controlled financial equilibrium This requirement is often in contradic-

tion with the extension of rural coverage

• Summary Notes Series • n° 4 sseptember 2008

– part of the work is delegated to volun-

itself through refinancing;4 a sharp rise in

Moreover, the cost of financial resources

ing number of loan defaults for which

teers.

and agriculture financing because of the

must remain very low, which means any

activities.

areas will require donor support.

low profitability levels of agricultural MFI operations in rural areas involve

strategy to implement operations in rural

The sustainability of the organisation is

high structural costs that arise from both

reinforced by a mutualist network provid-

implies and transport costs. This leads to

members (subscription of fixed or variable

the decentralisation process that this questions of governance which itself has a cost that is by no means insignificant.

Moreover, MFIs in rural areas provide

disadvantaged populations with loans for

ed there is sound financial support from its capital shares, guarantee deposits …). This is also the case for non-mutualist net-

works operating via solidarity credit when

an additional solidarity level (intergroup) is

provisions over the period due to the risrecovery is compromised as a result of

the lack of resources and a certain laxity

on the part of the management committees, the unions which intervene a month late and, finally, the technical assistance

service (TAS) during the quarterly controls. It should be noted that the latter has very little power.

Controlling management costs in the

general sense (operating, recovery, pro-

visions …) is therefore one of the only

CVECA premises in Mali

small amounts which consequently have

set up between the groups and the MFI.

areas where MFIs have room for manoeu-

For operations in remote rural areas - or

for the organisation in case of deficien-

capacity to set interest rates at the right

high marginal management costs.

areas where access is difficult and popu-

lation density is too low to allow less cost-

This type of network provides a security cies, or if a group ceases to exist.

The CVECAs in Mali, notably in the

ly, more profitable operations - MFI oper-

Niger River delta, are weakened by the

– there is a sufficiently high monthly

low portfolio yields for an MFI which are

ations can only reach financial viability if: rate (between 3.5% and 4.5%);

– management costs are tightly con-

trolled and new investments are limited;

– there is a very low level of loan

defaults;

conjunction of several factors: extremely unlikely to increase due to rate pressures

(usury rate set at 27%); the differential

between the portfolio yield and the cost of borrowing is too low and this could fall even further as the institution finances

vre. Additionally, viability depends on the level when there is no possibility to

access grants and/or subsidised refinancing.

Indeed, the 4% margin between the rates of input credits for rice growing (70% of allocations) set historically at 12% and the 8% of refinancing from the National Bank for Agricultural Development (BNDA) is very low. It is divided between the bank (2%) and the union (2%) which pays 1.75% to the TAS. In order to cover operating costs and renew equipment, the CVECAs must charge at least 18 basis points between the cost price of financial resources and the cost of outgoing credit.

exPost ExPost • Summary Notes Series • n° 4 sseptember 2008

3. Financing Growth

The business plans of the institutions studied are all based on fast-rising loan volumes

consistent

with

potential

demand and dynamism observed on the market.

The availability of resources adapted

both in volume and in cost is therefore a

major issue for MFIs. MFIs operating in rural areas had previously been heavily dependent on lines of credit from donors

or locally collected savings, but are now

changing their sources of financing by developing savings collection in urban

areas and via bank refinancing. These changes require a higher level of profes-

An account being opened (Mali)

banking skills. They also mean that

ucts that pay little or no interest. Poten-

sionalism in the MFIs which now require donors must adapt to this new situation. 3.1 Savings collection

Savings collection in rural areas general-

ly involves low amounts - the exception being rich, densely populated areas. It is based on term deposits with cycles that

are out of step with the need for resources

tial savings then tend to be invested in

opportunities that are considered finan-

ing system are also developing. Local

However, a recent trend for monetary

mechanism via lines of credit backed by

stock, durable consumer goods…).

savings has been observed in areas facing insecurity, but this context also makes the MFIs fragile.

In urban areas, collection is based on

unit deposits for high amounts, particu-

whereas the possibility of recycling them

social vocation (student parent associa-

as loans is very low at that time.

Practices to refinance from the bank-

cially or socially better (purchase of live-

for loan activities. For example, monetary

savings are higher when crops are sold,

3.2 Local bank refinancing and guarantees

larly from groups or associations with a

banks have a role to play in this type of specific medium-term products (mutual-

ist hire-purchase, equipment hire-purchase, warehouse receipt financing…), global refinancing (input credits…), as well as through overdraft authorisations which allow treasury to be smoothed.

In order to be effective, these lines of

tions …).

credit must take the cultural cycle of agri-

expensive service and gives rise to a high

cial resources, savings collection aims to

some procedures in credit establishments

which means a cash balance is perma-

and less dependent on external bank

In rural areas, savings collection is an

level of activity for very small amounts nently required on the spot. To make

this service profitable, MFIs offer prod-

In addition to lowering the cost of finan-

make the institutions more autonomous credit.

cultural operations into account. Cumber-

sometimes lead to late disbursements

which are not always used by the network, whereas these lines of credit represent a heavy financial cost.

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• Summary Notes Series • n° 4 sseptember 2008

In view of the needs of MFIs and the

ice that justifies maintaining their pres-

sharing mechanism such as the ARIZ

Financial costs must be reduced if

capacities of banks in Madagascar, a risk-

But it is also risky for a donor to push

ence?

MFIs in a direction that they do not wish

guarantee (insurance for investment

they are to maintain activities in rural

where development banks had initially

has reached a sufficient level of maturity.

determined by its financing methods

risks) may be relevant once the network

Moreover, some networks constitute “disaster reserve” funds in order to face systemic risks.

3.3 Mobilising migrant savings

Evaluations show that activity is turning

towards urban areas which are seen as

being more profitable. The PASECA in Kayes is studying the possibility of implementing a system for migrant remittances

and developing adapted savings products (to obtain and transform part of the

transferred funds). By putting informal transfers through the banking system in

the framework of an economically

areas. The viability of an institution is

and the appropriateness of the products and services it offers.

MFIs originally established in rural

areas are developing - or wish to extend

- their activities to peri-urban and urban

to take. In fact, MFIs are leaving areas taken them as part of a poverty reduction strategy with no clear targets for financial sustainability (this is the case for the

CECAMs in the regions of Menabe and

Sofia, the CVECAs in Cameroon and in the region of the Niger River delta).

If organisations maintain the principle of

areas, either via a mutualist organisa-

credits based on solidarity groups in

is the case of the recently created CVE-

must generally be adapted to the context

tion or via solidarity organisations (this CAs and PASECAs, and of Kafo Jiginew

and CMS). An equalisation or mutual

guarantee system is being established in order to ensure the overall profitabili-

ty of organisations by combining profitable urban activities and more delicate operations in rural areas.

urban areas, operational procedures of cities. Individual credit would appear to

be a relevant product, even if it does imply a delicate change in approach for

the MFI, particularly in terms of risk assessment (guarantees, less stable

client base with no land ties…). This process, combined with a loan offering for

autonomous and profitable activity, and,

at the same time, making funds more accessible locally, the project has improved the quality of a service which

has today become essential. These serv-

CECAM premises in the region of Menabe & Sofia.

ices should contribute to the economic

development of a poor region that is heavily dependent on migrant support.5

3.4 Towards an equalisation system?

Will MFIs continue to operate in rural

areas if there are better opportunities in

urban areas? Is savings collection a serv5

These transfers offer possible financing for MFIs, yet it has also been observed that the high level of flows and savings they engender is not without problems, as they may also lead to excess levels of liquidity for the institutions that manage them. Indeed, putting migrant remittances through banking circuits may contribute to local development, but it cannot help face the structural economic problems experienced by rural regions of migration which suffer from considerable development constraints.

This carries the risk that some MFIs

microenterprises, means a higher level of

sion to finance the rural sector. This

the possibility of higher unit credit

will lose the sense of their original mis-

underscores the need for an opposition

force based on elected mutual members, a board of directors to ensure

strategies are respected, and the partners and donors which are involved.

profitability can be reached. In addition to

amounts than in rural areas, this establishment in urban areas aims to reduce the cost of financial resources for MFIs by collecting more savings.

exPost ExPost • Summary Notes Series • n° 4 sseptember 2008

4. The Role of Donors

Microfinance may be a tool that can

meet the needs of rural areas, but it is not a panacea and must fall within a development strategy that integrates: land tenure

security, access to water, improving agricultural techniques, infrastructure devel-

opment (crucial to improve flows on the agricultural market, strengthen distribution

circuits and limit the risks in this sector).

However, a strategy to support rural MFIs may be based on the elements described below.

4.1 Diversified support The main areas for support can involve: –

participating in the creation and

expansion of MFIs, notably in countries with low accessibility and few MFIs;

– supporting MFIs in rural areas and in

post-crisis countries;

– developing additional products for

existing and stable MFIs: microinsurance, home loans, migrant services: international and inter-State transfers, home ownership savings schemes;

4.2 Support tools Donors provide a number of tools to

meet the different needs of MFIs at each stage of their development.

• Start-up. Microfinance activities gener-

ally begin as pilot projects. Priority is given

to developing products tailored to the creation of a market for microfinance. Grants help initiate this process without compromising the viability of the institution.

• Expansion. During this phase in which

– conditionally strengthening support

potential market. MFIs often continue to

benefit from grants for their institutional strengthening, but often also resort to

soft loans from donors (such as the

approaches to microfinance. The latter may be seen as one tool that is required for the development of rural areas, yet it is important:

– to build exchanges between the dif-

areas, within the framework of a strateorder to avoid overlaps in production or conflicting price levels in terms of profitability;

– that the different actors, notably

ment that will be replenished by MFI

duct that sets out rules in order to avoid

growth. The aim is to create an instrurepayments in the case of successful projects.

• Consolidation. At this stage MFIs

ner on the basis of a code of good con-

distortions of competition that can weaken these institutions in terms of financial

viability and make them vulnerable to difficulties over the long term.

their operations. Lines of credit can be

mechanisms in order to encourage institutions to turn towards local banks.

• Integration. MFIs are now an integral

concessional financing, or projects

growth. Donors should consequently

not been defined.

divided between several ideological

donors, operate in a coordinated man-

part of the formal financial system. They

where the institutional conditions have

rural) and the way in which the market is

microfinance facility) to finance their

for projects that are not balanced from a

financial point of view, projects subject to

mechanisms for operations (urban,

gy for structured agricultural sectors, in

allocated to local banks or to risk sharing

local currency;

sity of regional contexts, the different

them to monopolise a major part of the

ities and client base, their success allows

tool to manage activity and data trans– developing access to financing in

several institutions because of the diver-

MFIs set out to widen their range of activ-

– strengthening IMSs by using new

fer);

Microfinance generally develops via

ferent continents and geographical

focus on the viability and sustainability of

technologies (mobile telephony may be a

4.3 Regulation

are regulated and can accelerate their operate via equity or quasi-equity investments in these institutions.

Directeur de la publication : Jean-Michel Severino.

Directeur de la rédaction : Jean-David Naudet. ISSN : 1776-1050

Dépôt légal : septembre 2008