Micro-Finance in Rural Communities in Southern Africa pdf

Micro-Finance in Rural Communities in Southern Africa PREPARED FOR THE INTEGRATED RURAL DEVELOPMENT PROGRAM OF THE W.K. KELLOGG FOUNDATION, SOUTHERN AFRICA BY THE HUMAN SCIENCES RESEARCH COUNCIL, PRETORIA Country and Pilot Site Case Studies, Policy Issues and Recommendations Free download from www.hsrc p ress.ac.za Photo Credits pp 1, 24 – Ellen Elmendorp pp 20, 26 – Paul Weinberg (South Photographs) pp 76, 142 – Motlhalefi Mahlabe (South Photographs) Cover by Paul Weinberg DTP and Design by Charlene Bate Produced by Compress in 2002 Free download from www.hsrc p ress.ac.za Contents Executive Summary ________________________________________________________ 1 Chapter 1: Introduction ____________________________________________________ 23 Chapter 2: Determinants of Demand for Financial Services in Three Pilot Studies _____ 29 Chapter 3: Access to Financial Services _______________________________________ 79 Chapter 4: Micro-Finance in Rural Communities ________________________________ 127 Chapter 5: Policy Issues and Recommendations _________________________________ 145 References ________________________________________________________________ 169 Appendix _________________________________________________________________ 173 Free download from www.hsrc p ress.ac.za Glossary ACAT African Co-operative Action Trust ADAF Agricultural Development Assistance Fund AFC Agricultural Finance Corporation of Zimbabwe AFRACA African Rural & Agricultural Credit Association AGRITEX Agricultural Technical & Extension Services BAAC Bank for Agriculture & Agricultural Co-operatives CAP Credit Against Poverty CARE Concerned Americans for Relief Everywhere ITDG Intermediate Technology Development Gap CASS Centre for Applied Social Studies, University of Zimbabwe CBZ Commercial Bank Of Zimbabwe CCDR Corperativa de Credito para o Desenvolvimento Rural CCM Conselho Cristao de Mocambique CGAP Consultative Group to Assist the Poorest CSO Central Statistical Office DGRV Deutscher Genossenschaft und Raiffeisen Verband FCPL Food Consumption Poverty Line FPL Food Poverty Line FRELIMO Frente de Libertaçao de Moçambique GB Grameen Bank GMB Grain Marketing Board GTZ (ISTARN) Gesellschaft fur Technisches Zusammenarbeit (German Development Corporation) (Informal Sector Training and Resource Network) IDDP Initiative for Integrated District Development Programme IFAD International Fund for Agricultural Development ILRP Inhambane Livelihood Recovery Programmes IRDP Integrated Rural Development Programme LSM Living Standards Measurement MDC Movement for Democratic Change Free download from www.hsrc p ress.ac.za MFI Micro-Finance Institution MFRC Micro-Finance Regulatory Council MIS Management Information System MMF Mozambican Micro-Finance Facility MSE Micro and Small Enterprise NASASA National Association of South Africa of Stokvel Associations NGO Non-Governmental Organization NHFC National Housing Finance Corporation PARPA Plan for the Reduction of Absolute Poverty POSB Post Office Savings Bank PPPP Public Policy Promotion Programme RDC Rural District Council RENAMO Resistençia Nacional Moçambique RDDC Rural District Development Council ROSCA Protecting Savings and Credit Associations SACCO Savings and Credit Co-Operative SACI Specialized Agricultural Credit Institution SAFIRE Southern Alliance for Indigenous Resources SBP Sustainable Banking with the Poor SDI Spatial Development Initiative SME Small and Micro Enterprise SMME Small, Medium & Micro Enterprise SOCREMO Sociedade de Credito de Mocambique TCPL Total Consumption Poverty Line USAID United States Aid Agency WKKF W.K. Kellogg Foundation ZAMFI Zimbabwe Association of Micro-Finance Institutions ZANU (PF) Zimbabwe African National Union ZAPF Zimbabwe Agricultural Policy Framework Free download from www.hsrc p ress.ac.za Free download from www.hsrc p ress.ac.za 1 Executive Summary INTRODUCTION The Integrated Rural Development Program (IRDP) is a core initiative in the W. K. Kellogg Foundation Africa portfolio of programmes, which aims to reduce poverty and improve the quality of life of rural communities. A component of this programme is to help capitalise locally based enterprise development initiatives by stimulating the provision of and access to micro-finance in rural areas. Three sites have been selected to pilot the introduction of this and other IRDP activities. These are: Chimanimani (Zimbabwe), Chimoio (Mozambique) and Nyandeni (South Africa). As part of this initiative, the Human Sciences Research Council (HSRC) based in Pretoria has conducted an evaluation in three key sites of the IRDP to evaluate the implications of implementing a micro-finance scheme in these areas. While micro-finance in its various forms has helped to make loan capital more accessible to low-income rural communities, much remains to be done to increase its outreach, impact and sustainability. The essential objective of this study is to make well-researched recommendations for IRDP policy and strategy to enable the micro-finance agents that it will shortly be appointing to maximize improvements in these key indicators in the three pilot sites. Chapter 1 outlines the institutional context and terms of reference of the report and briefly discusses its timeframe, methodology, value and limitations. Chapters 2 and 3 depict, on the one hand, the demand for financial services in the three pilot sites and, on the other, access to micro-finance in the respective communities. Free download from www.hsrc p ress.ac.za In Chapter 4 an account is given of the essential nature and capabilities of micro- finance, of recent developments in this regard, of fundamental lessons from international experience and of best practices in a rural context. Chapter 5 identifies the key sets of policy issues facing, in the first instance, public policy makers seeking to promote micro-finance development and, in the second, donors/investors/wholesalers seeking to support individual micro-finance retailers. It then applies the findings of Chapter 4 to the three on-the-ground pictures sketched out in Chapters 2 and 3 to arrive at some initial and very tentative recommendations for policy for the IRDP in the respective pilot sites. STATUS QUO IN THE PILOT SITES The demand for micro-finance in Chimanimani Chimanimani has been affected by the prevailing political instability facing Zimbabwe recently resulting in a difficult economic environment. This instability involves farm resettlements or invasions, the rule of law increasingly under threat, violence and political intimidation. This has contributed to less formal employment being available throughout Zimbabwe, which has further expanded the average size of households in areas such as Chimanimani, as less migrant work has become available. Over 70% of the population of Chimanimani (110 000 people) live in the communal areas, which have less potential for commercial agricultural production and an increasing pressure on natural resources. Economic activities Chimanimani has extremely varied ecological and climatic conditions. The five agro- ecological zones of Zimbabwe are present in the district, ranging from areas that receive over 2000mm per annum in the Chimanimani mountains to areas that have dry, harsh conditions, which receive less than 300mm per annum. This means that there is extensive variability in agricultural potential and in natural resource endowments. Essentially this means that the major diversity found in Chimanimani should be used by Kellogg and the IDRP to test and refine different options for the variety of agro- ecological zone present. The district has a mixed economy with agriculture being the main economic activity. Agriculture in the communal areas is primarily for subsistence. The District has a dual agrarian system divided between commercial farms (48.5%) and small-scale farming (subsistence) community (51.5%). 2 MICRO-FINANCE IN RURAL COMMUNITIES IN SOUTHERN AFRICA Free download from www.hsrc p ress.ac.za The area is rich in natural resources with a locational advantage in terms of private sector partnerships and cross-border trade. A recent study (June 2001) undertaken by TechnoServe, which was\designed to carry out an assessment of Potential Economic Drivers for the district, details the most attractive economic opportunities as: ■ Fresh fruit production ■ Fruit processing and ■ Tourism ■ Honey manufacturing However, the government and non-governmental organisations’ intervention, which includes income generating activities, has fallen short of exploiting such opportunities. The contributing factors cited include lack of institutional capacity, poor infrastructure, fragmented agricultural production with no value adding, the group focus that does not consider entrepreneurial and management skills, as well as capital and market access. Implications for micro-finance ■ Political and macroeconomic instability has reduced the availability of formal sector jobs and increased reliance on the informal sector. This will have increased the demand for micro-finance (credit and savings) but will also have increased the risk of default on loans. Political instability is a particular problem in Manicaland, in which the Opposition MDC party has strong support. Violence involving the military and police was reported in Chimanimani as recently as mid-October. ■ Most rural households reside in the less fertile agricultural areas. They are nevertheless still heavily dependent on agriculture for income, given the near absence of social security payments, the declining contribution of remittances to household income and the virtual collapse of arts and crafts trade as tourism has evaporated with political instability. But the long period between cash outlays and cash inflow in most sorts of farming makes agriculture difficult to finance with micro-credit. ■ All of the economic activities identified as having greatest potential – fruit growing and processing, tourism and honey production – offer opportunities, directly or indirectly, to small enterprises who will be looking primarily to micro-finance to help meet their capital needs. 3 EXECUTIVE SUMMARY Free download from www.hsrc p ress.ac.za ■ Though little information on local household expenditure patterns has yet been obtained, it can be expected that almost all spending will be for consumption. Income, whether from earnings or from loans, used for this purpose in effect constitutes a small entrepreneur’s/household’s working capital. ■ The rapid increase in the incidence of HIV/AIDS will also have increased the need for access to micro-finance (again both credit and savings) in care-giving households to help them maintain income streams and reduce the pressure to sell assets. But, again, it will have raised the risk of default as well as raising the number of households beyond the ambit of sustainable micro-credit. ■ Most households continue to use formal sector savings facilities. Given the distance and the cost of transport, there is an urgent need for improved informal sector savings alternatives. The location of about 81% of households in rural areas suggests that unit transactions costs will be high for micro-financiers ■ The multiple constraints on economic activity – political/macroeconomic instability, poor infrastructure, low levels of business skills – indicate that, on its own, improved access to micro-finance will have only a limited impact on poverty reduction. An integrated range of interventions is needed for significant impact. Access to Financial Services in Chimanimani ■ Access to credit for micro-enterprises in Chimanimani is very limited. The few formal sector lending institutions that there are, either do not cater for clients without adequate traditional collateral security or do so only for specific needs, such as seasonal agricultural input requirements. ■ Informal sector lenders are reported to be few and, in general, small and weak. In addition, such savings and credit associations as there are – whether co-operatives (SACCOs) or rotating – are confined to lending only to their own members. ■ One registered micro-lender has now begun to operate in about half of the wards in the district, but is also still very small, has yet to prove its viability and lends only to women on a group basis. ■ Especially recalling the substantial and increasing demand for micro-loans from the informal sector, there is an urgent need for a sustainable expansion of micro- lending in Chimanimani. ■ There is also an urgent need for new, more widely distributed and more user-friendly savings facilities – formal or informal. While meeting this need could be articulated 4 MICRO-FINANCE IN RURAL COMMUNITIES IN SOUTHERN AFRICA Free download from www.hsrc p ress.ac.za [...]... the capacities of rural communities to drive their own development in an integrated and sustained manner In April 2001, the IRDP was launched in nine sites in six Southern African countries The programme strives to: s mobilize rural communities to work together, maximizing their institutional capacities to support sustainable development; s in crease commu n ity capacity towards su stain able econ omic... problematic environment for any business to operate in – especially fledgling industries such as micro-finance The net result has been a dearth of financial intermediaries capable of channelling state or donor capital injections widely but sustainably to micro-enterprises, especially in rural areas This is a particularly difficult time in which to launch a new micro-finance initiative, but also a particularly... of households in rural areas suggests that unit transactions costs will be high for micro-financiers Access to Financial Services in Nyandeni s South Africa has a large, well established rapidly expanding micro-finance industry However, the centre of gravity of the industry is firmly in urban areas, in consumer finance and in the salaried employee market s Though as much as 35% of micro-finance activity... countries and sites, noting especially factors facilitating or constraining the expansion of micro-finance services in rural areas; s to assess the degree to which the need for access to adequate and appropriate financial services – in particular micro-lending – is being met in the three sites; s to review international experience in respect of rural micro-credit, highlighting key policy and strategy... suggestions for reporting requirements Characteristics to guide MFI selection The following defining characteristics are listed, which should be applied with discretion Free download from www.hsrcpress.ac.za where the micro-finance industry has not yet established itself on a firm footing, as is arguably the case in Zimbabwe and Mozambique and, in certain respects, also in rural South Africa s Institutional... F R I CA s The rapid increase in the incidence of HIV/ AIDS will also have increased the need for access to micro-fin an ce (again both credit an d savin gs) in care-givin g households to help them maintain income streams and reduce the pressure to sell assets But, again, it will have raised the risk of default as well as raising the number of households beyond the ambit of sustainable micro-credit... more accessible to low-income rural communities, much remains to be done to increase its outreach, impact and sustainability The essential objective of this study is to make wellresearched recommendations for IRDP policy and strategy to enable the micro-finance agents that it will shortly be appointing to maximize improvements in these key indicators in the three pilot sites In keeping with the overall... yet been obtained, it can be expected that almost all spending will be for consumption Income, whether from earnings or from loans, used for this purpose in effect constitutes a small entrepreneur’s/ household’s working capital s The rapid increase in the incidence of HIV/ AIDS will also have increased the need for access to micro-fin an ce (again both credit an d savin gs) in care-givin g households... assist the creation and sustainability of rural livelihoods, such as early childhood, health and local government programmes and partnerships The initial focus of the PPPP is on containing the spread of HIV/ AIDS in rural communities, and ameliorating its impact, as well as the promotion of micro-finance 1 1 1 Objectives Free download from www.hsrcpress.ac.za While micro-finance in its various forms has... learned, in the first instance, about the demand – existing and expected – for Free download from www.hsrcpress.ac.za micro-finance and, in the second, about the current nature and level of access to financial services – in particular micro-finance – in each of the sites 27 28 Free download from www.hsrcpress.ac.za Free download from www.hsrcpress.ac.za 2 Determinants of Demand for Financial Services in . activities and informal business. 6 MICRO-FINANCE IN RURAL COMMUNITIES IN SOUTHERN AFRICA Free download from www.hsrc p ress.ac.za The expenditure patterns evaluated indicate that the main financial. rapid increase in the incidence of HIV/AIDS will also have increased the need for access to micro-finance (again both credit and savings) in care-giving households to help them maintain income. estimated to take place in rural areas, the overwhelming bulk of it is through informal sector savings groups. Micro- 10 MICRO-FINANCE IN RURAL COMMUNITIES IN SOUTHERN AFRICA Free download