During the 1960s and 1970s the key issue in agriculture and rural development was agricultural production. Agricultural credit was but an input, next to improved seeds and seedlings, fertiliser, pesticides, tools and machines. The target group were farmers. The issue was how to disburse agricultural credit to farmers. The funds were provided by governments and donors. Disbursement mattered, not repayment. The main disbursement channels were agricultural development banks and projects. Agricultural credit was a service, not a business.
The strategy had much to show: the green revolution, driven by technology, financed on credit, with subsidised interest rates. The produce was purchased by government at guaranteed prices. So impressive was the business of the green revolution that the business of the financial service was ignored. But when farmers didn't repay their loans, the banks didn't cover their costs and the governments ran out of money to finance the subsidies, the banking business finally failed, and so did the service. Meanwhile, populations continued growing, increasing numbers of rural people could not live on agriculture alone. To survive they had to engage in numerous activities: on-farm, off-farm and non-farm. Rural households and rural economies got increasingly diversified. Access to finance was the limiting factor.
Agricultural credit had been exclusive. It excluded all those who didn't own and till the land: labourers, micro-entrepreneurs, traders, women and large numbers of smallholders too poor to pay the bribes and too uneducated to do the paperwork. The unsatisfied demand prepared the ground for a revolution on the supply side: microfinance. Perhaps this should be called the blue revolution, blue being the bankers' colour. The new emerging issue was now how to link microfinance to rural entrepreneurs: through inclusive financial systems development.
Due to the overall failure of capital transfer and government directed credit during the 1960s and 1970s, the emphasis in development policy shifted:
- From targeting bigger farmers and SMEs to inclusive finance, including micro-entrepreneurs, women and the poorer segments of the population - From development banks and, subsequently, credit Non Governmental Organisations (NGOs) to (rural) financial system development with a conducive policy framework and the building of self-reliant, sustainable institutions - In rural areas from agricultural credit to rural financial services for a diversified economy - From development banking to microfinance

So, what is microfinance? The Syngenta Foundation Discussion (SFD) indicates that concepts of microfinance vary widely, with significant implications on development strategies. Many reduce microfinance to microcredit or microfinancing, associating the recent microfinance movement with the socalled microcredit revolution spearheaded by credit NGOs during the 1970s. Given the recent popularity of the concept of microfinance, many players have redefined the concept for their own purposes, bringing it close to the point of meaninglessness. Some have reduced its meaning to such concepts as microcredit, credit NGOs, group finance or Grameen banking.

 

A bias to credit for the poor or very poor is widespread. Statistics on microfinance institutions (MFIs) frequently continue to reflect the old bias to credit NGOs. The fact is widely ignored that in many countries agricultural development banks (AgDBs), various types of rural banks and savings and credit cooperatives continue to be the largest providers of microfinance services in rural areas.

 

However, the term microfinance was first introduced in 1990 with the specific connotation of encompassing microcredit and microsavings as well as other financial services, in response to Robert Vogel’s claim that savings were the forgotten half of rural finance. While the term is new, the concept is old if not ancient, with institutional origins for instance in European countries in the 18th and 19th century, Nigeria in the 16th century and India around 1000 BC.

 

This has resulted in a more general concept brought forward in the SFD: Microfinance is that part of the financial sector which comprises formal and informal financial institutions, small and large, that provide small-size financial services in theory to all segments of the rural and urban population, in practice however mostly to the lower segments of the population.

This bias is partly due to self-selection of clients and partly to the mandate of institutions according to the will of their owners or donors. Worldwide formal and semiformal Rural Microfinancing Institutions (RMFIs) are in the hundreds of thousands; informal institutions are in the tens of millions. Sustainability is nothing new; without it the large numbers of informal MFIs could not have survived.

 

Size of financial services is relative and varies widely by the economic development of a country; rigid definitions of size can lead to exclusion and unintended consequences. Microfinance covers a wide array of microfinance institutions (MFIs), ranging from indigenous rotating savings and credit associations (RoSCAs) and self-help groups to financial cooperatives, rural banks and community banks as well as non-bank financial institutions (NBFIs) including credit NGOs, all the way up to development banks and commercial banks. They may also comprise moneylenders and private deposit collectors. In contrast to microcredit, microfinance proper refers to a system of financial intermediation between microsavers and microborrowers; it may further include microinsurance and other financial services such as money transfer.

The two concepts have widely different implications for development strategies and have practically divided the microfinance community, particularly the practitioners, into two camps:

 

Advocates of microcredit for the poor, with an emphasis on donor funding and capital transfer from developed countries with little
concern for legal status, prudential regulation and supervision – quite pronounced during the 2005 Microcredit Year of the UN and in the Millennium Development Goals agenda

Advocates of financial systems development and sustainable microfinance institution building, who argue that only healthy and self-reliant institutions will be able to provide sustainable financial services to the vast numbers of the rural and urban poor, but to attain that objective may have to serve a differentiated market of poor and non-poor and will require legal status, appropriate regulation and effective supervision

The concept of microfinance is thus not tied to size nor type of institutions; least of all can it be reduced to credit NGOs or Grameen banking. There are three worlds of finance, each with a great potential to increase outreach to the microeconomy, in which players such as the Syngenta Foundation may intervene in different ways:

– The old world of donor-driven development finance comprising development banks, state cooperatives and credit NGOs which all need to be transformed into sustainable institutions

 

– A new world of microfinance, comprising viable formal and semiformal institutions with a commercial orientation, which do not, or not fully, rely on donor support for survival and expansion

– An ancient or indigenous world of informal finance including recent innovations, based on principles of self-reliance and viability, with a potential for innovation, upgrading and mainstreaming.

 

There are numerous developments in RMF. This had led Malcolm Harper to make the statement that “rural microfinance is pretty well established, and growing fast, and sustainably.” This leaves just two questions which he considers subsidiary to the more general SFD:
(1) How (if at all) can (or should) MFIs extend their products so that they can provide larger loans to mainly male-owned and employment generating business enterprises, so that rural people can break out of poverty and rural MF can go beyond the much needed sticking plaster survival enhancement role it is playing right now? (2) Related to the above, how can MF satisfy the needs of on-farm investment, short and long term that it presently fails to do?

 

In the majority of countries, there are still major shortcomings that call for country-driven, coordinated interventions. E.g. Quiñones lists the following major factors which constrain the
access of microenteprises to financial institutions:
(i) limited track record – most micro-enterprises do not have either a deposit account or a loan account with any financial institution
(ii) lack of acceptable collateral – banks require real estate or tangible assets as collateral. Assets in the possession of rural entrepreneurs such as work animals, shareholding contracts with the landowner or a thatched-roof house are not acceptable as security for the loan.
(iii) inadequate financial records and reports– rural entrepreneurs do not keep or maintain financial records of their transactions. They have no financial statements and, in many cases, no declaration of income tax returns either.
(iv) absence of business plans - rural entrepreneurs are not in the habit of preparing a written business plan, as is often required by formal lenders.
Donors with their projects are found in both the old and the new world; but there is an overall move from the old world of supply-driven development finance to the new world of demand-driven commercial finance. The ancient or indigenous world of informal finance has been largely ignored.

History has shown according to the SFD that, regardless of ownership, type of institution, and rural or urban sphere of operation, to be sustainable MFIs ultimately have to:

– Mobilise their own resources through savings and equity, augmented by other domestic resources
– Recover their loans
– Cover their costs from their operational income
– Finance their expansion from their profits
– Acquire an appropriate legal status
– Submit to appropriate regulation and supervision

There is no place for charity in microfinance. As one contributor to the SFD put it, “in a situation where there is no strict supervision and monitoring…, working without any hard budget constraints and mixing microfinance business with charity, (will lead to) crowding out the operations of more sustainable rural financial intermediaries.”

From the Philippines Quiñones describes a strategy involving the People’s Credit and Finance Corporation (PCFC), an apex organisation wholesaling funds to microfinance-oriented rural banks specifically for the purpose of retailing loans to rural entrepreneurs.

 

The PCFC wholesale funds have enabled rural banks to create a clientele base and establish an operational institutional delivery mechanism ahead of local resources mobilisation. When the number of the rural bank clientele reached a critical mass (1,000 clients in the case of the Producers Rural Banking Corporation in Central Luzon), deposit mobilisation rose in importance as a source of loanable funds and eventually made the microfinance operations sustainable.

 

A relevant lesson from the financial linkages strategy is that microfinance institutions (MFIs) need start up funds to penetrate areas/sectors not served by traditional banks but such funds should be prioritised for use by MFIs with savings mobilisation capabilities inasmuch as they are in a better position to make their operations among the poor/rural entrepreneurs sustainable.

 

One of the crucial factors of success of the Philippine financial linkages is the adoption of microfinance performance standards. Performance criteria include portfolio quality, cost effectiveness, financial self-sufficiency, and outreach which significantly affect the sustainability of MFIs.

 

The setting up of standards leveled off the microfinance playing field for all types of financial institutions. Given the microfinance standards, it no longer matters whether one is a traditional bank or an NGO to be able to provide microfinance services to the poor. The most important thing is that the MFI passes the standards, and when it does, it enjoys the privilege of accessing wholesale funds from PCFC.