Not much has been written about specific microfinance programmes for fisheries because they are usually subsumed in the overall discussion of microfinance for the rural poor. But while the concepts and principles of microfinance have a general applicability, there are particular considerations that are unique to fishing communities that may require special attention. The guidelines try to address these concerns while adhering to the generally acceptable “best practices” in the microfinance industry. However, the guidelines are by no means comprehensive and definitive since the microfinance field is still evolving and “best practices” change in response to changing contexts and environments. As mentioned in the introduction, the guidelines on microfinance in fisheries and aquaculture are complementary to the management guidelines on revolving loan funds and credit programmes for fishing communities first published by FAO in 1989.
The guidelines provide general principles and basic considerations for those involved in providing microfinance services to the fisheries sector or for those who intend to include fishing and fish farming communities as part of the client base of their operation. The focus is on credit and savings since these are the areas where donor support is concentrated. Because of the diversity of the demand for and suppliers of microfinance services, the guidelines do not prescribe nor subscribe to a particular methodology or an institutional mechanism but present options with the most relevance to fishing communities. The overall objective is for those concerned to tailor lending methodologies and procedures appropriately so that they best serve the financial needs of the fishing and fish farming communities concerned.
The emergence of microfinance as an alternative financial delivery mechanism was a response to the failure of past efforts by government and international agencies effectively to provide financial services to the poor. Subsidized and directed credit programmes implemented in the 1980s were saddled by poor loan recoveries, inefficiencies and high transaction costs, among others. This led to the piloting of bold experiments and new approaches utilizing market-based solutions to reach the majority of the poor who had been excluded from formal credit sources. From rapid disbursements of subsidized loans to target sectors and populations, the focus was shifted towards setting up and building local institutions that catered for the poor. This resulted in the emergence of microfinance institutions (MFIs)[2] that serve the poor. MFIs initially started out by providing microcredit but have now broadened their services to include other financial products. This is in recognition of the diverse demand of poor and low-income households for other financial aids such as safe and reliable deposit services.
The mechanics of a microfinance operation basically involve three levels: i) the borrowers who take out loans that they invest in microbusinesses; ii) the loan delivery and recovery system; and iii) the institution or organization that manages the delivery system. The successful operation of these levels is premised on the twin principles of client discipline, where borrowers take responsibility for their decisions and agreements made with the MFI; and institutional discipline where MFIs offer and provide products and services characterized by quality, efficiency and commitment.
A core principle that has been proved by successful microfinance programmes is that the poor have the capacity to repay loans, pay the real cost of loans and generate savings. And while the field of microfinance is diverse in its approach, methodology, organizational structure and culture, there are clear principles that are being established. These are summarized in Box 1. These principles are further clarified and elaborated upon in the following sections.
In addition to the principles shown in Box 1, the special characteristics of fisheries and aquaculture make it necessary to include two more principles - timeliness and linking microfinance to training and extension. Both capture fisheries and fish farming have distinctive seasons, i.e. fishing and fish culture seasons, which are related to the natural behaviour of fish and other aquatic species as well as to fisheries regulations. Therefore, production inputs and supporting credit must be available at the exact time when they are needed, otherwise the potential earnings from a particular fishing or fish culture season are endangered.
Both capture fisheries and fish farming require considerable vocational skills. In the case of the rural or urban poor who take up fishing as a new occupation or who want to make their fishing and fish farming activities economically more efficient and will use microfinance programmes in support of this purpose, proper vocational training and advice are crucial for the success of their endeavours. This is also made clear in the two case studies in Part IV of this publication.
The delivery of financial services to the poor is affected by a host of factors. At the macro level, Ledgerwood (1999) identified the contextual factors given below as important in placing microfinance in the overall country context.
3.1.1 Financial sector policies and the legal environment
Interest rate ceilings and restrictive usury laws, given the cost structure of microfinance, usually undermine the ability of an MFI to operate efficiently and competitively. To allow for full cost recovery, MFIs need to price their loan products and must charge higher interest rates. Government mandates that support certain sectors through subsidized interest rates discourage the emergence of viable MFIs. A clear legal framework for enforcing repayment is useful in a microfinance operation when clients do not adhere to their agreements.
3.1.2 Financial sector regulation
This refers to the principles, rules, standards and compliance procedures that apply to financial institutions. Financial supervision involves the examination and monitoring of organizations for compliance with financial regulations. MFIs that mobilize public savings require regulation; however, as they differ significantly from commercial banks in their institutional structures, a conventional banking sector regulatory framework may not accommodate microfinance operations appropriately. Governments considering regulating the microfinance sector must understand what is involved and how the MFIs will be affected. However, the temptation and the “rush to regulate” may undermine the success of MFIs. Regulation may be required at a critical mass or size when failure would have consequences that reach far beyond owners and creditors.
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BOX 1 Principles of financially viable lending to poor entrepreneurs Principle 1. Offer services that fit the preferences of poor entrepreneurs These services could include the following:
Principle 2. Streamline operations to reduce unit costs
Principle 3. Motivate clients to repay loans Substitute for pre-loan project analysis and formal collateral by assuming that clients will be able to repay. Concentrate on providing motivation to repay such as:
Principle 4. Charge full-cost interest rates and fees The small loan sizes necessary to serve the poor may result in costs per loan requiring interest rates that are significantly higher than commercial bank rates (although significantly lower than informal sector rates) Source: Rhyne and Holt, as cited by Ledgerwood, 1999. |
3.1.3 Economic and social policy environment
Any microfinance operation needs to examine a country’s economic and social policy environment. Policies that affect the rate of inflation, growth rates, the stability of financial and other markets, investments in and the presence of infrastructure and social services, all affect the ability of an MFI to provide financial services.
MFIs differ significantly from commercial banks in the risk factors they face, particularly in terms of the client base, lending models, ownership, management and governance. An assessment and understanding of the above factors will therefore influence how effectively MFIs are able to reach their clients.
In most parts of the world, fishing communities are often poor, geographically isolated and have little access to basic social services, including affordable financial services. The mutually reinforcing issues of resource depletion and persistent poverty have relegated small-scale fishers to being one of the most economically and socially disadvantaged groups in many societies.
If microfinance is to achieve its development goal of servicing the financial needs of unserved or underserved markets such as fishing communities, there must be a recognition and understanding of the community’s unique characteristics. These include a wide range of sociocultural and demographic characteristics and arrangements within fishing communities, fishers’ capacity to service debt, the estimated market size of the target community for financial services and the type of microenterprises and activities, including the level of development of the enterprises to be financed through microfinance. A determination and understanding of the local microcontext where microfinance operates ensure the design of appropriate financial products and services that meet the needs of fishing communities.
3.2.1 Sociocultural and demographic characteristics of fishing communities
The importance of a thorough understanding of the sociocultural context in fishing communities is made more critical in microfinance because it requires strong social bonds among the borrower groups to enforce discipline to repay loans. Peer group monitoring and group guarantee schemes, among other features of microfinance, all depend on strong social and organizational environments to succeed.
An FAO-commissioned study that formed part of The State of World Fisheries and Aquaculture 2000 (FAO, 2000a) identified some of the most important and common cultural characteristics of fishing communities. The following may be useful when considering the design of microfinance services for the sector.
Fishing communities undertake small-scale capital commitments and levels of production and have limited political power. This makes them vulnerable to external threats, especially the large-scale fishing sector.
Fishing communities are dispersed along coastlines and, because they depend mainly on marine ecosystems that are close to home, they are particularly vulnerable to resource depletions.
The nature of the ecosystems and the particular species that are exploited are important determinants of many cultural characteristics, including the social and economic organization and the fishing gear and technologies that are utilized.
The various fishing occupations that community members pursue will be interwoven through the whole fabric of a community’s culture.
There is a systematic division of labour according to both gender and age, with corresponding role expectations regarding men, women, children, adults and the elderly.
In most communities, the primary producers are men, while women are expected to play a dual role: as mainstays of their household and children, and as mainstays of fish processing, marketing and distribution systems.
Access to credit and insurance is problematic in most small-scale fishing communities and constrains fishing effort and production.
Contemporary small-scale fishing communities are increasingly stressed by external problems, including expanding globalization, marine pollution and, in some regions, the growth of a coastal tourism industry.
As there are a variety of socio-economic subgroups in fishing communities, there is a further need to identify properly the subgroups most in need of financial services to support their enterprises.
Apart from common sociocultural characteristics, important demographic and socio-economic changes have taken place in recent years in coastal fishing communities and these need to be taken into account in the design of microfinance programmes for the sector. Studies carried out in the context of a United Nations Population Fund (UNFPA)-funded and FAO-executed project in the Philippines, Malaysia, Bangladesh, India, the United Republic of Tanzania and Senegal as well as a review of national fisheries and population statistics, show that during the two decades from 1970 to 1990, the number of fishers and aquaculturists more than doubled, growing more quickly than the world’s population.[3] The total number of fishers, including those involved in marine and inland fisheries and aquaculture, increased from 12.5 million in 1970 to 29 million in 1990. During the 1990s, however, increases were much smaller than in previous decades and the total number of fishers and aquaculturists is estimated to have reached about 30 million in 1997.
As far as coastal fishers are concerned, the increases in their numbers were both a result of population growth and of migration to coastal fishing and contributed to the overexploitation of local fisheries resources and deterioration of the coastal environment.
The studies carried out by FAO also revealed that contrary to the assumed global trend, the number of coastal fishers has recently started to decline or stagnate in four of the countries studied, while it is still increasing, although more slowly, in the other two. Also contrary to commonly held views, levels of fertility and infant mortality in fishing communities were found to be similar and not much higher than those in farming communities. However, adult mortality data seem to indicate that living and health conditions in fishing communities could be worse than average, in particular for women.
Investigations into occupational change within and between generations suggest further that artisanal fisheries are no longer a “last resort employment” for people in some coastal areas. Artisanal fisheries are one of a number of income-earning opportunities, including some outside the fisheries sector. In a number of countries, government policies aim at a reduction or limitation of fishing effort and at conservation or rehabilitation of fisheries resources. Such policies affect the options of fishing households in coastal areas regarding income opportunities and may take them out of their traditional main occupation.
Fishers are generally aware of the decline of fisheries resources and the deterioration of the coastal environment. They are also aware that an increase in their numbers has contributed to the present state of affairs, together with the intrusion of industrial fisheries in coastal waters and with industrial pollution. Fishers in the villages studied see an urgent need to introduce effective policies and measures for the management and conservation of fisheries resources and coastal environment and are keen to participate in their implementation.
A transition in attitudes regarding both family formation and future livelihoods is visible among the younger generations. A modernization of marriage and fertility norms is under way. As for fisheries, like farming they are no longer seen as a promising long-term option.
3.2.2 Service debt capacity and market size
Microfinance is primarily a cash-based operation. Frequent repayments associated with successful microfinance programmes require borrowers to generate enough cash to repay the loan on time. This in turn involves a determination of a client’s capacity to repay the loans without running the risk of insufficient cash flow that would consequently lead to defaulting on the loan. In fishing communities, fishing is a seasonal occupation and income streams from it; other related activities may not be as regular. During peak fishing seasons, on the one hand, cash is earned almost daily, while almost no income is earned during off-seasons.
In fish farming, on the other hand, particularly in the case of small-scale operations, the bulk of income is earned when the main harvest of the fish pond occurs, while during the initial months of the production cycle, hardly any cash income is realized. Corresponding adjustments on repayment schemes have to be considered.
An estimation of the market size for microenterprises and their products must be made to ensure that enough demand for financial services exists, thereby ensuring the long-term sustainability of microfinance operations.
3.2.3 Types of projects and microenterprises to be financed
Experience shows that microcredit best serves those who already have identified or existing microenterprises but who need financial services, either to expand or build up their asset base. Extremely poor people who do not have any stable source of income are not suitable microfinance clients, as they will only be pushed further into debt by loans that they cannot pay.
The type of economic activities and the level of development of the microenterprises to be financed will further define the types of products and services appropriate for the market.[4]
Microfinance is a segment of the overall credit and other financial services that are being provided in the fisheries and aquaculture sector. For this reason, it needs to be seen in the overall context of credit and investment in fisheries and aquaculture.[5]
The fishery industry regularly invests in the modernization or replacement of fishing craft and gear, fish aggregating devices, navigational and safety equipment, equipment for onboard preservation and handling of catch, onshore facilities, fish processing plants and facilities, purchase of raw materials, fish transportation and marketing facilities, the promotion of fishery products, construction and repair of fish ponds and fish farms, fingerlings, fish feed, pond fertilizers and other items.
Part of the investment funds comes from savings within the industry or from informal sources of credit such as fish traders and processors. These sources, however, particularly in developing countries and even more so in the case of poor fishers and fish farmers, are not sufficient to meet increasing investment needs.
First, informal sources are limited regarding the type of credit they supply since they generally meet short-term credit needs rather than medium- and long-term financial requirements. Second, their terms of finance are often disadvantageous for fishers since they charge high rates of interest and credit is frequently linked to unfavourable terms of trade and the establishment of exploitive relationships.
This situation is particularly severe in the case of poor fishers and fish farmers since their indebtedness to moneylenders, in many cases, is one of the underlying causes of their poverty and a main obstacle to their escaping from it.
The ability to generate enough savings within the sector is seriously hampered by the fact that income patterns in fisheries are unpredictable and rarely match the needs for investments. Moreover, low profitability and poverty, particularly in the case of small-scale fisheries in many developing countries, make it difficult if not impossible to meet investment requirements originating from structural changes in the industry and processes of adaptation to these changes.
More important, the introduction of responsible fishing practices and the implementation of measures for the rehabilitation and conservation of fisheries resources and the coastal environment require further credit support to facilitate related investments. These are needed for the diversification of fishing effort away from overexploited and heavily exploited resources to less exploited ones; in support of occupational shift from capture fisheries to aquaculture or to occupations outside the fisheries sector; for the generation of self-employment opportunities for women in fishing communities; for the promotion of value-added processing and marketing with the objective of making better use of scarce or currently underutilized resources; and for a transition to sustainable, environmentally friendly and organic aquaculture practices.
Without appropriate institutional credit arrangements, an important link is missing in the fishery industry and the optimum utilization and allocation of human and marine resources and capital in the fishery industry are hampered. This applies to medium- and large-scale credit programmes as well as to microfinance and microcredit programmes.
All credit and finance programmes need to be designed so that they fulfil the criteria of timeliness, simplicity, flexibility and demand orientation and meet the actual needs of the fishery industry. Such programmes also need to be financially viable and sustainable to encourage the growth of economically and financially viable fishery enterprises without contributing to the overcapitalization of fisheries with resulting overexploitation of fisheries resources. This again applies to large- and medium-scale enterprises as well as to microenterprises.
While fisheries credit programmes, as a rule and for the above reasons, should not be subsidized but instead incorporate terms and conditions comparable with those of commercial lending operations, there can be exceptions under certain circumstances, such as the use of subsidized interest rates, waivers of collateral requirements and extension of loan repayment periods.
These circumstances may arise when there is a need to facilitate a shift from nonsustainable to responsible fishing practices and for diversion and reduction of fishing effort which result, in the short term, in an increase in the cost of fishing operations and a decline in revenue. They may also arise in the following situations: i) when an occupational shift of fishers out of fisheries because of overfishing, for example, needs to be supported; ii) when fisheries in structurally disadvantaged regions and regions where poverty poses a problem need to be developed; and iii) when special support for the artisanal fisheries sector needs to be provided to safeguard the sector from the negative impacts of globalization and other similar conditions.
The field of microfinance is diverse because it is still evolving. In terms of methodologies, there is no single model appropriate for all situations and therefore each model must be adapted to the local context to fit and reflect local needs.
There are two broad categories of credit delivery in microfinance, based on how loans are delivered and guaranteed. These are individual and group-based approaches. Individual lending is credit provision to individuals who are not members of a group that is jointly responsible for loan repayment. As it is documented and asset-based, lending is provided to individuals based on their ability to give the MFI assurances of repayment and some form of collateral, or a willing co-signer. As such, individual lending may have limited relevance to small-scale fishing communities, although it can be appropriate for production-oriented and medium-scale small businesses in fish farming and aquaculture.
Group-based lending may have a more practical applicability for small-scale fishers and fish farmers. This involves lending to groups of people, either to individuals who are members of a group who guarantee each other’s loans, or to groups that subloan to their members. Group formation is an essential component of group-based lending and the use of peer pressure from other group members acts as a collateral substitute as well as a repayment incentive. Group lending may also reduce transaction costs and risks because of internal group monitoring and screening.
Group-based approaches have many variants and can take different forms. The specific lending technology is thus dictated by how the various models are put in practice. Lending technology is generally defined as the entire range of activities carried out by an MFI or the groups themselves in delivering credit. It involves activities from borrower selection, determination of loan terms and conditions for loan monitoring and recovery.
The following sections describe just three of the group-based models, differentiated by the role played by the groups in the lending process.
Self-help groups (SHGs) are prominent in this model. Essentially a member-based group, an SHG is a small, socially and economically homogeneous group composed of 15-20 members who voluntarily come together for mutual benefit and support. It is a self-managed group that practises collective leadership and decision-making in credit management, including the determination of loan size, interest rates to members and repayment periods and rates. The group also decides on its savings policies whereby members agree to save small amounts on a regular basis. Groups usually lend among themselves, initially using their savings, before obtaining external finance. In this model, loans are made to the group by the MFI, which acts as a sort of SHGpromoting institution. Because of the relative homogeneity of members, default risks are minimized. Members are familiar with each other, allowing for a fairly reliable source of information on potential loan diversions and defaults.
This model is also referred to as solidarity group lending. From four to seven group members collectively guarantee each other’s loans, thus replacing traditional collateral requirements. Borrowers are small businesses and microbusinesses in need of small, short-term working capital loans. In fishing communities, fish vendors and traders could benefit from this kind of model. Group formation consists of an initial training course focusing on the responsibility of joint liability. Loan approval by the credit officers of the promoting MFI is based on the group’s application. Loan disbursements are made to the group leader who then distributes the loan to individual members who usually receive equal amounts. Access to subsequent loans is dependent on successful repayment by all group members and can be increased depending on the ability of the borrower to take on a larger loan amount. Savings are usually required as a portion of the loan. Interest rates charged are relatively high.
Exemplified by the Grameen Bank model, peer groups of five members, composed mostly of women, are organized and incorporated into village centres of up to eight peer groups. Membership is limited to people who live in the same village and who have similar economic resources. A chairperson is elected in each group who is responsible for the group’s discipline. Weekly meetings are mandatory, as are weekly savings and group fund contributions. Group members perform loan appraisal. Access to loans is phased where two members initially receive the loans and subsequently to two more members after successful repayments. No collateral is required as group members mutually guarantee each other’s loans. Progressive loan sizes are also provided. The Grameen Bank model has been replicated globally but incorporating adjustments to adapt to the local context.
Flexibility and suitability for client demands and needs as well as responsiveness to changing environments characterize viable microfinance programmes. The following offer some basic considerations.
Direct targeting of specific groups or sectors, such as fishing and farming communities, has its own usefulness although there is also the disincentive of imposing some eligibility criteria. Most microfinance programmes prefer indirect targeting because products and services are aimed at people who require the services and not at particular groups that fit a specific profile. However, the many variants of group-based lending models that do not directly target specific groups have an implicit borrower self-selection criterion. Member-based groups are relatively homogeneous in terms of economic resources and standing in the community. Their similar backgrounds and the economic activities they are engaged in lend easily to group formation essential in these models. This also applies in fishing and fish farming communities where low-income and small-scale fishers (both men and women) are the appropriate target groups. Poverty and income levels could be used as criteria but there is a considerable variation in countries as to what and who constitute the poor. The consideration of who are the poor and the level of income to be used as eligibility criteria should be dependent on country and local contexts.
5.1.1 Targeting women
Globally, women constitute the majority of microfinance clients, primarily because of their better repayment records. This also makes them a particular target group for microfinance activities in fishing communities.[6] It is recognized that women play an important role in fishing communities, encompassing social and economic responsibilities and duties, both within and outside their households. Women are involved in productive activities directly related to fisheries production, processing and marketing as well as in non-fisheries livelihood activities that are very important in augmenting household income during periods of scarcity and seasonality often experienced in fishing communities. Because of women’s multiple roles and demands on their time, they are more involved in trading/vending and marketing activities to generate continuous earnings to make up for the seasonal nature of their husbands’ incomes. Loan size requirements are small, which makes them appropriate clients of microfinance. Other features of microfinance, such as no collateral, easy documentation requirements and simplified procedures benefit women who have had to face some barriers to access credit in the past. Women’s involvement in microfinance has been shown not only to benefit them personally but their households and the community as well. Because they spend more of their income on their households, the welfare of their families is enhanced, thus generating a multiplier effect. Targeting women in microfinance programmes in fisheries is like investing in their empowerment and improving the well-being of their families and communities.
Global experience has demonstrated that subsidized interest rates are not financially sustainable. Borrowers have been found to be more concerned with access to credit issues than the cost of the service; thus they are generally not sensitive to interest rates. Fishers, themselves no strangers to informal credit arrangements that offer high interest rates, are concerned with MFIs that can offer efficient, flexible and convenient credit services. Therefore, a balance between a market-based interest rate regime that allows the MFIs to cover all their costs on the one hand and what the clients can afford and what the market will bear, on the other, must be reached.
Market-based interest rates charged on loans should be based on the MFI cost structure. For mature MFIs, effective interest rate calculations include all direct financial costs that are composed of the following items.
Financing and capital costs - the actual cost of MFI funds when the MFI funds its portfolio with savings, commercial debt and equity. As most MFIs initially fund their portfolios with donated funds or equities, adjustments have to be made to account for these subsidies. Capital costs vary according to the market rate of interest and the inflation rate prevailing in the country.
Operating costs - the annual recurrent costs incurred to run the credit service and include salaries, rents, utilities, depreciation and other administrative expenses.
Loan loss provision - the amount provided to cover expected defaults of the loan portfolio.
There are several methods of calculating effective interest rates, as there are many loan variables that affect them. As such there are also different interpretations. It is thus important for an MFI to follow accepted accounting and auditing principles as well as performance standards that are available and being promoted by some donor agencies and other more established microfinance providers.
Loan amounts should, in principle, be based on the loan purpose and the borrower’s absorptive and debt capacities. Successful group-based lending usually starts with small loans, gradually increasing based on repayment history. Loan sizes vary from less than US$100 per borrower to a certain maximum amount. MFIs differ in offering credit limits but these are generally dependent on the capacity of the MFI to assume risk. In some countries, the law defines maximum amounts.[7] Some MFIs have started to introduce individual loan products for borrowers who have graduated and have the capacity to take on bigger loans for a growing microenterprise.
In fishing and fish farming communities, there is a demand for both working capital and fixed asset loans for fishery-based activities. For small-scale fish farming activities, working capital will be used to purchase production inputs such as fish seed, fingerlings and fish feed and for other production and marketing costs. In fishing, working capital to finance small-scale operations for inputs such as fuel and food for the crew and small fixed asset loans for the purchase of nets and small fishing equipment will be needed. In fish marketing and fish processing activities that are carried out mostly by women, loans for raw materials and trading advances as well as small-scale equipment for fish marketing and fish processing purposes will require both working capital and fixed asset loans. However, loans should not be limited to fishery-based activities only but to other livelihood opportunities that are available to members of the fishing communities. The guiding criteria for both fishery and non-fishery based projects should be the viability and profitability of the chosen economic activities.
The loan term and frequency of loan repayments should ideally be based on the borrower’s cash patterns. Microfinance loans are generally short-term, ranging from less than a year to two years, since most loans are small and are used for working capital purposes.
For most MFIs, repayments are made on an instalment basis (weekly, biweekly, monthly) for activities that generate ongoing revenues. In fishing communities, this would be appropriate for fish marketing and trading projects. For seasonal activities, such as in aquaculture and fish farming, where expected revenues are realized at harvest time, lump sum payments would be appropriate. There can also be variations where a combination of instalment and lump sum payments are made so that borrowers are not unduly burdened.
The design of repayment periods also depends on the ability of the MFI to collect and ensure repayments. The location and proximity of the MFI to the borrowers so that credit officers are able to make frequent visits to the clients and vice versa are also critical considerations. Whatever the design of the repayment schedule, the basic rule is that it should correspond to the income derived from the activity financed by the loan and therefore loan terms and repayment periods must be flexible enough to meet the client’s needs.
Fishing households, as in any poor household, save to manage risk, reduce their vulnerability against natural disasters and other emergencies, smoothen consumption during off-seasons, and for investment and many other purposes. That the poor have the capacity and willingness to save has been borne out by the success of informal saving schemes in mobilizing savings. There is, therefore, a demand for savings services for the poor that are safe, secure, convenient and liquid.
There are two kinds of savings services provided by MFIs: compulsory and voluntary savings. Compulsory savings are funds contributed by borrowers as a condition for receiving a loan. They are held either as a percentage of a loan or a nominal amount contributed to group funds. They are generally not available for withdrawal while a loan is outstanding, thus acting as a form of collateral as well as serving as an additional guarantee mechanism to ensure loan repayment. The premise underlying compulsory savings is that borrowers must learn financial discipline and therefore must be taught how to save. The downside is the limited scope of compulsory savings (for members only). Many borrowers stop saving once the loan has been received. MFIs also stand to lose potential clients who do not want a loan.
Voluntary savings operate on the principle that the poor already save and only require appropriate institutions and services to meet their needs. These savings are not mandatory for the poor to be able to participate and gain access to credit, and are therefore provided to borrowers and non-borrowers. However, very few financial NGOs are authorized to accept voluntary savings because of the administrative complexities and institutional requirements in providing this kind of product. Mobilizing voluntary savings requires an enabling environment that includes an appropriate legal and regulatory framework. MFIs need a licence to collect savings and must be subject to some form of regulation and supervision by a government entity. Most NGOs or semiformal institutions are not licensed to capture deposits. Savings collected from members are deposited in formal financial institutions that may or may not be available and accessible for poor households.
The risks and responsibilities of MFIs mobilizing voluntary savings in different capacities are listed in Box 2.
The design of voluntary savings products must strike a balance between the needs of the clients and the MFI’s financial sustainability in providing the service. A Women’s World Banking best practice workshop on microfinance (1999) identified how an MFI can build responsive savings mobilization products and processes, by:
ensuring safe and flexible collection arrangements in terms of time, amount and place;
providing products that motivate clients to save for specific purposes, e.g. education, housing, health and life insurance, holidays;
motivating clients to save through education on product features and operating systems, counselling on benefits and strategies and marketing;
building systems that ensure accountability, control and trust;
ensuring client participation in product design, motivation strategies and collection methodology;
performing market research for product design;
building up a credible public image.
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BOX 2 Risks and responsibilities of mobilizing voluntary savings |
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Risks |
Responsibilities |
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MFI collects savings from borrowers only |
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· Increase in borrower’s income · Propose management of funds · Internal controls · Liquidity ratios · Building strong groups to withstand funding constraints · Safety of funds · Physical safety of funds · Physical safety of deposit collectors |
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MFI collects savings from public |
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· Build self-regulation with internal and external audits and transparency · Work within legal structures if possible · Have a good management information system (MIS) · Build up public trust |
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NGO as an intermediary between borrowers and bank |
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· Use banks with credibility · Provide deposit insurance · Ensure service meets a real need · Develop alternative sources of funds to meet any losses |
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MFI mobilizes savings and invests it for earnings |
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· Establish good investment policies · Provide deposit insurance · Conduct feasibility studies for prudent investment (short-term, long-term) · Ensure investment policy is coherent with mission · Hire qualified personnel |
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MFI uses savings to expand loan portfolio |
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· Have a transparent accounting system and MIS · Set up reserve fund for emergencies · Ensure adequate liquidity and recovery on time |
Source: Women’s World Banking, 1999.
Aside from the legal requirements, an MFI must have the financial strength and stability as well as the institutional capacity to be licensed. Institutional capacity requires operational structures, adequate management and governance capabilities to be in place. Not many NGOs meet these requirements and this remains a challenge in the microfinance industry, particularly in the context of its integration in the mainstream and broader financial system and in attaining the goal of outreach and sustainability.
The client base of microfinance services - poor women and men without tangible assets, who often live in remote areas and have low levels of literacy - usually requires more than financial services to ensure the successful operation of their businesses and their general well-being. The range of services can be broadly categorized as the following.
Financial intermediation - refers to the provision of financial products and services, notably credit and savings.
Social intermediation - the process of creating and building human and social capital required for sustainable financial intermediation. This is an intervention strategy that helps marginalized clients connect and link up with formal financial institutions.
Business and enterprise development services - include a wide range of non-financial services and interventions that assist borrowers in running their microbusinesses.
Social services - includes non-financial services such as health, nutrition, education and literacy training that aim to improve the well-being of target groups.
MFIs take on either one of two approaches in providing any of these services. One is the minimalist or “credit first” approach that holds credit as the single missing piece in poverty reduction programmes. Thus the provision of financial services is its primary intervention and, in some cases, there are limited social intermediation inputs in group formation. The second approach, called the integrated approach or “credit plus” approach, recognizes the importance of providing both financial and non-financial services in helping the poor (see Figure on p. 18). There is still an ongoing debate as to the merits of the two approaches but the decision on which approach to adopt depends upon the objectives of the MFI, the demand and supply situation in which it is operating, and the additional costs and feasibility of delivering such services. An important consideration is that, in terms of financial sustainability, costs incurred in providing financial services should be kept distinct and separate from those of nonfinancial intermediation activities, which are rarely financially sustainable and may require subsidies to keep them going.
Fishing communities, disadvantaged as they are, could benefit from both financial and non-financial interventions. Providing the range of services requires the participation of a number of institutions that each have a comparative advantage in what they do best. Local institutions are important because they are familiar with the local circumstances and environment while foreign partner agencies can contribute funding, technical assistance and training to the partnership.
Microfinance services are provided by different institutional types. An institution has a well-defined function and certain permanence; thus a one-time activity such as a project is not defined as an institution. Based on whether there is a legal infrastructure that provides recourse to lenders and protection to depositors, microfinance providers can be classified as formal financial institutions, semiformal institutions and informal providers. Formal financial institutions are subject to banking regulation and supervision and include public and private development banks and commercial banks, among others. Semiformal financial institutions, notably NGOs, credit unions and cooperatives and some SHGs, are not regulated by banking authorities but are usually licensed and registered entities and are thus supervised by other government agencies. Informal providers are those entities that operate outside the structure of government regulation and supervision.
Minimalist and integrated approaches in microfinance
Source: Ledgerwood, 1999.
Institutional microfinance includes microfinance services provided by both formal and semiformal institutions and serves more appropriately as a partner institution in microfinance provision. Semiformal institutions often receive donor or government support through technical assistance or subsidies for their operations. International organizations and donors also place some funds in commercial banks as guarantee/ revolving funds to provide microcredit to target sectors.
Commercial banks in microfinance are considered relatively new actors in the field. The high costs of microlending, the high risk of default and other internal constraints such as the lack of institutional commitment, the existing organizational structure and the lack of financial methodologies and of specialized staff to cater to microborrowers, have been cited as reasons that have prevented their entry into microfinance. But some commercial banks have begun to see microfinance as a profitable venture and, of late, have started to offer a range of services for microfinance borrowers. They have integrated microfinance in their operations in different ways. Some work through intermediaries, acting as a wholesaler rather than a microcredit retailer by establishing linkage programmes with semiformal sources; some establish a separate window or a part of a branch office or a specialized unit or subsidiary that handles microfinance clients; and some have fully independent retail centres affiliated to the bank but with their own lending policies and staff. However, while some banks have introduced and instituted these innovations, many still need to make adjustments to their products, services and operating procedures to make them more appropriate for microfinance borrowers.
By far, NGOs have emerged as key players and are the most common institutional type for MFIs. They have received the bulk of donor funding and support through grants and subsidies for their operations. NGOs are basically service organizations and, as such, profit orientation is not a primary characteristic. Although not memberbased organizations, their strength lies in the fact that they are close to the target group and are thus better placed to respond to their needs. Their weakness, however, is their limited capacity to expand the scope and outreach of services on a sustainable basis. Some NGOs also suffer from operational inefficiencies and governance problems. Financial viability is a major concern. While a few NGOs have expanded and evolved into more professional and formal institutions that have achieved financial sustainability, many still struggle to survive financially. Not all NGOs can transform themselves into banks and they should not attempt to do so because there are still valid roles for them to play, particularly in the areas of social mobilization and intermediation.
Experience shows that governments are inefficient microfinance providers and therefore should not lend funds directly to poor borrowers. Government-implemented microfinance programmes that are usually subsidized and operated through state-run financial institutions are unsustainable, as they are often perceived as social welfare.
Most practitioners and donors agree that the government’s main role in supporting the development of microfinance and MFIs is to create an enabling policy environment. This involves building the financial infrastructure to strengthen and ensure the sustainability of MFIs through the appropriate legal and regulatory framework. Instead of direct lending to the poor, governments should focus on the provision of technical assistance and capability-building resources to organizations and MFIs needing such services.
Governments can also provide enterprise development services to microfinance clients through their specialized bureaus and agencies promoting microenterprises and small businesses, as well as resources to improve their profitability through infrastructure development, research and technology and extension services. Governments should also facilitate the provision of or improved access to social services.
Donors, including local, bilateral and multilateral institutions, have been the primary funders of microfinance programmes. They provide support through: i) grants for institutional capacity building, to cover operational shortfalls and for loan capital or equity; ii) concessional loans for onlending; iii) lines of credit; iv) guarantees for commercial funds; and v) technical assistance. The failure of subsidized lending has changed the focus of donor assistance more on capacity building. Donor funds are usually disbursed into any of the types shown below (CGAP, 2002).
A retail MFI that provides direct services to poor clients.
A wholesale “apex” fund that finances various retail MFIs such as NGOs or private commercial banks.
A component of a social fund or community development project that provides a revolving credit fund for local community organizations.
A technical implementer, such as an international NGO, that conducts institutional capacity building, industry infrastructure and policy work.
In 1995, a World Bank-led Donor’s Working Group on Financial Sector Development and the Committee of Donor Agencies for Small Enterprise Development put out a joint document that outlined some guiding principles for selecting and supporting intermediaries in micro and small enterprise finance. The purpose of the principles was to establish common standards for donor agencies to apply in support of broader access to financial services for micro and small enterprises. This was partly in an effort to prevent donors from duplicating and contradicting each other’s efforts and also to create a consistent strategy towards microfinance.
The guiding principles focused on two important and complementary objectives of outreach and sustainability for MFIs. They identify characteristics that donors should seek in selecting institutions to support and the appropriate forms of donor support to those institutions. Intermediaries seeking donor support must demonstrate institutional characteristics, through acceptable institutional performance standards and plans. These include institutional strengths, quality of services and outreach and financial performance. Strategies for donor support identify the following critical areas: i) appropriate uses for grants, such as for institutional development, capitalization, operating losses and fixed assets; ii) appropriate uses of loans for lending-based institutions that meet performance standards; iii) commercial sourcing of funds through means such as investor equity, raising funds from commercial sources and onlending to MFIs and partial guarantees of loans; and iv) coherence of donor policies by way of more consultations and coordination with each other.
Asian Development Bank. 1998. Microfinance - an interim action plan. Manila, ADB.
Asian Development Bank. 2000. Finance for the poor: microfinance development strategy. Manila, ADB.
Bangko Sentral ng Pilipinas (Central Bank of the Philippines). 2001a. Circular No. 272, Attachment notes on microfinance. Manila.
Bangko Sentral ng Pilipinas (Central Bank of the Philippines). 2001b. Circular No. 273, Series of 2001. Manila.
CGAP. 1997a. Anatomy of a microfinance deal: the new approach to investing in microfinance institutions. CGAP Focus Note No. 9. Washington, DC, World Bank.
CGAP. 1997b. State-owned development banks in microfinance. CGAP Focus Note No. 10. Washington, DC, World Bank.
CGAP. 1998. Commercial banks in microfinance: new actors in the microfinance world. CGAP Focus Note No.12. Washington, DC, World Bank.
CGAP. 1999. Savings in the context of microfinance - state of knowledge. CGAP Working Group on Savings Mobilization. Washington, DC, World Bank.
CGAP. 2002. Microfinance donor projects: twelve questions about sound practice. Donor Brief No.1. Washington, DC, World Bank.
CGAP. 2003a. Microfinance, grants and non-financial responses to poverty reduction: where does microcredit fit? CGAP Focus Note No. 20. Washington, DC, World Bank.
CGAP. 2003b. Is microfinance an effective strategy to reach the Millennium Development Goals? CGAP Focus Note No. 24. Washington, DC, World Bank.
Committee of Donor Agencies for Small Enterprise Development. 1995. Micro and small enterprise finance: guiding principles for selecting and supporting intermediaries. Donor’s Working Group on Financial Sector Development. Washington, DC, World Bank.
FAO. 1988. Women in fishing communities - guidelines, by F. Haque & U. Tietze. Rome.
FAO. 1989. Revolving loan funds and credit programmes for fishing communities, by J. F. Dorsey, P. A. Ryhanen & U. Tietze. Rome.
FAO. 1990a. Report of the workshop on fisheries credit and marketing development, by U. Tietze. FAO Fisheries Report No. 435. Rome.
FAO. 1990b. Fisheries credit programmes and revolving loan funds - case studies, by P. Merrikin & U.Tietze. FAO Fisheries Technical Paper No. 312. Rome.
FAO. 1994a. Report of the Seminar on Credit for Artisanal Fisheries in West Africa, by S. Arnal, C. Nauen & U. Tietze. FAO Fisheries Report No. 480. Rome.
FAO. 1994b. Report of the Workshop on Fishery Credit Development for Eastern and Southern Africa, by U. Tietze. FAO Fisheries Report No. 496. Rome.
FAO. 1995a. Report of the Consultation on the Establishment of a Fisheries Credit Network for Asia and the Pacific, by U. Tietze. FAO Fisheries Report No. 516. Rome.
FAO. 1995b. Code of Conduct for Responsible Fisheries. Rome.
FAO. 1996a. Rapport du seminaire sur le credit à la peche artisanale en Afrique centrale, by E. Ossinga. FAO Fisheries Report No. 535. Rome.
FAO. 1996b. Report of the Regional Consultation on Institutional Credit for Sustainable Fish Marketing, Capture and Management in Asia and the Pacific, by U. Tietze. FAO Fisheries Report No. 540. Rome.
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COURTESY OF BAY OF BANGAL PROGRAMME
Artisanal fisherfolk in India
COURTESY OF BAY OF BANGAL PROGRAMME
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[2] In general, MFIs refer to a
wide range of organizations and institutions, whether regulated or unregulated,
which are dedicated to providing microfinance services. [3] The results and discussion of the study are contained in FAO Fisheries Technical Paper No. 403 (FAO, 2000b). [4] Examples of specific fisheries- and aquaculture-related activities and other activities and microenterprises to be catered for by microfinance programmes in fishing and fish farming communities can be found in section 5.3 on p. 14 as well as in Part IV of this publication. [5] See also article on credit and economic incentives in FAO World Fisheries and Aquaculture Atlas (available at www.fao.org). [6] For practical suggestions on integrating a socio-economic and gender approach to microfinance, refer to SEAGA guide to gender-sensitive microfinance, by R. Boros & U. Murray, SEAGA Programme, FAO Gender and Population Division (2001). Another relevant document discussing women in fishing communities in detail as a special target group for development projects is Women in fishing communities - guidelines, by F. Haque & U. Tietze (FAO, 1988). [7] In the Philippines, for example, an equivalent of around $3 000 is set by law as the maximum capitalization of a microenterprise. |
