November 9, 1998

Policymakers Call for Credit Services for the Rural Poor in Developing Countries

Contact: Don Lippincott (1-202-862-5670), or David Gately (1-202-862-5679)

Ghana contact: Mrs. Felicia Quartey-Acquaye, Bank of Ghana, 223-21-668372, or 665252, ext. 4712

WASHINGTON, D.C. – For many of the rural poor in developing countries, access to credit and savings services is not a viable option since most traditional urban banks will not lend to them. However, a number of innovative financial institutions have sprouted up in developing countries, enhancing income and employment opportunities for many poor rural residents.

Against this backdrop, an international workshop to explore the role of rural financial institutions in developing countries will take place in Accra, Ghana, from November 9 to 13. Representatives from governments, donor agencies, nongovernmental organizations, research centers, banks and other microfinance institutions are gathering to pinpoint the costs, benefits, and future potential of emerging financial markets for rural development and poverty alleviation.

The workshop – Innovations in Microfinance for the Rural Poor: Exchange of Knowledge and Implications for Policy – is sponsored by the Washington, D.C.-based International Food Policy Research Institute (IFPRI), the Rome-based International Fund for Agricultural Development (IFAD), the German Foundation for International Development (DSE), and the Bank of Ghana.

Recent IFPRI and other research on microfinance for the rural poor recommends appropriate public interventions for strengthening rural financial markets and draws conclusions about how best to use public resources.

"To reach the majority of the poor, a dual agenda needs to be pursued, one that expands efficient, low-cost services while improving basic infrastructure," said Manfred Zeller, research fellow at IFPRI and coauthor of the recently published IFPRI report Rural Finance and Poverty Alleviation. Zeller and coauthor Manohar Sharma argue that just as there is a role for the public sector to develop or support science-based technologies, there is a need for concerted public action to create an environment in which institutional innovation is encouraged and given room to spread.

In developing countries, poor rural households face severe constraints when they seek credit from formal lending institutions. Formal financial services are rarely available to those below the poverty line because of restrictions requiring that loans be backed by collateral. Nor do banks welcome the small amounts the poor want to save. As a result, the poor usually turn first to informal sources such as friends, relatives, or moneylenders, or to informal, local institutions such as savings clubs to borrow enough to purchase food and other basic necessities. These informal networks may help during highly difficult times, like bad harvests, but cannot finance working capital for investments in farm and off-farm enterprises.

"What emerges from IFPRI's analysis is a clearer picture of credit constraints that poor rural households in developing countries face," said Zeller. "Our findings show that loans from well-managed rural financial institutions, far from being one-shot income transfers, help poor families make permanent and positive change in their lives."

Creating microfinance institutions for the poor is by no means a panacea for poverty alleviation. Yet IFPRI's research in a number of African and Asian countries finds that such improved access to credit can increase household income, improve food security, and lead to the adoption of agricultural technologies that were otherwise out of reach. Since private sector support for innovative lending to the rural poor is still "in its infancy," public support to promote and expand such programs is critical. When policymakers, microfinance practitioners, researchers, and experts from national and international donor organizations gather for the conference at the Novotel Hotel Accra City Centre they will identify the key microfinance challenges and encourage conceptual and practical innovations that boost sustainable services in rural areas.

IFPRI identifies and analyzes policies for sustainably meeting the food needs of the developing world. Established in 1975, IFPRI is a member of the Consultative Group on International Agricultural Research, an informal association of 40 countries, international and regional organizations, and foundations that support sustainable improvements in agricultural productivity through research centers around the world.