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RESULTS
- Significant effects of financial market access on rural incomes and food expenditures. By and large, results from the multicountry study show that improved access to credit enables households to adopt new technology, intensify their agricultural production, invest in off-farm enterprises, and therefore can increase income levels and food expenditures. However, the country studies also indicate that the income effect of credit access depends importantly on the availability of other complementary factors, notably access to agricultural land and well-functioning markets for both agricultural inputs and outputs. These complementary factors are usually less available in areas with poor infrastructure, resulting in lower marginal income effects of financial market access and substantially increasing costs of service delivery. These results not only emphasize the potential of rural financial market policy for alleviation of poverty, but also indicate its limits if not combined with complementary policies and programs in other sectors.
- Insignificant effects on nutritional status. The effects of financial market access on calorie intake, and nutritional status were not statistically significant for most of the country studies. Substitution in favor of higher quality foods with rising incomes was a major reason for the weak marginal effect on calorie intake. Also, nutritional status is the result of a complex interaction between food intake, access to safe water and sanitation, nutritional knowledge of caretakers, and access to care and medical services. Higher income and ability to finance food expenditures are therefore only two of many determinants of nutritional status. The policy implication is that the provision of improved financial access to rural households needs to be complemented by services in order to translate higher income (generated through improved access to rural financial services) into improved nutrition. In general, most rural micro-finance institutions in developing countries--with some notable exceptions consisting mostly of NGOs--do not directly provide these complementary services. However, whether the financial institutions themselves or other specialized agencies should offer such complementary services is a much debated question at present. It appears that building sustainable rural financial institutions for the poor is a challenging task in itself, and that provision of additional services in the areas of health and nutrition is likely to overburden these mostly young institutions. While a few successful institutions manage both (such as BRAC and the Grameen Bank in Bangladesh), it may be, in many circumstances, more appropriate to strengthen existing specialized public programs that directly address these other important determinant of nutrition.
- Access to credit assists households in coping with temporary reduction in income. Previous country studies in Cameroon, Madagascar, Pakistan, Ghana, Bangladesh, and China identified the importance of consumption credit provided by informal lenders. The study in Nepal, completed in 1997, confirms and expands on these earlier results. The study showed that borrowing for consumption by households generally increased when incomes were temporarily depressed, either because of seasonality in agricultural production or because of reduced crop incomes due to unfavorable weather. This result stresses the importance of the insurance function of credit in low-income countries. For the poor, it was credit from informal sources that was more responsive to income changes. This was because lenders in the informal sector, unlike formal sector banks, were able to provide services without the use of any kinds of physical collateral and were able to tailor loan instruments (timing, loan size, repayment rates and refinancing) to the specific needs of the borrowers.
- Limited substitutability between formal and informal credit. Studies in Malawi and Nepal show that increased access to formal sector credit does not necessarily reduce borrowing in the informal sector, when income and other household characteristics are controlled for. The reason for this limited substitutability is that informal and formal loan products differ in terms of loan size, collateral requirements, conditions tied to use of the loan, transaction costs including time costs, and repayment schedule. While the formal sector usually provides larger and longer-term loans for financing specific agricultural or off-farm enterprises, it is the informal lenders that are able to quickly provide smaller sized loans needed for consumption smoothing, financing unexpected expenditures, and financing short-term working capital.
- Credit demand is only weakly responsive to interest rates. A Food Policy Review on Rural Finance and Food Security, based on an extensive literature review, concluded that the demand for loans by households is generally inelastic with respect to the interest rate. The Malawi study confirms this finding, using a comprehensive econometric model that distinguishes between informal and formal loan demand. This finding suggests that for many poor households, establishing access to credit is much more important than its cost. The policy implication is that credit policies should focus on improving access to sustainable financial services rather than providing credit at subsidized interest rates.
- Placement of financial services by NGOs. A study of branch placement by NGOs in Bangladesh indicated that though NGO institutions responded to general conditions of poverty, branches were more likely to be established in locations that had better access to transport and communication infrastructure. It appears therefore that NGO services are directed to poor pockets of relatively well-developed areas rather than toward the poor living in remoter, less developed areas. Client density of the established branches, however, did not exhibit such a feature and actually tended to be higher in less favorable and more distressed locations.
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CONFERENCES/SYMPOSIUMS/SEMINARS
- In August, a special symposium on Rural financial institutions for and with the poor: Relating Access and Impact to Policy Design was organized by the research team members at the 23rd International Conference of the International Association of Agricultural Economists.
- In Malawi, results of the research study were extensively discussed with government officials, donor agencies, and staff of rural financial institutions. Presentations on research activities and results were also made to FAO and IFAD staff in Rome and to the UNDP international working group on sustainable livelihoods.
- A special IFPRI news release on research findings was published at the time of the Microcredit Summit, held in Washington, D.C., in February 1997.
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