Innovations in Rural Finance: A Conceptual Framework

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Innovations in Rural Finance A Conceptual
Framework

• By Wolday Amha, Director of the Association of
  Ethiopian Microfinance Institutions (AEMFI)
• A Technical Workshop of AFRACA on Innovations in
  Addressing Rural Finance Challenges in Africa
• Dare Salam, Tanzania
• November 25-26, 2008

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Innovations in financial institutions, mainly
banks and insurance companies

• Major causes of financial innovation
• Lower costs
• Higher profits
• Whenever the perceived benefits of innovation
  exceed the costs, an incentive exists to engage
  in innovation.
• Some innovations can bring quantum leaps and
  other s involve novel twists on old ideas

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Factors behind the rapid financial innovations
after 1960s include

• External factors behind the rapid financial
  innovations after 1960s include
• The availability of computer and information
  technologies
• Advances in telecommunication 
• The avoidance of regulation
• High competition
• The volatility of prices, inflation, interest
  rates and exchange rates
• Advances in financial theory

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Continued

• Internal factors
• Liquidity needs (financial innovations pioneered
  over the last 20 years have targeted addressing
  liquidity)
• Risk aversions
• Governance issues (agency costs)
• Quantitative sophistication and management
  training (business schools producing carbon copy
  managers-the end of MBA programs

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Why do we need innovation in rural finance?

• Rural finance clients are located in dispersed
  areas
• Rural finance clients often demand relatively
  small loans and saving accounts
• Clients are heterogeneous with varying skill and
  cultural background
• Getting information of borrowers to repay often
  takes time and money
• The weak institutional capacity of rural finance
  institutions affects their outreach and
  efficiency
• Rural finance is perceived to have high risk

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Continued

• Rural finance lients have little acceptable
  collateral
• Poor communication systems and physical
  infrastructure in rural areas
• Inadequate regulation and supervision and weak
  contract enforcement mechanisms
• Inflation is a challenge in delivering financial
  services
• Competition is the key to innovations

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Innovations in rural finance

• Innovation in rural finance is a change in
  product, process, system, regulation, etc to
  address the problem of access to finance in rural
  areas. The innovations include
• Innovations in product development
• Innovations in lending methodologies
• Innovations in institution development
• Innovations in technology
• Innovations in risk management
• Innovations in regulation
• Innovations in human resource development

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Innovations in product development

• Woreda based saving mobilization in DECSI,
  Ethiopia
• Village phone loans in Ruwanda and Uganda (Uganda
  Finance Trust)
• Micro insurance by using AIG (Uganda Finance
  Trust)
• Saving mobilization using mobile van (Uganda
  Finance Trust)
• Value chain financing in Kenya (Agricultural
  Finance Corporation)
• Weather based crop insurance (Malawi, Ethiopia,
  etc)
• Money transfer in Ethiopia (DECSI and ACSI)
• Provide package of training such as family
  planning and BDS in Ethiopia in Shashemene Edir
  MFI
• Provide loans in kind to promote dairy value
  chain in Ethiopia by Wosassa MFI
• Linking MFIs with cooperatives and the facilities
  in Ethiopia
• The MFI gives loan to a group and the group lends
  to its members by taking the entire
  responsibility in Ethiopia by Wasassa MFI

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Challenges in product development and innovations

• The regulatory framework influencing the type and
  development products
• The owner (mother NGO, government or
  shareholders) defining the products
• Absence of competition
• High risk and high cost developing new products
• Limited capacity of the institutions to develop
  financial products

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Innovations in lending methodology

• Group lending methodology (Reducing the size of
  the group to three clients in DECSI)
• Village banking
• Islamic banking in Sudan
• On top of the group MFIs in Ethiopia use the
  credit committee to monitor the activities of the
  people taking loans in a community

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Innovations in institution development (systems,
procedures, etc

• Linking SACCOs with a community bank (Kilimanjaro
  Community Bank) in Tanzania
• Linking banks with MFIs in Ethiopia (CBE)
• Implementing social performance measurement in
  Ethiopia by Bussa Gonofa MFI

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Innovations in technology

• The various MIS soft wares used by MFIs to track
  financial and operational information
• Automated teller machines (ATMs)
• Point-of-sale (POS) networks (devices in retail
  outlets which use debit/credit cards to
  facilitate electronic payments and transactions)
  used in Ghana in Sinapia
• Mobile phone banking

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Continued

• Innovations in risk management
• Establishing credit information bureau in Uganda
•  Innovations in regulation
• Developing the missing laws and regulations such
  as foreclosure law in Ethiopia
• Innovations in systems development and human
  resource management,
• Performance based annual increment for loan
  officer in Ethiopia (Agar MFI)
• Business Process Management (BPM) being
  implemented in SFPI (Ethiopia) with the support
  of Grameen Foundation

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Challenges of innovations

• What is the motive innovation in rural finance?
• Who should take cost of innovations?
• Should NGOs continue to be innovators?
• Who is the innovation behind Grameen and Prof.
  Yunus?
• Are innovations documented in Africa?
• Developing Innovative Products to Address the
  Financial Needs of the Rural Population
• Is innovation in rural finance sustainable?

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The way ahead

• In the long run,
• Competition, lower cost, and profit will be the
  engine of innovation in rural finance
• The finance providers should be the one who
  promote innovation
• In the short-run
• Donors, government and other development partners
  should provide support to promote innovation in
  order to increase outreach and reduce transaction
  costs
• Donors should help the finance providers in
  selecting the right innovation
• There is a need for financial education to use
  the technology by the illiterate and rural poor
• Build the capacity of technology providers to
  provide backup services in a given country

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• Thank you