Innovations in Rural Finance: A Conceptual Framework

1. 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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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?

15. 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

16. Thank you