Innovations in addressing rural Financ e in Mozambique: Economic Development of rural Areas Through decentralization

1. Innovations in addressing rural Finance in Mozambique: Economic Development of rural Areas Through decentralization Joana J.David, Msc Banco de Moçambique

2. Presentation Outline • Brief Historical Overview • Economic and political-administrative reforms. • Financial sector infrastructure and rural finance. • Decentralization programme and Local Economic development: The District budgets. • Achievements & Challenges • Concluding remarks

3. Brief Historical Overview • GDP: USD 397 per capita (2007) • Surface (Km2):799,380 • 11 provinces, 128 districts • Pop:19,42 millions (2005) • Rural population: 62% • Rural area: 95% of total Surface. • Independence: 1975 • Currency: Metical • Exchange rate: MZM 24.14/USD (October 2008)

4. Economic and Political reforms (1) • Economic, Political & Administrative reforms • Law 8/2003 –LOLE (Law on local organs of the State). • 2005/06 – Formal devolution of responsibilities and autonomy to the district level (Decrees 11/2005 & 6/2006); • 2006 –PARPA II (Second Action Plan for the Reduction of Absolute Poverty)- Strong Government commitment to attain the MDGs); • 2007 – Rural Development Strategy & “Green Revolution” strategy approved.

5. Economic and legal reforms(1) • Financial Sector Policy Environment • Law 15/99 - Credit and financial institution’s law • Law 9/2004 - new financial institutions typology (e.g. micro-banks, postal saving banks) and Decree 57/2004 (microfinance institutions & operators). • Notice from Central Bank Governor setting Minimum capital requirements to promote rural outreach (location incentives).

6. Financial sector infrastructure and rural finance (1) • The statistical data shows that in 2006 the country made significant progress since the beginning of the reform measures: • The financial sector has improved from 2 dominant, state owned and 1 private commercial banks in 90’s to14 banks with 288 branches to serve 20 million habitants. (October 2008) • Impressive role of Microfinance institutions outreach. • Nevertheless delivery of financial services is still far below the needs of rural population.

7. Financial sector infrastructure and rural finance (2) Geographical Branches’ distribution: • 12.1% of the branches in the North (32% total population); • 21.3% in the Centre (42% total population) • 66.6% in the South (25% total pop.) • 47% in the Capital • 1 branch for 82 thousand people • 1 branch for 3782 Km2 • Currently 39 districts have a bank branch.

8. Financial sector infrastructure and rural finance (3) • In nearly 10 years MFIs have registered impressive growth rate, both in number and active clients : • From 20,000 beneficiaries in 1997 to aprox.120,000 by the end of 2007); • Over 80 financial intermediaries (Banks, Cooperatives, Microbanks, MFI operators) • Rural-Urban disparity as an indicator of prevailing rural markets’ obstacles.

9. Decentralization programme and Local Economic development (1) • Endorsing and trying to achieve Millennium Development Goals challenged the Government to quickly find innovative ways to improve rural finance; • The District was defined as the development pole to fight against poverty. • Budget for investment in local initiatives – OIIL instituted in 2006; MZM 7 millions (USD 300,000) budget allocation to improve rural financial and markets at district level. • Local Communities Involved In Planning & Monitoring Basic Local needs and Services through local State Organs

10. Decentralization programme and Local Economic development (2) 2006 - Guidelines to ensure that district budgets are spent on social infrastructure and projects on economic development. May 2006, guidelines were revised to focus the budget allocation to the promotion of local projects on income and employment generation including food production. In 2008 - Additional budget allocation of aprox. USD 100,000 specifically for local infrastructures through the budget and Medium term fiscal framework for 2008-2010.

11. OIIL budget allocations – impact assessment (by June 2008) Up to now, approximately USD 41 millions allocated to the districts; 6,300 projects funded (individual & associations beneficiaries)in commercial basis i.e. interest rate charged; 50,000 New Jobs (permanent and seasonal); Main acquisition/expenditures on: Food production (Farm machinery - e.g. Tractors) Income generation (Kits and inputs - e.g. seeds, fertilizers) Employment generation (poultry, fishery, manufacture, trading, agro-processing) Immediate impact on local, rural communities livelihoods Achievements & Challenges (1)

12. Achievements & Challenges (2)

13. Achievements &Challenges(3) Despite the encouraging signs, there are some concerns and risks to be addressed: • Improve reimbursement/collection rate; • Need to institute clear budget allocation procedures; • Enhance post disbursement monitoring; • Prevent funds’ misuse or investment in non-income generating activities by beneficiaries; • Provide technical assistance to support project monitoring/follow up;

14. Final Remarks Market-led solutions alone are not enough to enable innovations that reduce risks and costs. Institutional innovations are equally needed to expand financial services at lower costs. E.g. improving roads, institutions, information; More effective mean to foster local development through a participatory development approach. E.g empowerment of citizens, organizations and local government Strengthens local government capacity and enhance the role of civil society in innovating forms of intervention E.g human and institutional capacity development at local level

15. ObrigadaKanimanboAsante!