Microfinance for Pastoralist Areas
in
By
Wolday Amha
February, 2006
Pastoralists
are found in the northern, northeastern, northwestern, eastern, southeastern
and southwestern lowlands (below 1500 m) of
The
major economic activities of pastoralists are livestock with little crop
production. For example, in the
The
major problems of pastoralists in Oromia Regional State include: lack of
appropriate development policy and strategies to pastoral areas; misperception
of pastoralists and agro-pastoralists; poor livelihood and economic
capabilities of pastoralists; limited awareness on multi-sectoral, holistic and
integrated development interventions; rangeland resource degradation; shortage
and uneven distribution of water resource development; recurrent drought and
food insecurity; lack of rural infrastructure development; poor social service
delivery; poor livestock productivity and veterinary services; lack of private investor’s interest in
pastoralist areas; absence of market oriented production, poor livestock
market-infrastructure and lack of market information; inaccessibility of
financial services such as banks and microfinance institutions; lack of
pastoral-oriented extension approach; bush encroachments and uncontrolled
farming practices; conflict on scarce resources; migration from highlands to
lowlands; and inadequate capacity of implementation (Oromia Pastoral
Development Commission, 2005).
The major economic constraints of
The socio-economic constraints of
The
formal financial institutions (mainly banks) in the Somali region are limited
to few towns. Even where they exist they require collateral, which is
practically inapplicable in pastoralist and agro-pastoralist areas (Kejela
2001).
Pastoralists
have not benefited from the remarkable development of the microfinance industry
in
1.2 Objectives
The
general objective of this study is to evaluate the existing microfinance
policy, strategies, programs, projects and develop a background document to
design an appropriate microfinance strategy aimed at promoting access to
finance in the pastoralist areas in
(a)
Review the microfinance policies, strategies, programs and projects in
pastoralist areas;
(b)
Assess the strength, weaknesses, opportunities and threats in delivering
financial services to pastoralists and agro-pastoralists;
(c)
Identify the gaps of previous microfinance policies, strategies, programs and
projects in pastoralist areas which need attention in designing microfinance
strategies; and
(d)
Recommend appropriate policies, strategies and programs that promote the
delivery of financial services in pastoralists and agro-pastoralists.
This
study mainly involved gathering information from a number of secondary sources.
These included:
(a) Federal level policies, strategies and programs;
(b) Development policies, strategies and programs of
pastoralist areas;
(c) Various studies and research reports; and
(d) Best practices in
1.4 Research questions
Designing
policies, strategies, and instruments in order to improve access to finance in
pastoralist areas requires responding to the following research questions:
Where
are we now?
Who
is doing what in the delivery financial services?
What
are the best practices?
Where
do we want to be?
How
do we get there?
How
do we track and measure our progress?
2.
The Financial Landscape in Pastoralist Areas
The pastoralist and agro-pastoralists have low income that
leads to low investment, which in turn leads to low productivity and income.
Access to institutional credit, saving services and microinsurance is very
limited in pastoralist areas. Moreover, there are limited studies that identify
and estimate the demand and supply of financial services in pastoralist areas.
According to Gebeyehu (2001), the total demand for loans in the
From the supply side, the major
sources of loans or financial services are as follows:
2.1 Commercial banks:
The
conventional banking sector in
High transaction costs on small loans are also one of
the principal causes for the exclusion of pastoralists from accessing loan from
the formal sector. According to Barton et al (2001), the major constraint of banking
in pastoralist areas included: the distance to towns with bank branches; the
intimidating nature of the formal sector (which has little sympathy for the
needs of pastoral people); the need for minimum deposits or balances; and lack
of awareness about how a bank operates and the services they provide.
Formal
banks (commercial and development banks) in
(a) perceive that there is a high risk in serving a
clientele that typically have no assets to provide as collateral;
(b) find the numerous but very small finance transactions
unprofitable; and
(c) find the cost of establishing sufficient outlets near
to the pastoralist and agro-pastoralist communities too expensive.
Banks think that lending to pastoralists is not
commercially viable and does not generate substantial profit. Inadequate
collateral, insufficient legal status, high transaction costs, and inability of
the pastoralists to cope with the complexities of dealing with formal banking
procedures are among the reasons why banks are not interested in serving the
pastoralist community. Furthermore, banks think that lending to pastoralists is
associated with high risk and is unprofitable due to lack of information on
pastoralist enterprises’ financial condition, no business plan, weakness in
management, poor market linkages, weak governance and absence of information
technology. Banks in
Thus, it seems that it is the
deposit taking MFIs and the cooperatives that would be appropriate to deliver
financial services to pastoralists in
2.2 Microfinance
institutions (MFIs):
MFIs in
2.3 Savings and credit
cooperatives and multipurpose cooperatives:
One
of the successful models used world-wide to deliver financial services to the
poor sustainably is the development of people-owned and managed grassroots
rural and urban saving and credit cooperatives. The Savings and Credit
Cooperatives (SACCOs) accept both compulsory and voluntary savings from
members. The quantum of compulsory savings varies from member to member
depending upon his/her capacity. The amount is kept low to enable women and
persons with limited means to join a SACCO. In the first year, SACCOs usually
accept only savings. This facilitates savings discipline and internalization of
the management process.
Interest on voluntary savings is usually aligned to
the one offered by MFIs/Banks while that on compulsory saving is lower.
Voluntary savings can be withdrawn at one week’s notice. However, for
withdrawals of compulsory savings, members are required to give notice and the
amount is refunded in six months. In the beginning, all the members deposit
their monthly savings on a designated day. The amount is deposited with
MFI/Bank on the same day. Once the number of members of a SACCO exceeds 50 and its
management capabilities improve, fortnight/weekly savings are accepted.
The savings and credit cooperatives model implemented in
pastoralist areas with the support of Pastoral Risk Management Project (PARIMA)
in
The first loans were disbursed to 90 members of the Dida
Hara savings and credit group (45% women) and the second loan for 85 members
(70% women). The design and performance of the first batch of loans are as
follows:
·
Average
loan size: 660 Birr
·
Saving
mobilized before taking the loan: at least 10% of the loan
·
Lending
interest rate: 10.5%
·
Activities:
livestock trading and petty trading (19%) and cattle and goat fattening (81%)
·
Repayment
rate: 100%
·
Other
support: training (small scale business development and management) and tours
for selected members
The PARIMA project and implementing agencies regularly
monitor and document loan repayment, loan use, profits earned, losses incurred,
etc. Moreover, the group members participate in the monitoring and evaluation
process (Solomon et al 2005).
In addition to Dida Hara saving and credit cooperatives,
PARIMA project Outreach Unit has organized various saving and credit
cooperatives in various Woredas in pastoralist areas (Dire, Dugda Dawa, Moyale,
and Liben Woredas. According to the report of PARIMA Outreach Unit (2006), as
of March 2006, a total loan of Birr 3,283,711 was disbursed to more than 3,500
members over three years. The groups and SACCOs mobilized a total savings of
Birr 541,608. The interest collected (about 118,005) was accrued back to the
groups in SACCOs account. The repayment rate has been 100%.
The pilot activities in the PARIMA
project are very important steps that give lessons to scaling-up of SACCOs in
pastoralist areas. However, replication and scaling-up of the program should be
based on cost effectiveness, and preferably be without the support (baby
sitting) of projects and governments.
2.4 NGOs which are
involved in the delivery of financial services:
The
NGOs in
These
NGOs had a positive impact in developing flexible methodologies that fit the
needs of pastoralists and agro-pastoralists and tested various innovative ideas
and methods in their programs. However the question of operational and
financial sustainability of their ventures has become the main issue in many of
the evaluations of the above projects. The NGO micro-credit programs in
pastoralist and agro-pastoralist areas faced several problems, which include the following:
·
The
entire orientations of the microcredit initiatives or activities in pastoralist
areas were geared towards a project concept. The NGOs involved in microcredit
programs and government projects were not interested in establishing
sustainable institutions that deliver diversified financial services to the pastoralist
and agro-pastoralist communities.
·
Subsidized
NGO microcredit programs in pastoralist areas failed to build sustainable
financial institutions. The real interest rates (the actual interest rates
deflated by the annual rate of inflation) in these microcredit programs were
negative. As a result, the loans were more of gifts in nature than being loans
that should have been strictly paid regularly. The microcredit schemes or
programs were not able to cover the operational costs of the institutions. As a
result, the institutions required permanent and heavy subsidies.
·
The
very high default rates of NGOs and government projects were mainly the result
of borrowers seeing the lending organizations as donor funded or government
funded projects that were providing financial services for a fixed period of
time for humanitarian reasons. The NGOs were mixing charity and finance.
·
The
lending institutions and employees were not seriously concerned and committed
on financial discipline, provided donor funds kept on flowing. The NGOs did not
have the right professionals for their activities.
·
The
microcredit programs were entirely concentrated on the provision of loans to
beneficiaries. Savings, microinsurance, money transfers and leasing products
were given less emphasis in the delivery of financial services to the poor.
The
results from the restocking projects of NGOs in other countries also reveals
mixed results:
(a) restocking through micro-credit is feasible and
cost-effective in narrowly defined terms;
(b) different models exist, but so far few general
lessons have been drawn;
(c) repayment of restocking loans has so far been at
unusually high levels for a micro-credit scheme; and
(d) subsidies are common, making such schemes generally
unsustainable in the long-term (Swift ???).
2.5 Government
projects and programs involved in providing loans
In
addition to the loan provided to farmers by the Agricultural Bureaus in
pastoralist areas to promote input supply, there are government projects which
are involved in delivering financial services directly to the pastoralist
communities. A good example is the UNICEF WIBS program which provided
micro-credit in two Woredas (Afder and Teru) in Afar. The implementation of the
program was given to the Planning Bureau of the Afar Regional Sate. The
regional bureau selected 100 poor women from Teru and 89 women from Afdera. The
loan was given on the following conditions:
-
loan period of one
year,
-
compulsory saving of
10%,
-
lending interest rate
of 12%,
-
single borrower limit
of 500 Birr, and
-
women beneficiaries
75%.
The main activities of the beneficiaries of the
project were retail business and salt mining from
This
project was not successful for various reasons. Firstly the two Woredas were
far away from the capital which made supervision difficul. Since the selection
was done by the Bureau (representative of the Farmers Cooperatives in the
Woreda Council), it was difficult to have a cohesive group to enforce group
pressure or liability. The loan was given to the executive committee elected by
members to be distributed to members. Both the facilitators and beneficiaries
of the project did not receive training of any kind. The project was a complete
failure due to poor design and absence of institutional and human resource
capacity to implement the project. There
was no systematic monitoring and evaluation system in the project.
According to Barton et al (2001), the institutional and cultural
constraints observed in some government and donor interventions hindering the promotion
of access to finance in pastoralist
areas include the following:
·
Donor and
government interventions (famine relief) during drought crises, which engenders
a culture of dependency in pastoralist populations
·
In
·
Proximity to
bordering countries and the danger that those responsible for managing funds
may mitigate with the funds
·
Traditional
lending of stock to relatives/friends who have become destitute is reported to
be dying
·
Non-acceptance
of interest due to religious beliefs
·
Physical
security of funds mobilized in pastoral communities
Although
we think that the support of NGOs, donors and governments at various levels in
pastoralist and agro-pastoralist areas is very critical in the delivery
financial services to the communities, they should not be involved in delivering
financial services directly. As a matter of fact, in the Ethiopian context,
this is strictly prohibited by law (see the details in Wolday Amha 2005).
2.6 Informal and semi-formal finance:
The
clan members in Afar and Somalie have strong social linkages and help one another
during crisis. If a person losses his/her property due to natural disaster such
as drought or man-made calamities, clan members contribute in-kind to
rehabilitate him/her. They also share whatever they have among clan members.
Because of the inherent mutual help system (as a culture) in these communities,
one hardly finds a beggar in Afar (Gebeyehy 2001). If a person from a clan of
Afar is found begging, it will be seen as an insult to the entire clan.
Therefore, members of the clan will make sure that he/she has the means to
leave on.
Informal
institutions provide microfinance services to pastoralists. According to Kejela
(2001) the main traditional lending practice in the Somalie region is lending
in-kind. Shopkeepers, pastoralists and farmers provide lending in-kind for
petty traders and retailers on pre-agreed prices. The borrowers are usually
honest and repay the credit as per the agreement. Some pastoralists in
3. Policies and strategies with direct
relevance to the development of microfinance in pastoralist areas
The provision of rural
finance contains two basic elements; namely, capital, the funds which are being
provided, and the financial system, the process of providing them and the
institutions involved in this process. If the objective is to deliver financial
services to rural households efficiently, we need to have both the capital, and
a well-functioning financial system and institutions. In order to increase
outreach (growth), efficiency and sustainability of financial institutions, we require
interventions at the level of the whole economy (such as the structural
adjustment program) or regional level or at the level of the financial sector
(such as the financial sector reform), and interventions focused on individual
financial institutions or, as the case may be, on their customers.
Finance is one of the key
elements in addressing development issues. It is even considered to play a
leading role in guiding development interventions at macro and regional levels.
Whatever development strategies or programs (poverty reduction strategy, rural
development strategy, food security strategy, etc.) we propose for Pastoralist
areas, there is a need for finance and financial systems geared towards meeting
the overall development objectives of the interventions.
Microfinance as a
tool to development is clearly stipulated in ‘A Plan for Accelerated and
Sustained Development to End Poverty’ (PASDEP), the Rural Development Strategy
and the Five Year (2005/06 to 2009/10) Development Plan. Attempts are made here
to review the microfinance interventions identified in the development
strategies, programs and plan and assess whether these are relevant to the
pastoral areas.
PASDEP
Access to finance, according
to PASDEP, has been one of the main constraints in promoting private sector
development, agricultural development, micro and small enterprise development,
and investment in general. About 1/3rd (33.1%) of households need to
travel 20 or more km to reach the nearest microfinance service centre. The
proportion with financial services within 5 km is 77% in urban areas and only
17% in the rural areas. Despite the emergence of many microfinance
institutions, only 6% of smallholder farmers in
The main elements of the
private sector development strategy, according to PASDEP, include the
development of an institutional framework that enables realising private
initiatives (many of these elements are relevant to the agricultural sector as
well). This would be realised by
(i)
continued simplification of business processes and
licensing requirement;
(ii)
strengthening of the regulatory framework and
establishment of a level playing field-through judicial strengthening,
implementation of the competition policy, and enforcement of contracts;
(iii)
financial sector reform, to increase the availability
of capital and working finance;
(iv)
progressive withdrawal of state entities from areas
that can be efficiently provided by the private sector, through the continued
privatization program and increased competition;
(v)
continued reforms to establish the land tenure
security for investment and trade purposes;
(vi)
major investments in infrastructure;
(vii)
upgrading the
skills of the work force through expanded education and technical and
vocational program; and finally,
(viii)
maintaining macroeconomic stability, stable exchange
rate and low inflation.
The role for the government
during the PASDEP period will focus on facilitating private sector growth
through:
(i)
providing an educated and skilled workforce through
the education system;
(ii)
investing in infrastructure-transport and
telecommunications that lower the cost of businesses, and provision of reliable
water supply and power that are essential inputs to any private activity;
(iii) ensuring the availability of land;
(iv) building a
functioning and well-regulated financial sector, so that credit is available, and
(v)
maintaining security, stable environment, and
macroeconomic stability.
In addition the
on-going Civil Service Reform Program and
The agricultural strategy,
according to PASDEP, will revolve around a major effort to support the
intensification of marketable products-both for domestic and export markets,
and by both small and large farmers. Elements of the strategy include the shift
to higher-valued crops, promoting high-valued export crops niches, a focus on
selected high potential areas, facilitating commercialization of agriculture,
supporting the development of large scale commercial agriculture where it is
feasible, and improving the integration of farmers with markets – both locally
and globally. The majority of these response will have to come from the private
sector, (which includes millions of small farmers), but given the early stages
of transition to market agriculture, a range of public investments and services
is needed to help jump-start the process. The instruments to achieve these
under PASDEP will include:
(i)
constructing farm-to-market roads;
(ii)
development of agricultural credit markets;
(iii)
specialized extension service or differentiated
agricultural zones and types of commercial agriculture;
(iv)
the development of national businesses plans and
tailored packages for specialized export crops (such as spices, cut flowers, fruits
and vegetables);
(v)
irrigation through multi-purpose dams;
(vi)
measures to improve land tenure security, and to make
land available where feasible for large-scale commercial farming;
(vii)
improve the availability of fertilizer and seeds.
The PASDEP also states that,
on top of the commercial banks, the financial strategy will address the task of
developing microfinance institutions. MFIs will play a significant role in
expanding financial services to low income groups, entrepreneurs and traders,
who are not usually reached by the banks. In particular, the National Bank of
Ethiopia (NBE) envisages fostering the role of MFIs in intermediating financial
assets in the rural areas. To this end, the NBE encourages commercial banks to
on-lend to microfinance institutions. One way to encourage commercial banks is
by strengthening the regulatory framework and supervision capacity of its
microfinance supervision department.
Five
Year (2005/06 to 2009/10) Development Plan
Although the Five Year
Development Plan indicates the need for microfinance to promote agricultural
and private sector development, there are no sufficient details on the
implementation arrangements in many respects. However, the plan is specific on
some aspects of the delivery of financial services to rural and urban
households. These include increasing the:
(i)
number of cooperatives banks from one to four;
(ii)
savings of SACCOs in rural and urban areas from 630
million birr to 1.2 billion Birr, and
(iii)
volume of credit to cooperative members to 13 billion
birr.
Rural
Development Strategy
The Rural Development
Strategy of the Federal Democratic Republic of Ethiopia (2002) states that
rural finance is vital for the implementation of the agricultural led
industrialization strategy, agriculture sector development and other sectoral
development programs. It plays a critical role in increasing agricultural
productivity, production, investment, employment and improve agricultural
marketing (both the input and output markets). An efficient rural financial
intermediation and a functional financial system is the basis to transfer
resources from agriculture to other sectors of the economy. According to the
rural development strategy, there are three key financial institutions which
can support rural development in
Although the role of commercial
banks in rural development is very limited in
However, the
strategy also stresses that governments, at various levels, should not
subsidize and interfere in the activities of MFIs. According to the Rural
Development Strategy of Ethiopia, cooperatives should play a useful role in the
delivery of financial services to members and non-members by linking their
activities with commercial banks and MFIs. They can even establish cooperative
banks to meet the financial needs of cooperatives at various levels. However,
credit to cooperatives should not erode the repayment culture of rural
households.
The
tools identified in the Rural Development Strategy for financial service
delivery are the commodity-based cooperatives. The strategy did not mention the
role of Savings and Credit Cooperatives (SACCOs) in this respect. Since
sustainable delivery of financial services requires specialized financial
institutions engaged in banking activities, commodity-based cooperatives are
not the appropriate institutions for financial services delivery to both rural
and urban households. Efforts should be made to support the development of
SACCOs at various levels (primary, union and federation). At the end of the
day, since the SACCOs are independent and self-governed private sector
enterprises, it is them who will develop their own strategies to establish the
cooperative banks.
Policy gaps in the macro and
regional level policies/strategies for improving access to finance in pastoral
areas
Lack of finance is an
impediment to the implementation of rural development strategy, poverty
reduction strategy and the food security strategy at regional and federal
levels. Creating employment, increasing production and productivity, improving
input supply, developing the private sector, etc require a package of
interventions with finance as its key component. The federal and regional
governments in
Lack
of access to financial services, realized in the form of absence of convenient
savings instruments and credit mechanisms, is a major constraint that limits the
accumulation of assets in pastoralist areas.
Improving access to financial services is viewed as one of the
antipoverty tools in the recently drafted development programs of pastoralist
areas. The Three Years Strategic Plan of the Oromia Pastoral Development
Commission identified limited access to finance as one of the main problems of
pastoralists. Microfinance is only identified as one of the strategies to
increase livestock marketing. We argue that microfinance should be considered
as one of the policy instruments in the strategic plan to help increase employment
and to facilitate economic growth by easing liquidity constraints in production.
This could be accomplished by providing capital to startup new production or to
adopt new technologies as well as by helping pastoralist producers manage their
production risk. Thus, microfinance should have been taken as an intervention
in the strategic plan. However, it should be noted that microfinance is not a
panacea for poverty and related development challenges in pastoralist areas.
Microfinance alone cannot improve roads, housing, water supply, education, and
health services in these areas. Yet, it could play an important role in making
the above interventions realized. It also empowers the participants and
provides them the confidence, self-esteem and financial means to increase
income and access social services.
The PASDEP states the special
efforts needed to develop pastoral areas as follows:
Some 10
million semi-nomadic people depend primarily on grazing herds of cattle,
camels, and goats, and are concentrated mostly in the dry lowland areas of Afar
and Somalie. Human development indicators and poverty among these groups are
uniformly worse than elsewhere in the country, and they have proven difficult
to reach with traditional services. Under PASDEP a major effort will be made to
reach them with tailored programs. In education, a network of informal
community-based schools and teaching arrangements is being developed; and
mobile outreach health services will be strengthened. Special programs will
provide improved veterinary services, and strengthen livestock breeds,
marketing, and early-warning systems. Water points will be constructed adjacent
to range areas for dry season utilization, and infrastructure (such as roads,
communication, and small-scale irrigation) will be built up, both to improve
current conditions, and to facilitate the slow transition for those who want to
shift towards settlement overtime.
Thus, microfinance
is not considered as priority area of intervention in the pastoral areas in
PASDEP. We think that this needs to be revisited. However, the microfinance
interventions identified in PASDEP, Five Year (2005/06 - 2009/10) Development
Program and the sectoral strategies are clear and relevant to guide the
development programs of all regions, including the pastoralist areas. It can
help regional governments in pastoral areas to craft their microfinance
strategy and programs that fit pastoralists and others in these areas.
4.
Strategies for improving access to microfinance services in pastoral areas
Although
little is known about the sustainability of delivering financial services in
pastoralist areas, experiences in