Financing in Livelihoods Projects

The situation seriously limits asset and capital formation and undermines economic development. For this reason, linking community institutions and individuals to formal finance is a top priority of rural livelihoods programs. Higher savings and investments per family for livelihoods enhancement along with necessary input (skills, technology, etc.) and output linkages (market, price) enhances incomes.

 Making the Unbankable, Bankable: Start with Savings

Access to credit is critical, but it alone is not enough to reduce poverty and develop livelihoods. Neither is it always an appropriate starting point for reaching the very poorest, who are sometimes called the unbankable poor. For all groups, but especially this group, savings is an important starting point. Combined with asset creation, savings can help groups establish a strong basis of creditworthiness, leading to a crowding-in effect from various financial service providers. It also helps poor rural households learn to build a cushion of capital that they can smooth their passage through emergencies (illness, natural disasters, and the like).

Many programs have been able to encourage savings through community organizations.

• In Andhra Pradesh and Tamil Nadu India, livelihood programs build on the self-help group (SHG) movement for their project activities. SHGs inter-lend to their own members and they also federate into village level organizations that manage village revolving loan funds that members can use.
• Common interest groups (CIGs) in Madhya Pradesh and Chhattisgarh in India build village savings for investment by setting aside a portion of matching grants they receive for investment into a village savings fund. These funds are used to maintain local infrastructure investments and other purposes. The programs also encourage savings by households.
• Small groups in Sri Lanka start by saving “a rupee a day” to create a small capital base for their members. These groups federate into Village Savings and Credit Organizations that manage a revolving loan fund that those who cannot get formal finance can use to start income generating and asset building activities. The combination of savings and asset accumulation can form a bridge to formal finance in the future. Compulsory savings allow even the poorest to join the savings and credit groups. Voluntary savings product enables members to save additional funds according to their means and needs.
• Jibikayan Groups in Bangladesh also engage in savings similar to the small groups of Sri Lanka; however these groups engage in some intra-group lending by their members.

Savings by Groups in Select Rural Livelihoods Projects

Village Finance and Linking to Formal Finance

Savings is one element that helps build the bridge to rural finance. The other element is credit, which can be provided through village finance, linking to microfinance institutions (MFIs), or linking to commercial banks. The ultimate goal is for the rural poor to have access to formal finance, and this effort can comprise many steps.

• In village finance aggregate institutions of the poor manage revolving loan funds at the village level. These funds help the poor access credit at better rates than those offered in the informal sector, and it helps them start income generating activities that create assets and collateral and to get experience repaying loans on time, which makes them more attractive to formal financial institutions. In Sri Lanka, Village Savings & Credit Organizations (VSCOs) in the Gemidiriya project have loaned 1,417.3 million rupees as of December 2008, earning 131.9 million rupees in interest income.
• Linking with MFIs often involves identifying and vetting potential credit providers, building their capacity with technical assistance, and having them provide credit to project beneficiaries. The Pakistan Poverty Alleviation Fund (PPAF) has provided 2.4 million microcredit loans through carefully-selected intermediaries. This represents 50% of the microfinance sector. Forty-six percent of the loans went to women. The recovery rate is 100%.
• Linking to commercial and other formal financial institutions requires information about the creditworthiness of groups and groups that have experience repaying credit (even through village funds). In the Andhra Pradesh, the Rural Poverty Reduction project started with a village finance model, where aggregate institutions of the poor accessed funds from the project (at first) and ultimately MFI and commercial banks, which they on-lent to village organizations and self-help groups. As of the end of 2008, 25 commercial banks and 16 regional rural banks have provided over 58 billion INR in credit to community organizations from 2001 to 2008.

Why Link to Formal Finance if Village Finance is Available?

Community groups that can access village finance ultimate strive to access MFIs and commercial banks for a number of reasons:

• Members may be able to source bigger as well as cheaper loans than what is available from the group’s internal savings;
• Excess group savings can be deposited in banks for safekeeping;
• Members may gain access to other financial services such as insurance.

Using Matching Grants to Finance Livelihoods

Matching grants can be a useful starting point for common pool and productive public goods, or initial asset creation, given that some livelihood-related investments need relatively large start-up funds and/or may be too risky for ‘debt financing’, particularly for the poorest.

In Afghanistan, democratically elected Community Development Councils (CDCs) can receive block grant transfers to the CDC bank account to support rehabilitation and development activities that they plan and implement. While the goal of private sector and bank linkages was not among the original objectives of the project, the institutional development and the investment in productive public goods have attracted MFIs and private companies.

Some projects use matching grants to finance livelihoods investments by community groups that cannot access formal financing. These efforts may be done in addition to loan funds, as in the Nepal Poverty Alleviation Fund where CIGs can use a mix of match grants and village loans to finance income generating investments. These projects also negotiate linkages with formal finance based on the fiscal discipline exhibited by the groups. They also forge links with institutions—such as cooperatives—that can also provide financial links.

Using Technology for Better Access to Finance

A computerized financial management system having control functions built into the system for sub-projects at the village level as well as other revenue and capital expenditure at the central level has been strongly recommended for the ongoing programs. Through better use of technology, it is hoped that a computerized system will help avoid time consuming pre-audit functions for numerous transactions and use of automated system at the transaction level rather than posting transactions after they occur.