Magazine article African Business

The Rural Finance Revolution

Magazine article African Business

The Rural Finance Revolution

Article excerpt

The work of the UN bodies, the Food and Agriculture Organisation (FAO) and the International Fund for Agricultural Development (lEAD) is not widely known but, as our correspondent points out, is vital in maintaining the lifeblood of African economies - the small scale farmer.

Love One Another' is becoming more than a song, thanks to singer Youssou N'Dour who was at the forefront of the gala concert that took place on 17 October in Dakar, Senegal. Broadcast world-wide as TeleFood 98, the concert was organised for the second year running by the FAO, the UN's Food and Agriculture Organisation. The aim of gala concert was to raise both awareness of the need to reduce the number of hungry people world-wide, in line with the objective of the 1996 World Food Summit, as well as money for specific projects.

In fact, last year's TeleFood concert raised more than $2m for the benefit of almost 150 small projects, a third of which were undertaken in 23 African countries. These funds, while vital for the projects at stake, are nevertheless a trifle compared to the annual budget of the FAO ($325m) and a fortiori with the $3bn or so that FAO-assisted projects attract each year from donor agencies and governments.

But what exactly is the role of the FAO? Created in 1945 to raise levels of nutrition and standards of living, to improve agricultural productivity and to better the condition of rural populations, the FAO intervenes mainly through a mixture of direct development assistance, collection, analysis and dissemination of information and advice to governments. For example, earlier this year the FAO criticised a proposed ban on fish exports from East African countries affected by cholera.

A particular focus of the FAO is to improve access to finance by rural populations. The modes of intervention recommended by the FAO have actually evolved in line with profound changes in the structure of the economy and with lessons drawn from past mistakes. Market liberalisation and privatisation of the means of production and trading have increased financing needs while the cost of credit is being pushed up due to the elimination of credit subsidies. At the same time, the experience with state-owned agricultural development banks and directed credit programmes was, in general, less than satisfactory. All this encouraged a shift of attention to rural financing, the latter encompassing both agricultural and nonagricultural activities.

Donors also realised that the past supply-led strategy needed to be replaced by a savings/deposits-led approach. In the end, because the amounts involved in rural financing tend to be small, rural financing by and large overlaps with microenterprise financing, another means of assisting in the economic development encouraged by donors and commonly referred to as 'microfinance'.

The guiding principles of the FAO in the area of rural finance are to promote realistic interest rates, encourage mobilisation of local savings and facilitate development and efficient operation of a variety of financial intermediaries, including those in the informal sector. This said, the Rome-based institution has a particular fondness for safeguarding savings deposits, improving collateral management, incorporating concerns for the environment into bank lending policies and providing automated operation systems (the FAO's proprietary MicroBanking System is already installed in over 1000 sites in some 28 countries).

Recognising that isolation would be fruitless, the FAO established a forum for coordination between rural financial institutions in developing countries and organisations and agencies in developed countries. …

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