This report was originally prepared for the Asian and Pacific Development Centre Regional Workshop on Microfinance for the Poor in the Asia-Pacific (BANK POOR 96), held in Kuala Lumpur from 10-12 December 1996. It provides an assessment of microfinance in the Pacific island countries (PICs). It is based partly on an overall review of microfinance in nine countries in the region, namely Cook Islands, Fiji, Kiribati, Papua New Guinea (PNG), Solomon Islands, Tonga, Tuvalu, Vanuatu and Western Samoa.
the Womens Economic and Social Development Programme (WOSED) in Fiji;
the rural credit union movement in Solomon Islands; and
the outer islands credit project of the Tonga Development Bank.
Background to the PICs
Most of the PICs are currently emphasising private sector development. Moreover, despite the lack of official recognition, there is evidence of significant poverty in the region. Microfinance has a potentially important role to play, both in encouraging cash-generating activities in the informal sector of the economy, and in poverty alleviation.
However, there are a number of constraints to sustainable microfinance in the PICs, including low and highly dispersed populations, the lack of transport and communications infrastructure in many areas, and the continuing importance of the non-monetised subsistence economy in many countries.
Current access to financial services
There has been an increase in the number of microfinance programs in the PICs in recent years, with the most common programs being development bank schemes, revolving funds, credit unions, and most recently Grameen replications.
However, most of these schemes have been unsuccessful, or are still at a very early stage of development. In the larger countries in the region in particular, microfinance schemes have very limited outreach, and most disadvantaged people and people in rural areas have little access to financial services.
Performance and capacity of microfinance programs
Outreach to the disadvantaged
While there is a need for a dramatic increase in the outreach of microfinance, it is important that existing programs be expanded gradually, at a pace consistent with improvements in institutional capacity.
With the partial exception of Liklik Dinau Abitore Trust, the major microfinance programs in the Pacific do not focus strongly on targeting the most disadvantaged borrowers. Microfinance programs should establish effective means tests to ensure that they target the most disadvantaged people in the community, and refine their strategies for reaching such people.
The so-called minimalist model, which holds that it is not necessary to provide general technical and business training to borrowers, is inappropriate in the Pacific. Programs should provide business and technical training for their clients, or coordinate their activities with other programs that provide such training.
Savings facilities are at least as important as loan facilities. All programs should require compulsory saving as a precondition for borrowing, and should provide voluntary savings facilities, with voluntary savings able to be withdrawn on call.
Viability and sustainability
There are a number of major and unavoidable impediments which work against microfinance programs achieving self-sufficiency in the Pacific. These include high cost structures, shortages of qualified workers, low population density and remoteness, and difficulties in achieving high repayment rates. The indicative timetables for achieving self-sufficiency in the Guiding Principles agreed by donor agencies (three to seven years for operational self-sufficiency, five to ten years for financial self-sufficiency) are unrealistic in the Pacific.
All programs are currently operating at low levels of self-sufficiency. While this partly reflects the fact that they are relatively new, all programs should develop strategies to improve their operational and financial self-sufficiency.
Apart from Liklik Dinau Abitore Trust with an effective interest rate of 29.4 per cent per year, programs in the Pacific generally have effective interest rates between 8 and 13 per cent. These are far too low for sustainability, and should be increased substantially. This need not require large increases in nominal interest rates.
Programs tend to have small numbers of borrowers spread over large areas, significantly increasing unit costs. Programs should establish themselves far more intensively with more borrowers in smaller areas. Ideally, programs should restrict themselves to a small number of districts. Within districts, programs should establish themselves intensively in a small number of contiguous villages.
While repayment rates for most of the programs included in this study are relatively high by Pacific standards, they are low by most standards. Programs should continuously monitor their repayment rates, and should adhere to the key features of the Grameen Bank model, such as compulsory savings requirements, group guarantees, and intensive
training and motivation of borrowers, as much as possible.
Financial management and reporting requires considerable improvement. All programs should regularly produce at least the minimum reporting information set out in the Guiding Principles agreed by donor agencies.
Program management is a critical issue. It is important that managers have much greater exposure to core concepts of microfinance provision and international best practice if programs are to be developed systematically to maximise outreach on a sustainable basis.
Programs should focus on training as an integral component of addressing issues such as lending policies and procedures, means testing, financial management, and information systems.
As noted above it will be difficult for microfinance programs to achieve self-sufficiency, and they may need access to funds from donor agencies and governments for a considerable period of time. Donors and governments should be realistic about the time frames necessary for programs to reach sustainability, and should be prepared to make long term commitments to fund them. Funding will be necessary for administrative expenses, institutional strengthening and loanable funds.
Programs should work towards accessing commercial funds, from commercial banks or other sources, over the medium term.
Policy and macro factors
Those programs that have not already done so should establish independent governance structures as soon as possible. This is likely to reduce the scope for political interference and increase flexibility.
Governments and central banks should consider how they can best support the development of microfinance and rural financial services on a sustainable basis. This includes developing overall strategies for the provision of financial services to disadvantaged people, and establishing supportive arrangements for monitoring and supervising microfinance programs.
Small grants schemes should only be available to community groups for genuine community projects. Donor agencies and governments should not provide grants to individuals, or for income-generating projects. They should not support small loan schemes unless they are established on a rigorous basis with mechanisms to ensure high repayment rates.
Institutional strengthening and capacity building
Microfinance programs require technical assistance in a variety of areas. These include training staff and clients, improving lending policies and procedures, developing effective means tests to target disadvantaged people, developing strategies for improving self-sufficiency, improving financial management, developing effective financial and management information systems, and establishing effective and independent governance structures.
Governments and central banks may also require technical assistance for developing the overall policy framework for microfinance.
Donor agencies and governments supporting microfinance programs should incorporate assistance for institutional strengthening in all microfinance projects.
In addition, donor agencies should consider flexible, cost effective ways of supporting capacity building, such as funding national workshops on microfinance, establishing a small unit for providing short term technical assistance, and establishing a South Pacific regional training program.
Alternative models of microfinance
It is unlikely that one model of microfinance would be appropriate throughout the Pacific, given differences in population density, infrastructure, existing institutional arrangements, and other factors.
Grameen replications have a number of advantages over other models, but are expensive. They are most likely to be feasible in those areas with relatively large populations and population densities, and reasonable infrastructure. Where the Grameen model is used, it would seem appropriate to follow it as closely as possible unless there are strong reasons for modifying it.
The structure of development banks makes it difficult for them to reach the most disadvantaged borrowers, while the use of traditional banking practices designed for much larger loans leads to high transaction costs. If development banks are to engage in microfinance, they should consider innovative approaches to lending, such as lending through local communities, NGOs and self-help groups. Such groups will need capacity-building assistance for this purpose.
Credit unions are likely to be particularly appropriate in more isolated communities and on small islands, where intensive monitoring and supervision of borrowers is not feasible. They have a number of attractive features as microfinance institutions. To fully realise their potential, however, they will need to establish specific programs or targets for providing services to disadvantaged people, and allow members to borrow sufficient sums for income-generating activities.
As a general rule, revolving funds are likely to be less effective than credit unions. However, they are most likely to operate successfully where they impose a savings requirement before people are eligible to borrow, where there is an effective apex body to provide training, and monitoring and supervision, and where there is a means test to ensure they benefit the genuinely disadvantaged.
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