Income-Generating Activities - Action Against Hunger

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Field handbook • Scientific and Technical Department APPENDIX 6: FINANCIAL SERVICES FOR VULNERABLE POPULATIONS: AN EFFICIENT TOOL TO REACH ACF MISSION 1. Summary The modern microfinance movement started in the 1970s when pilot programs in Bangladesh, Bolivia, and other countries began to provide small loans to groups of vulnerable women to invest in economic activities. By lending to groups of women where every member of the group guaranteed the repayment of all members, these microcredit programs challenged the prevailing conventional wisdom that vulnerable people were not able to repay loans or save on a regular basis. It appeared that when offered appropriate services meeting their needs, a very important percentage of them would repay loans with interest. As a result, microfinance institutions (MFIs) providing financial services to vulnerable populations developed. The range of products - credit, savings, money transfers, microinsurance - has expanded as MFIs developed a better understanding of the needs of their beneficiaries. In 2004, ACF issued a first positioning paper on microcredit in which ACF decided not to develop microfinance activities but would explore the creation of revolving funds and partnership with microfinance institutions. Since then ACF has implemented several programs using financial services. In the meanwhile the microfinance sector changed significantly and new literature was published. The objective of this Positioning Paper is to update and clarify ACF positioning visà-vis the use of financial activities to reach its mission. Note: for the purpose of this Positioning Paper “Income Generating Activities” is taken with a broader sense. They include household IGAs as well as IGAs for small groups within the community. WASH programs sometimes include this second type of IGA. Main ACF Recommendations > ACF recommends analyzing whenever appropriate microcredit as a potential funding mechanism for IGA projects; > ACF should never become a formal microfinance institution or register as a banking institution; > ACF recommends identifying in advance potential partner MFI in areas of activity; > ACF encourages microfinance activities done in partnership with specialised organizations (credit & saving cooperatives, rural banks, village banks, NGOs specialized in the microfinance sector etc) INCOME GENERATING ACTIVITIES: A KEY CONCEPT IN SUSTAINABLE FOOD SECURTIY 101
➔ > ACF does not recommend setting up new revolving funds > ACF recommends introducing beneficiaries with MFIs offering formal saving services Alternatively, ACF encourages setting up saving groups in partnership with previously established community organizations 2. Main Microfinance Concepts What is microfinance Microfinance offers vulnerable people access to basic financial services such as loans (or microcredit), savings, money transfer services and micro-insurance. Vulnerable people usually address their need for financial services through a variety of financial relationships, mostly informal. Credit is available from informal moneylenders, but usually at a very high cost to borrowers. Savings services are available through a variety of informal relationships like savings clubs, rotating savings and credit associations, and other mutual savings societies. But these tend to be erratic and somewhat insecure. With time and experience, microfinance institutions have developed a variety of financial services to meet the needs of vulnerable populations. The main financial services that MFIs offer are: • Loans: the best-known microfinance product, microcredit provides an amount of money to beneficiaries to develop income-generating activities. It can be used for working capital or investment in equipment, livestock, seeds etc. Loans are repaid with an interest. • Savings: because traditional commercial banks tend to ignore vulnerable populations, MFIs developed saving services to offer safe, secure and accessible deposit services. Some programs require compulsory savings before a loan is provided. Other MFIs developed voluntary saving products, which have been particularly well received by vulnerable beneficiaries. But in some countries NGO microfinance institutions are not permitted to collect deposits. • Remittances and money transfers are used by many people as a safe way to send money home. Remittances are subject to technology innovation such as money transfer using mobile phones to reach more people living in isolated areas. • Micro-insurance helps cover vulnerable populations against specific external risk in exchange for regular premium payments proportionate to the likelihood and cost of the risk involved. Main micro-insurance products cover the death of the borrower and health risks. 102 INCOME GENERATING ACTIVITIES: A KEY CONCEPT IN SUSTAINABLE FOOD SECURTIY
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➔ Pages CHAPTER 4: INCOME GENERAT
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