Who are rural entrepreneurs, asks one of the contributors to the SFD, family producers who don’t pay for wages and use mostly their own work force? Medium and large producers with lot a workers? Much depends on the local development situation. According to the contributors to the SFD, there are at least three different subsegments of the market where private and governmental agencies may intervene in various ways: (i) the rural poor, particularly in disadvantaged countries or marginal areas; (ii) all segments of the rural population in more open economies, particularly non-agricultural entrepreneurs in a situation of increasing diversification; and (iii) commodity producers, processors and traders, with a tremendous growth potential if the potential for value-added is fully mobilised. 

Rural entrepreneurs in stagnating countries

From the perspective of poor countries like Ethiopia, rural entrepreneurs are the rural poor. The communication system, particularly the road network, makes access to financial services difficult. Where access is available, as in the case of the Amhara Credit & Savings Institution (ACSI), one of several large MFIs, clients’ low skills and business abilities reportedly weaken their absorptive capacity. Many are found risk averse, or for cultural reasons don’t like to venture into non-traditional activities, while others have a low income perspective and simply don’t have the demand for incomeimproving services. Such problems reportedly manifest themselves more profoundly in women, whose access is further limited because of problems emanating from a male dominated social order; yet the situation of women in microfinance is more differentiated, as will be shown below.

Rural entrepreneurs in more progressive countries

A different part of the rural enterprise spectrum is covered by contributors from countries with a more open rural economy. Here it is argued that microfinance is important to rural entrepreneurs for agriculture, but under conditions of increasing diversification even more so for non-agricultural enterprises. Microfinance thus comprises all segments of the rural population.In fact non-agricultural activities often complement agricultural income and labour flows and hence help build livelihood stability and growth. It is further argued that rural financial services actually become much better if we take the micro-specificity away and concentrate on sustainable financial services to a wider array of rural households and businesses. This increases institutional viability, reduces unit costs for services to the poorest and helps finance not only other poor but other important rural actors including – truckers, agribusinesses, side businesses, etc. all of which have an important role to play in rural development.

Yet, the importance of non-agricultural activities not withstanding, commodity production, processing and trade continue to be the backbone of the rural world in many developing countries. The commodity sector provides subsistence food, income, employment and opportunities for growth and development.

 

One contributor reports that, “all the microeconomic data collected over the last 40 years in Nicaragua demonstrates that small land holders, family producers are more productive and more competitive than large and medium producers.” From the US it is being reported that agriculture, in myriad forms of property, acts as an engine for economic growth. Eg, crops increasingly become the basis for products other than food or feed (eg, fibres and fuels), and as research expands opportunities for value-added innovations increase; this in
turn increases employment.

 

There are two sides in the financing of the commodity sector:

(i) the demand side, with strategies for processors, producers and traders; and

(ii) the supply side, with strategies for financial institutions. Closing the supply and demand gap is a daunting task, but not impossible.

Two issues are crucial in combating poverty in a sustainable way:

(i) on the demand side, a move is necessary from a sole emphasis on commodity production towards value creation through processing and marketing goods that respond to market pull;

(ii) on the supply side, there has to be a shift away from charity and interest rate subsidies towards dynamically growing and sustainable financial services at commercial terms.

 

From this perspective, the challenge is how to turn effective (ie, creditworthy) demand for financial services into effective supply of financial services. The two sides have sometimes contradictory, but mostly complementary, though not identical interests. These are not two different worlds, but two sides of the same world: they can only grow together or fall together. Each contributes to the other’s growth or failure: viable financial institutions provide financial services to producers, processors and traders, thereby contributing to their viability and growth; viable producers, processors and traders contribute to the viability and growth of financial institutions. Viability is crucial.

 

Short-term benefits of small entrepreneurs – gained, e.g., by running away with a loan – are of little benefit to them if this is the last loan they received. Squeezing collateral out of a small entrepreneur who cannot repay a loan is of little benefit to an MFI as this will be the last loan given to that customer. Sustainability is crucial: of producers, processors and traders on the one hand and of MFIs on the other hand. A few high-quality loans to a few first-rate producers, processors and traders do little good: be it to the commodity sector or to the MF sector. Outreach is crucial.

A broad spectrum of topics that can shape a strategy for rural enterprise development were discussed. Several examples of the potential and needs of rural agro-processing were presented
in the SFD: cassava, leather, and preserved and processed fruits and vegetables. In the past few decades, particularly during the heyday of agricultural credit, there has been a sole emphasis on production, regardless of costs, comparative advantage and opportunity.

 

This has changed fundamentally. It is now realised that the viability and profitability of rural enterprise and rural microfinance institutions are intimately linked and mutually reinforcing in a virtuous circle. Profitability matters, not production. Of crucial importance are value-addition and quality at every link of the commodity chain to respond to strong market demand from rural and/or urban areas. There is a huge underutilised potential here.

 

In Ghana, as in numerous other countries, cassava processing offers highly profitable, diversified opportunities for production, processing, trade and investment. Eighty percent of farmers produce cassava, amounting to 10 million tonnes, which accounts for 22% of agricultural income and supplies 25% of calories consumed.
The International Institute of Tropical Agriculture (IITA) in Nigeria exhibits 32 cassava products; very few of them are found on local markets, commercialisation being the bottleneck. In this situation, Feed & Flour (Ghana) Ltd. (FFGL) propose to set up a plant for the processing and marketing of high quality cassava flour, based on a modification of the gari-making process developed by IITA. Facing an estimated annual demand around 144,000 tonnes, there seems to be a good potential for a joint investment by local and external investors.

Quality matters

Quality is of crucial importance. Quality (together with standardisation and packaging) is crucial throughout the commodity chain and in the process of adding value. Each commodity has its own range of opportunities for adding value and improving quality. In the case of meat, hides, leather, this starts with the quality of livestock and its veterinary care, which has a bearing on the post-processing of meat and leather. The major needs are training of producers in clean production and processing, quality awareness and quality management, capacitybuilding, access to finance, accurate information, and essential utilities and services.

For a substantial improvement in the processing and marketing of leather, better cooperation between private producers, producer associations, commercial institutions, government agencies and donors is required. Another example are perishable fruits and vegetables. Depending on seasonal and regional variation, many developing countries produce an excess of tomatoes, yet import large quantities of tomato concentrate. There may also be a seasonal abundance of fruit like mangoes, much of which, in the absence of processing facilities, is lost. The drying and processing of fruits and vegetables would offer solutions to these problems. The preservation and processing of fruits and vegetables adds value, generates employment and improves diet.

Key issues are: Is processing worthwhile? And can farmers supply the material on a regular basis? Can economies of scale be achieved? Value creation requires the planning of diversified processing of several fruits and vegetables over the year to maximise plant utilisation; intermediate-scale processing through contract farming and the pooling of producers; the use of locally available raw materials and appropriate technologies to minimise capital expenditure and, at the same time, maximise product quality.

Success factors are adequate training, the quality of raw material, and market analysis. The history of financing is full of failures. The sector needs experienced micro-entrepreneurs
linked to farmers who are willing and able to grow fruits and vegetables, thereby guaranteeing:
– A steady source of supply
– Appropriate risk management, such as spreading
production over several fruits and vegetables
– Good linkages between producers and processors
– Financial engineering comprising savings mobilisation
as a basis for self-financing
– The provision of investment capital
– A balancing of individual and group lending
technologies
– A legal framework for sanctions against defaulters

Focus must be on sustainable financial institutions with sustainable financial services, combining credit with savings as a service to customers and as a source of loanable funds, thus moving away from credit-only provided through projects and programmes. Any MFI, bank or microbank striving for sustainability must: mobilise their own resources, apply appropriate lending technologies, provide attractive loan products with appropriate interest rates, have their loans repaid, manage their risks, make a profit, finance the growth of outreach from the growth of savings and profits, and through advocacy strive for a conducive policy and legal environment.

 

Evidence to the contrary in the old world of development finance notwithstanding, sustainable MFIs, microbanks and AgDBs in the new world of development finance, with appropriate risk management technologies, have demonstrated their ability to lend to the agricultural sector including producers, processors and traders at low default rates and high profits. The number of
such institutions has substantially increased in recent years: in all ownership categories, including government-owned banks, private and community-based rural banks, and various types of MFIs. Networks and associations of MFIs and banks have a crucial role to play in disseminating the positive experience and developing support strategies in cooperation with government and donor agencies.

 

Experience in several countries has shown
that the informal financial sector is quite able to cater for small-scale financial needs, but not for larger loans; that rapid access to finance is more important to borrowers than cost; and that agricultural banks, as in Thailand and Bangladesh, are able to successfully diversify their portfolio by combining loans to both agricultural producers and non-agricultural small enterprises and processors.

 

Business development services (BDS):

BDS are of crucial importance to small and micro enterprises in various sectors of the economy, linking the strategies of producers, processors and traders with those of financial institutions. As reported in the SFD, to date more is to be
learned from error than trial. Not only have many heavily funded BDS programmes broken down; it is being argued that it is the very fact of donor support which has undermined the market for BDS. Just as subsidised interest rates have undermined financial markets, so has donor support undermined the viability of
BDS. This, however, can be turned around, as the experience with CEFE (Competency-based Economies through Formation of Enterprise) shows.

Provision of BDS as a private good CEFE is a medium, small and micro enterprise development training concept and was developed in 1979 by GTZ, the German Technical Cooperation
Agency. It is an action-oriented adult training tool, applied in numerous countries around the world, which helps micro- smalland medium-entrepreneurs developing a realistic
business plan, which they implement at their own risk. To break the vicious circle between donor dependency and lack of viability, the proponents of CEFE have proposed a new paradigm, turning BDS as a public good into a private
good. They argue that BDS should be provided by the private sector and governments should only facilitate the market development of BDS. Accordingly, the delivery of BDS has now been made a private business in various countries, including
Sri Lanka. In Sri Lanka, 18 organisations are making use of CEFE as a fee-based BDS in different contexts and environments, 10 of them in the private sector. To a good number of them, BDS is a major source of income. These organisations use CEFE for three major components of their portfolio: training & capacity development of BDS organisations; brand image development; and product packaging & marketing. Market orientation, marketing and diversification for agricultural producers, processors and traders is one of several products, with two major parts: market orientation and business planning. The benefits include: sustainable increase in income, better ability to analyse production and marketing patterns, and the identification and use of opportunities for improved marketing.
The CEFE team in Sri Lanka has also analysed most of the major microcredit schemes, which were all donor-driven, and found that most of them were not successful. They have already tested and introduced a new approach to link commercial BDS and commercial microfinance schemes operated by microfinance institutions and banks. The approach includes direct linking of CEFE training and microcredit and opening of CEFE training for microcredit
customers on a commercial basis.

A different experience is reported from India, where Nabard, the National Bank for Agriculture and Rural Development, has promoted the establishment of about 1.6 million self-help
groups (SHGs) of the rural poor and their linkages with some 36,000 bank branches. The approach, referred to as SHG Banking, is applied all over India: in marginal as well as
high-potential areas. Numerous NGOs and government organisations are involved in social mobilisation and non-financial services. An example is Bharatiya Agro Industries Foundation
(BAIF) Development Research Foundation an NGO which has helped some 13,000 tribal families, who are among the disadvantaged in India, to cross the poverty line: (i) through sustainable agri-horti-silvicultural production on 12,000 acres of rehabilitated lands and (ii) through commodity processing. Against a historical background of the direct sale of raw materials, six vertically integrated layers of production, processing and marketing were established in remote forest areas:
(i) individual farm households for basic production on wastelands, (ii) small farmer groups for procurement and grading, (iii) community organisations (Gram Vikas Mandals) for the establishment of community processing facilities,
(iv) village planning committees for the organisation and coordination of activities, (v) regional cooperatives for finishing and packaging; and (vi) an apex organisation for federated
marketing. BAIF acted as a resource and technology sourcing agency, introduced streamlined systems, provided managerial backup services, and facilitated credit and market linkages.
The two major products where producers took control of the full commodity chain were mangoes and cashews. In the case of
mangoes, procurement and grading alone added 20% value. In a second step, the raw mangoes are cut into pieces and semi-pickled at village level, which are then brought to the final pickling stage by cooperatives, where they packaged and forwarded to a Producer Company for federated marketing. Value addition through processing contributed substantially
to a sustainable increase in employment and income.

Combining financial and non-financial services including BDS under a single institution is frequently advocated as a necessary strategy in poverty alleviation and rural development. The favourable role played by the Cameroon Gatsby Trust may serve as an example.

Financial and nonfinancial services to the commodity sector in Cameroon Cameroon is a country where financial and non-financial services strategies for processors, producers and traders have developed over a period of almost 20 years. The process was spearheaded by the Gatsby Root Crops Project, 1985-93, with a focus on improved technologies for cassava, yam and sweet potatoes. It was replaced in 1994 by a sustainable financial institution, the Cameroon Gatsby Trust (CGT), which continued multiplying and disseminating improved varieties, but at the same time provided microcredit to the producers.
During a third phase individual credit was replaced by group lending, comprising microcredit through solidarity groups and mesocredit to associations of small groups (at a satisfactory repayment rateof 96.5%). This also marked the cultivation of a most remarkable approach: building on preexisting indigenous self-help groups including rotating and non-rotating savings and credit associations, which are ubiquitous in Cameroon and neighboring countries.
A fourth phase started in 2003 by adding a range of nonfinancial services, comprising skill training in such fields as soap-making and tie-dye making, food conservation and tuber multiplication; group and association management training; financial management; and facilitation of local and regional trade fair participation. The trade mark of CGT is now the combination of financial services with business development services for three major market segments in the commodity sector: producers, comprising yam, cocoyam, sweet potatoes, plantains, corn and cassava as well as livestock farmers; cassava and textile processors; and traders in food, handicrafts, textiles and livestock.
The CGT approach constitutes an option in which special emphasis is placed on (i) group and association formation on the basis of pre-existing indigenous group structures,(ii) internal financial intermediation based on savings, (iii) their upgrading to sustainable formal organisations, (iv) access to refinancing by CGT, (v) networking among associations, and (vi) linkages of associations with other institutions.

Drawing some lessons

Care has to be taken in generalising singular observations. In a multi-country evaluation of NGO programmes in francophone West Africa, it was considered important for such services for rural micro-entrepreneurs to be linked. Among the non-financial services were literacy training, group formation, organisational assistance, empowerment assistance, informainformation dissemination, and skills training.
Some NGOs had carried out both types of services themselves, some had created external MFIs, some had transferred the execution of financial services to existing MFIs. However, some similar weaknesses were found in most of the models: Social and business orientations were rarely separated, and/or the transformation from a socially oriented to a business-oriented design of the financial programmes proved to be very difficult and lengthy.