Foodflation

July 8, 2008, Elizabeth Littlefield

When a family already spends 80% of their income on food and the prices double - what do they do? The food crisis affects poor people most acutely. Foods that are mainly consumed by the poor have seen some of the largest price rises; sorghum rose 95% in 2007-8. Some of the causes of the food crisis - food shortages, un-manageable price increases for poor and very poor households, and export controls - demand rapid action. Others - such as increased bio-fuel production, low agriculture productivity in Africa, and weak market infrastructures - will require longer term solutions.

Feeding people in crisis is obviously the most urgent issue. For very good reasons, donors and governments are coming under pressure to disburse large sums quickly. Since MFIs have a branch network and many clients, it’s often tempting to think that we can use them to distribute emergency assistance. In past crises, when MFIs and loan officers do the distribution directly, this has proven to be very damaging to MFIs’ commercial principles, and their ability to survive to provide services in the long run. But it’s hard to even talk about preserving commercial principles when people are going hungry. So, what should we do?

A better approach in previous crises, although not without risks, has been for microfinance institutions to partner with relief organizations to distribute food or other forms of relief, with clearly delineated roles (like relief staff wearing clearly different T shirts from loan officers or visiting at different times).

When clients are severely affected and loan repayments can’t be met, some MFIs have rescheduled loans, provided emergency loans that help pay the original one, or temporarily reduced or suspended payments. Some MFIs have also relaxed compulsory savings requirements until the situation abates, though this has had mixed long term effects. And ironically savings can be the most important thing for poor families in crisis.

What role should microfinance and MFIs play in the food crisis? I’d like to hear your views on where microfinance can help meet urgent needs while preserving long term viability.

TAGS: access to finance, food crisis, microfinance

4 comments

role vs. risks

July 08, 2008, Jamie Zimmerman

Thanks for writing about such a timely topic. Obviously as the foodflation crisis unfolds, it will inevitably impact both microfinance institutions and their clients and I commend the effort to think deeply about appropriate responses from a crucial sector. However, before exploring the role of MFIs in mitigating the effects of foodflation on their clients or the communities in which they operate, I would have liked to have seen an analysis of the risks the food crisis has for MFIs (small and large) in operation around the world. How will food price inflation impact demand for microloans from smaller agriculture producers (and what will that do to liquidity managment for MFIs?)?; how is/will inflation (in general) impact interest rates?; and what about foreign exchange risk mitigation as a result of food flation? These are just a few starter questions I think we should consider before we start getting creative on the role microfinance/MFIs should play in this crisis (even though I do think there is one to play).

Food crisis

July 09, 2008, Phalarin Chea

In Cambodia, high inflation rate is much affect to the poor people because most of each farmer household has land area less than one ha and they live totally based on the rice production, eg food, dresses, health,education of children. When the price of rice increase, most of farmers do not gain benefit because most of them has sold their rice since early harvesting. Food price increase would provide more benefit to rich people who have a large rice field where they can produce more production and some others have bought rice in huge quantity to keep in warehouse for export. Some other poor who are workers and have ability to buy food for a day or a week would suffer much on their life when the food price increasing fast. Meanwhile, their labor cost is slightly increase which is not proportional to the inflation rate and food price. Furthermore, they poor would paymore more in transportation, health, and education. In short, high inflation rate, food crisis, high price of petroleum have affect a lot poor people in living. To be survive, they try to reduce expenses in other components which is not direct impact to their living such as reducing saving, less quality of food, stop their children to school etc...

Food crisis and MFIs

July 16, 2008, Manohar Sharma

I think you have raised a very timely issue as a lot of proposals are currently calling for ramped up credit services to address the food price rise. Many are now also talking about asking MFIs to restructure loan repayments in order to provide flexibility to poor consumers. However, I do not think that microfinance institutions are the appropriate frontline institutions to DIRECTLY combat high food prices. Actually, to the extent that a MFI is unable to realign its nominal lending rates to rising inflation, its own financial bottom line may be in jeopardy, especially if it is not in the position to take advantage of spreads between saving and lending rates. (There are good chances that savings deposits will plummet in any case.) Also, as the source of the current crisis appears to be structural and long term, rescheduling repayment is not as easy as in situations when the disturbance is temporary (eg. floods or droughts) and clientsâ incomes are expected to rebound over the fairly short term. But the tension involved in âpreserving commercial principles when people are going hungryâ is, as you say, is quite real, especially when the key objectives of many of these institutions are to reduce poverty and hardship faced by the poor. In that sense, MFIs need to assess the implication of rising food prices on pattern of financial services demanded by the poor, and then figure out ways to adapt products and services that address this demand in a meaningful and sustainable way. To take an example, a renewed effort in the area of Agricultural Finance is now something quite worth pursuing. Despite all the woes that high food prices bring, one implication is clear: in many developing countries returns to investments in food production will now be significantly higher than in the past. It would therefore bode well for MFIs to recognize this changed market condition. And if MFIs respond by enabling poor and small farmers to finance these investments (working capital, land improvement etc.) and increase their incomes and food supply, a win-win situation is almost guaranteed. This will of course require MFIs to realign their products and services to agribusiness and food production. But this type of response holds more promise than ones that try to find quick fixes on the consumption side.

La microfinance au coeur de la vie chère

August 03, 2008, Mbouombouo Ndam Joseph

Confrontés au problème du surenchérissement des prix des denrées alimentaires dont la facture sociale est parfois très lourde, les dirigeants des pays d'Afrique Centrale comme ceux de tous les autres pays pauvres réalisent la nécessité d'accéder à la souveraineté alimentaire qui passe d'abord par une meilleure productivité vivrière locale. Ce constat confère toute son importance à l'économie populaire et à tout autre système qui vise d'abord à satisfaire les besoins locaux. Le secteur informel et la multitude des petits opérateurs qui s'évertuent à répondre à moindre coût à la demande de consommation et de services des populations nationales doivent être considérés avec plus d'égards désormais. De même que les mécanismes qui leur facilitent l'accès aux services financiers. La microfinance en fait partie, parce qu'ayant un contact direct avec les bénéficiaires et offrant des possibilités de mesure directe de son impact.
La prise de conscience de l'importance de la perspective micro comme préalable au développement économique est telle que de nombreux gouvernements veulent promouvoir les petites unités de production, après avoir assisté au déclin des grandes unités dédiées à l'exportation. Mais il faudrait, pour y arriver, s'appuyer sur des mécanismes économiques qui ont eux aussi un prisme micro de l'économie. Les petits paysans agissant en acteurs individuels ou regroupés au sein des organisations paysannes démontrent de plus en plus leur efficacité à mettre à la disposition des villes des produits alimentaires substituant largement ceux importés auparavant. Le haricot, le maïs ou le manioc sont autant de produits dont la production peut doubler voire tripler d'une campagne à l'autre si des facteurs précis sont mis en jeu : la disponibilité des terres, celle des infrastructures de stockage et de transport mais surtout celle des financements pour les intrants et les frais intermédiaires.
Car tel est le cÅur véritable du problème : le financement. Les banque boudent l'agriculture, surtout celle paysanne à cause des aléas trop nombreux, et de son incapacité à fournir des garanties classiques. Du reste, bien que réputées sur liquides, les banque d'Afrique Centrale sont insuffisantes en nombre, concentrées uniquement dans les grands centres urbains et ont des conditions très élitistes. A côté des prêteurs informels et autres usuriers, la microfinance s'est développée au cours des 20 dernières années comme une formule financière taillé sur mesure pour les économies complexes de nos pays. Les établissements de microfinance ont en effet montré leur capacité à prêter et à se faire rembourser par le secteur rural et les acteurs de l'économie populaire, en combinant les principes formels avec d'autre moins formels, copiés sur les mécanismes de solidarité communautaire. La microfinance est de ce fait une chance pour les pays du sud de cheminer vers leur souveraineté alimentaire.
Malheureusement, cette trouvaille pertinente du secteur informel souffre d'un déficit chronique de trésorerie et de capacités humaines et ne peut efficacement faire face aux demandes qui lui sont adressées en zone rurale. Mais ce ne sont pas les seules limites. Les initiatives de microfinance s'installent surtout en ville au détriment des campagnes, attirées par le confort infrastructurel et sécuritaire des cités. Les subventions et autres appuis accordés par les pouvoirs publics et les bailleurs de fonds pêchent par l'absence de formalisation des critères d'octroi et des mécanismes de suivi. La diversité des conditions (taux, durées) mettent les divers programmes en concurrence et provoquent des interférences négatives avec les programmes privés de microfinance. Le phénomène de la corruption routière (inflation des postes de contrôle) pénalise surtout les clients de la microfinance (transporteurs, négociants, paysans, petits salariés des villes) et les établissements de microfinance eux-mêmes dont le sort des crédits accordés est compromis et qui hésitent d'avantage à financer l'agriculture. Au total, l'outil microfinance ne peut véritablement participer à la conquête de la souveraineté alimentaire que si elle est l'objet d'une politique plus rationnelle. Les états sont avertis et doivent veiller à l'opérationnalisation effective des multiples déclarations d'intention contenues dans les stratégies nationales de microfinance. L'aide internationale en faveur de la microfinance doit aussi cesser d'être considérée comme la panacée, mais plutôt comme un appoint aux programmes endogènes. Du reste, il est préférable d'appuyer des initiatives endogènes de microfinance qui ont une meilleure affinité avec les réalités locales que de créer des institutions de microfinance aux mécanismes rigides et stéréotypés.

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