IFAD’s support to inclusive rural finance work: a snapshot from independent evaluations

In recent years, the Independent Office of Evaluation (IOE) of the International Fund for Agricultural Development (hereafter, IFAD or the Fund) has published several evaluation products assessing the performance of IFAD-supported operations on increasing access to financial services in rural areas. The evidence and analysis presented in its products positions IOE as a knowledge contributor in the rural finance community, both within IFAD and beyond. This blog summarizes some of the key findings and lessons learned.

Relevance of rural finance to IFAD’s operations

Strengthening financial services in rural areas has been part of IFAD’s operations since its inception. IFAD’s first Rural Finance Policy (RFP) was developed in 2000, to formally conceptualize its approach in the area. In particular, the stated focus was to “strengthen the capacity of rural finance institutions to mobilize savings, cover their costs, collect loans and make a profit in order to increase their sustainability and outreach”. According to the RFP, two thirds of the Fund’s projects at the time had a rural finance component, with rural finance accounting for roughly 21 per cent of the Fund’s resources.

The RFP was then updated in 2009, further refining IFAD’s approach by foreseeing interventions at three levels: micro, meso and macro. These entailed, respectively, a focus on rural finance institutions and beneficiaries, strengthening apex institutions, and legislative and regulatory changes.

The most recent update was in 2021, with the establishment of IFAD’s Inclusive Rural Finance Policy. This maintained the core elements of previous policies while adding greater emphasis on innovative financial products and services – for instance, taking advantage of digitalization of financial services, as well as stronger integration between financial services and other areas of IFAD’s programmes.

Independent evaluation of IFAD’s rural finance work

IOE has covered the area of rural finance through a range of evaluation products. The first organization-level effort to assess this area of work was the 2007 Corporate-level Evaluation of IFAD’s Rural Finance Policy, the recommendations of which fed into the development of the 2009 RFP. More recently, in 2019, IOE conducted an evaluation synthesis on rural finance. The scope of this report included the period 2008–2017, thus ensuring continuous evaluation coverage of rural finance activities following the corporate-level evaluation. The synthesis found that the IFAD portfolio mostly relied mainly on traditional financial instruments in such as matching grants and lines of credit. More innovative instruments required significant investments in technical assistance, market studies and capacity, for which governments were often hesitant to use loan funds.

In 2022, IOE conducted a project cluster evaluation on the topic of rural finance, with a specific focus on three projects in the East and Southern African countries of Ethiopia, Kenya and Zambia. The report compared the approaches and results of the projects and provided recommendations for new project designs in the region. The evaluation found valuable examples of innovative instruments being tested, such as credit guarantee schemes and the use of fintech, alongside more traditional tools such as credit lines.

Finally, rural finance was selected as the theme for the 2024 Annual Report on Independent Evaluation (ARIE), which provided a synthesis of findings from evaluations conducted in 2022–2023. The ARIE, building on the previous products, highlighted the importance of contextual analysis to inform design as a critical success factor.

Key findings

The common issues identified by IOE in IFAD-supported operations are the following.

First, instruments such as matching grants and lines of credit are the ones most commonly adopted and can play an important role in increasing the supply of financial services, especially credit services. However, according to the above-mentioned evaluations, they provide a less efficient pathway compared to, for example, credit guarantees or regulatory changes. Second, outreach to geographically remote areas and individuals with limited assets or financial literacy often poses challenges for projects. Success relies on working through cooperatives or other group structures. Third, a range of operational challenges arises in implementing rural finance projects, as these rely on government structures and financial institutions that often face capacity constraints. Fourth, the evaluations note that insurance companies have been largely absent as partners; their role in servicing smallholder farmers is being explored in only a few cases. Finally, evaluations found that projects that combined rural finance with other types of interventions (e.g. infrastructure, value chain development) tended to perform worse, however this was not due to shortcomings in their rural finance component, rather to the implementation challenges arising from more multi sectoral and complex projects.

The IOE evaluation products cited above flesh out these points in rich and detailed findings. While the findings are generally presented according to IOE’s evaluation criteria (relevance, effectiveness, efficiency, impact and sustainability, plus IFAD-specific criteria such as gender equality and women’s empowerment), the synthesis product presents findings based on common themes emerging from the evaluators’ research. These include the design of rural finance instruments and the necessary contextual analysis which precedes project design; the identification, training and monitoring of financial institutions; or the strategies to ensure outreach to the most disadvantaged members of communities. These issues have been progressively informed IFAD’s policies on rural finance and its project designs.

Conclusion

In conclusion, as rural finance continues to be an important area of IFAD’s operations, it is crucial to continue improving the effectiveness and efficiency of such operations, as well as strengthening monitoring of results. There are a range of issues which rural finance operations have to grapple with, starting from identification of the most relevant instruments, selection and management of financial service providers, and innovating with new insurance products. IOE’s oversight and leaning function will continue to provide rigorous analysis and identification of lessons for the benefit of rural populations.

Sources

1. IFAD Inclusive Rural Finance Policy (2021)
2. Corporate Level Evaluation of IFAD’s Rural Finance Policy (2007)
3. Evaluation Synthesis on rural finance (2019)
4. Project Cluster Evaluation on rural finance in the East and Southern Africa Region (2023)
5. Annual Report on the Independent Evaluation of IFAD (2024)

AUTHORS
Mikal Khan, Evaluation Officer, Independent Office of Evaluation of IFAD
SOURCE
IFAD
PHOTOS
© IFAD