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Finance for poverty reduction

Microcredit schemes for small enterprise development, which begun in the 1980s, have evolved to include other financial services, such as insurance and savings, delivered by microfinance institutions (MFIs). Further opportunities to improve and innovate are still necessary if microfinance is to have a more positive impact. Indeed, a major concern is that microfinance does not reach the poorest, most vulnerable people. The poorer people are, the greater the likelihood that credit is merely used to smooth household cash flows or as an insurance substitute. The contribution of financial services to coping with risk is more important than any expected return in the form of increased income. 

Microfinance refers to loans, savings, insurance, transfer services and other financial products targeted at low-income people.
Microcredit refers to a small loan from a bank or other institution.
A microfinance institution (MFI) provides these types of services. Although MFIs vary considerably, they all share a commitment to supply financial services to clients that are poorer and more vulnerable than clients of a regular bank.

Microfinance in fishing communities

Failure of previous credit programmes and a growing concern with poverty and vulnerability in the fisheries sector have raised attention to making microfinancial services available to fisherfolk.  Two types of MFIs have become involved in the fisheries sector: those focusing exclusively on fishing communities and those with fisherfolk among their clients, referred to as specialized and non-specialized MFIs, respectively.

Non-specialized MFIs generally associate small-scale fisheries with high risk and limit the number of fisherfolk among their clients. These tend to be predominantly urban-based women involved in fish processing and trading.

The first specialized MFIs emerged in the 1980s. Many are based on cooperative principles and initiated by owners of fishing equipment and more influential fish processors and traders, in an attempt to address their demand for investment loans. They are concentrated at larger landing sites near urban centers and are relatively small in number. Such MFIs generally have a relatively small capital base and limited outreach. Members do not represent the poor. These MFIs typically face a loan demand that far exceeds the resources available for lending. As a result of the failure to meet demand, members stop saving and discourage others, whether poor or less poor, from joining. Few have proven to be sustainable.

Financial services actually began serving the poorest when some MFIs also started offering savings and insurance products, business advice and support for organizational development – services that can be more vital to the poor than credit itself. The challenge for MFIs has been to find ways of providing such services while remaining financially sustainable. See below for examples of success.

Expanding the role of microfinance in fisheries

Although there are notable successes, before microfinance can significantly contribute to poverty reduction and fisheries management, there are a number of constraints to be overcome:  

• Informal financial services meet some needs but not all and formal financial services are usually beyond fisherfolk’s range.
• MFIs have potential but at present their scope is limited. Member-owned institutions have difficulty reaching the poor and their operational and financial capacity is often weak, while non-specialized MFIs perceive service delivery to fisherfolk as risky.
• Increased outreach and pro-poor growth should be supported by both an MFI operational and business development plan and a professional development plan.
• Lack of knowledge about fisheries and resource management and the inexistence or ineffectiveness of fisheries management efforts limit both the willingness of MFIs to become involved in the fishery sector and their potential to contribute to responsible fisheries.
• The limited availability of other (social) services in fishing communities that could support financial service delivery contributes to the reluctance of MFIs.

 These constraints can be surmounted through active partnerships between fisherfolk, MFIs and other actors in the development and fishery sectors.