Microfinance crucial to alleviating poverty in forest communities
Basic financial services can help families start their own small businesses
27 January 2006, Rome - Giving poor forest-dwellers access to basic financial services is a key element in helping them improve their living standards, according to a new FAO publication.
The publication, Microfinance and forest-based small-scale enterprises, funded by Norway, shows how microfinance can help low-income households living in forest areas start up and run their own small businesses. Such forest-dwellers frequently live in remote areas where a lack of financial services is a major obstacle to developing successful business activities.
“Opening up the possibility of taking out loans and saving money with interest is crucial to helping poor households who earn their living from forest products to establish their own small-scale enterprises,” according to Sophie Grouwels, an FAO forest expert.
Microfinance is a general term referring to the provision of basic financial services such as credit, savings, leasing, equity financing, insurance and remittance mechanisms by banks, non-governmental organizations and credit- and savings cooperatives in both the formal and informal financial sectors.
Close to 100 percent recovery rate in Nepal
Microfinance and forest-based small-scale enterprises includes a number of success stories, including one from the Parbat District of Nepal, where 673 small-scale enterprises were set up under a microfinance enterprise development programme, creating employment in rural areas that depend on trade of non-wood forest products such as honey, allo (traditional cloth made from nettles) and lapsi (a fruit used to make drinks and candy). Some 669 of the businesses, or 99.4 percent of programme participants, paid back their loans in full.
“Several factors contributed to this success,” said Sven Walter, an FAO forest expert. “The entrepreneurs were carefully selected using stringent criteria, the enterprises had access to business development services, and they were monitored regularly.”
He continued: “The provision of microfinance in itself will not break the cycle of poverty. To succeed, it must be accompanied by other services provided to the small forest enterprises.”
Microfinance can do even more
FAO's new publication suggests that in addition to their regular services, microfinance institutions should provide business development counseling and support to small enterprises. It notes as well that there is often a need to break social barriers that can discourage rural people from approaching financial institutions for help.
Microfinance and forest-based small-scale enterprises also warns against the imposition of artificial ceilings on interest rates and subsidizing targeted credit programs, since this can distort the market and make microfinance less sustainable.
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