NOTES AGRICULTURAL & RURAL DEVELOPMENT Grants for Income Generation 38405 BY: ANNE RITCHIE ISSUE 20 NOVEMBER Communities supported by World Bank rural develop- GRANTS TO DEVELOP 2006 ment projects often cite support for the development of ECONOMIC AND SOCIAL income-generating activities (IGAs) as a critical need. INFRASTRUCTURE This note identifies some of the core problems encoun- tered by Bank task teams that attempt to respond to World Bank­financed projects often respond to these this need, outlines the issues involved, and offers sug- concerns by providing grants for the following purposes: gestions on some of the points that should be kept in Investments that raise the productive potential of mind when designing grant programs for this purpose. the community that do not in themselves generate Providing support for IGAs typically involves dealing income, but rather facilitate income-generating activi- with any combination of the following: ties. Examples of economic infrastructure that directly · Inadequate social and/or economic infrastructure raises income potential include small-scale irrigation, and services to support increased opportunities for market facilities, a harbor or cold storage for fishing, income generation by community members and even a building and safe for a village savings and · Lack of financial institutions that are willing and credit association. Income-earning potential is also able to provide poor people with access to financial increased indirectly by investments that raise the pro- services, including loans for their IGAs ductivity of labor, such as clean water, education and · Saturation of local markets for the products of health facilities, and social intermediation, which existing economic activities, and lack of knowledge increases the capacity of disadvantaged people, espe- or facilities that would enable producers to expand cially women, to more fully realize their potential. their markets for these products Development of local organizations that can facili- · Lack of knowledge of new technologies or oppor- tate input supply, storage, processing, and marketing, tunities for investment in nontraditional economic either directly or in partnership with other private firms. activities, and aversion to risk when the probable outcomes of such opportunities have not yet been Creation of linkages between communities and the demonstrated to the potential clientele private sector. · Shortage of investment capital to start new eco- nomic activities or to expand existing activities Capacity building of professional financial institu- tions to enable them to downscale their financial serv- ices for low-income people. This can include technical assistance in developing products and service delivery mechanisms, acquisition of management information systems and efficiency-enhancing technology, and sub- sidies to help cover the cost of establishing new branch- es in underserved areas. Support may also include loans to these institutions to lend to their customers. Capacity building of community-based financial organizations, when professional financial organiza- tions are not willing or able to provide financial servic- es to the poor (Ritchie 2006). Capacity-building assis- tance can include technical assistance to develop ownership and governance structures, policies and procedures to provide basic financial services such as savings, and financial management systems. It also THE WORLD BANK sometimes includes grants to these organizations to poor people who have fragile livelihoods often cannot establish revolving loan funds (RLFs). absorb entrepreneurial risk, limiting their ability to bene- fit from new technologies and economic opportunities. The provision of grants for the above purposes is gener- People in these categories may be too vulnerable to take ally not controversial, because these grants create or on the risk of a loan from a financial institution for an improve infrastructure that can be shared by many peo- IGA. Many poor people are already highly indebted, and ple. Thus, they are more similar to public goods than to should not be encouraged to take on additional debt if private goods. However, the provison of RLFs as grants the revenue flows from the use of that debt could under- to community groups to lend to their members for their mine, rather than enhance, their economic security. economic activities is controversial. In most cases, com- Furthermore, although it has been demonstrated time munity-managed RLFs have not been effective in achiev- and time again over the past two decades that poor peo- ing the objective of sustainable financial services for the ple can and do save, it can take many years for extreme- poor (Murray and Rosenberg 2006). RLFs often don't ly poor people to accumulate sufficient savings for invest- revolve for very long; thus, members who don't repay ment in economic activities that have the potential to lift their loans capture all the financial benefits. In effect, them out of poverty. In these circumstances, grants to the grants to the groups for on-lending become grants individuals for productive assets may be appropriate. to individuals for their economic activities. In this situa- tion, it would be better for the loan to be a grant from Projects should be careful to clearly separate the admin- the outset, because loans that aren't repaid damage the istration of grants for public goods from grants for pro- credit culture and make it more difficult for professional ductive assets. They should also separate the adminis- financial institutions to operate sustainably. tration of a loan program for productive assets from a grant program for productive assets. The institutional In addition to having inadequate management capacity, arrangements, including staffing, need to be separated, groups often don't have the incentive to manage their because the eligibility criteria and operational guidelines funds as prudently as they would manage their own will be quite different. If they are not separated, there is money. Savings within these groups are also often dis- a significant risk that both staff and beneficiaries will be couraged by access to easy money. Thus, grants to com- confused, leading to failure of the intervention. munity groups for RLFs should be discouraged, and if they are provided despite the constraints, should be Several issues complicate the provision of grants to accompanied by measures to minimize the problems acquire privately owned assets. One, they may be a tem- and enhance the sustainability of these groups (Ritchie porary fix, unless the project is designed carefully and 2005). It should be noted that the Bank's policy on managed and monitored well. For example, a project financial intermediary lending states that subsidies may may provide the asset as a grant, but fail to plan for the be an appropriate use of public funds, but only if they maintenance of the asset, or for the other costs of oper- ating the asset. are transparent, targeted, and capped; do not give an unfair advantage to some financial institutions; and are Two, grants to finance IGAs are often used when there economically justified, or can be shown to be the least are no financial intermediaries willing and able to serve costly way of achieving poverty reduction objectives. the poor. This enables the project to avoid the numerous Furthermore, the Bank requires an assurance that finan- issues surrounding the development of sustainable cial institutions acting as on-lenders are viable institu- financial intermediaries in difficult areas. However, sus- tions (World Bank 2004). tainable sources of financial services that will enable GRANTS TO ACQUIRE PRIVATELY poor people to manage their households and economic OWNED PRODUCTIVE ASSETS activities over the long term are needed; indeed, grants have the potential to "crowd out" financial intermedi- aries that can provide sustainable services. Although financing of privately owned goods with pub- Three, there are many risks, including waste of public lic money is contentious, there are some instances when resources (common when assets are provided free of grants to finance productive assets can be appropriate. charge), political favoritism and corruption, and conflict These instances include emergency or postconflict situa- among community members over grant allocation. tions where families have lost most of their assets, and projects targeting extremely poor people, who have few Four, many grant-making programs are integrating with assets and little capacity to earn an income. In addition, participatory municipal planning exercises as the forum 2 for identifying microprojects. In these cases, there can to absorb downside risks associated with new be tensions between the public-good activities for which technologies or economic opportunities, a portion local governments are normally responsible, and the pri- of the investment can be financed with a grant, vate-good aspects of the income-generating activities. and the remainder with savings. Such grants can have a powerful demonstration effect if the tech- Five, projects often prefer to provide grants to groups of nologies are successfully adopted by the grantees. people rather than to individuals, so as to spread the ben- An example is shown in Box 2. efits to a larger number of people, reduce transaction 2. Grants should be carefully targeted and monitored, costs, and finance assets that cannot be financed by with strong and transparent eligibility criteria to avoid grants to individuals. However, conflicts can easily arise the capture of benefits by elites. Participatory mecha- when economic activities are owned and operated by nisms such as wealth ranking can be used by com- groups; examples are the amount of time that each mem- munities to identify the poorest members who should ber spends on the economic activity, the maintenance of benefit from a grant subsidy. Criteria that can be assets, and the division of revenue from the activity. For objectively monitored include agricultural landhold- these reasons, as well as the preference of most people ings and household assets. for individual or family-owned economic activities, grants for commonly owned assets can be problematic. 3. Grants should be made on a matching basis; benefi- ciaries' contributions may be in cash or in kind, such Six, groups formed solely to capture grants from a proj- as the provision of labor or locally available inputs. ect are often not strong. Chances for group solidarity are higher if group members have a common interest, 4. To ensure that people value and care for the assets past experience working together, and savings that can financed by the grant, they should contribute as high be contributed to the project. This solidarity takes time a percentage as is reasonable, given their overall eco- to develop. The short time span of projects makes it dif- nomic circumstances. ficult for implementers to allow enough time for these processes to occur. SUGGESTIONS FOR THE Box 1. BRAC's Income Generation for DESIGN OF GRANT PROGRAMS Vulnerable Groups Development (IGVGD) FOR PRIVATELY OWNED PRODUCTIVE ASSETS BRAC,one of Bangladesh's largest microfinance insti- tutions (MFIs), initiated the Income Generation for Vulnerable Groups Development program for the These issues are not easy to tackle, and require innova- "hard-core" poor in 1985; since then it has served tive approaches. Some suggestions that may be helpful more than a million people.These destitute people suffer from chronic food deficits, have no agricultur- to task teams in determining whether a grant program al land, and survive in a situation of endemic eco- to finance privately owned economic activities is appro- nomic insecurity.Thus, loans from MFIs are too risky, priate include the following: both for the very poor, who risk increasing their debt load, and for the MFI, which needs to ensure 1. Grants for productive assets should in most cases be high loan recovery for its own sustainability.This pro- limited to (a) extremely poor people who are too vul- gram provides free food grains for an 18-month peri- nerable to take on the risk of a loan, and (b) poor od, thus catering to the immediate consumption people who have some assets and earning capacity needs of participants, and freeing up their time for but cannot absorb the downside risk, or earn enough skills training in relatively simple economic activities, from the activity to pay off the investment cost with- such as poultry rearing. When the training is com- in a reasonable time frame. plete, generally within six months, participants in the program receive the first of two loans that enable (a) Extremely poor and vulnerable people may need a them to start up the selected economic activity. package of assistance, including income support During this time, they also begin to save small and training, as well as grants, if they are to earn amounts weekly. Following successful completion of income from an economic activity on a sustain- the program, they are mainstreamed into BRAC's able basis. An example of an integrated approach regular microfinance program. About two-thirds of is shown in Box 1. beneficiaries have successfully graduated into the regular program over the years. (b) For poor people who have some assets and Source: Bangladesh Rural Advancement Committee (BRAC). income-earning capacity but have limited ability 3 Box 2. Participatory Agricultural Development and Empowerment Project (PADEP) Grants given through the Participatory Agricultural Development and Empowerment Project are matched 80 percent/20 percent for infrastructure projects such as roads and bridges that enhance incomes of peo- ple living in rural areas, and 50 percent/50 percent for the adoption of new and improved agricultural tech- nology. Farmers work in already established groups (preferably with advisers) to identify superior produc- tive activities that they can adopt, and cost the additional expenditures needed for inputs, new implements, land preparation, etc. Once the inputs are costed, the farmers deposit 50 percent of the cost (their share) into bank accounts that they have already established. Farmers are expected to maintain the bank accounts over the period of program support (two to three years, depending on circumstances), regularly adding to their savings.Thus, when farmers leave the program, they will have higher incomes, sufficient savings to con- tinue financing the working capital,and an established relationship with the bank.This arrangement address- es the issue of sustainability of the economic activities, and also builds a potentially constructive relation- ship between small farmers and the financial system. Source: Karen Brooks, personal communications with author. 5. Development of a cost-recovery mechanism would usually considered to be an acceptable use of public help ensure that only people with serious intentions money. Grants to finance privately owned productive would receive grants, and extend the benefits to a assets are more controversial, and should in general be larger number of people. limited to the poorest and most vulnerable members of society, or to limit the downside risks to the poor of new 6. Innovative ways should be sought to reap the benefits technology adoption. of groups, such as greater access to expensive assets that cannot be provided by grants to individuals. But at the same time, it is essential to look for ways to REFERENCES avoid the conflicts that can arise from group owner- Murray, Jessica and Richard Rosenberg. 2006. "Community- ship. Grants should be provided to carefully targeted Managed Loan Funds: Which Ones Work?" Consultative individuals rather than to groups, if group ownership Group to Assist the Poor (CGAP), Washington, DC. does not have clear advantages that significantly out- Ritchie, Anne. 2005. "Guidance for Design of Community- Managed Revolving Loan Funds." Microfinance section of weigh potential disadvantages. World Bank Community Driven Development (CDD) Web site. 7. Grants for income-generating activities should be, in http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTSO- CIALDEVELOPMENT/EXTCDD/0,,contentMDK:20281035~me many cases, combined with training such as the nuPK:559252~pagePK:148956~piPK:216618~theSitePK:430 World Bank Institute's (WBI) Grassroots Management 161,00.html. Training program, which includes household manage- Ritchie, Anne. 2006. "Provision of Financial Services for ment, business skills, and financial skills. Such training the Rural Poor: What Can Be Done When Services can improve the ability of targeted groups (especially Aren't Available?" Microfinance section of World Bank rural women) to manage their income-earning activi- Community Driven Development (CDD) Web site. http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/ ties and finances. Such programs are sometimes EXTSOCIALDEVELOPMENT/EXTCDD/0,,contentMDK:2028103 linked with literacy and health programs. 5~menuPK:559252~pagePK:148956~piPK:216618~theSiteP CONCLUSION K:430161,00.html. World Bank. 2004. "Financial Intermediary Lending." In World Bank Operational Manual, 2nd ed. OP8.30, paragraphs 8 and There is a role for grants for income generation, but 9. Washington, DC: World Bank. such grant programs must be carefully designed and World Bank. 2005. "Meeting Development Challenges: Renewed monitored. The use of grants for the development of Approaches to Rural Finance." Agriculture and Rural social and economic infrastructure, including the devel- Development Economic and Sector Work. Washington, DC: opment of financial institutions that serve the poor, is World Bank. This note was written by Anne Ritchie. Reviewers for the content were: William Steel, David Warren, Karen Brooks, Jean Delion, Daniel Sellen, and Henry Bagazonzya. The text of this note can be downloaded at www.worldbank.org/rural or email ard@worldbank.org. THE WORLD BANK 1818 H Street. NW Washington, DC 20433 www.worldbank.org/rural