FINANCIAL SERVICES INTO POVERTY REDUCTION STRATEGIES

1. FINANCIAL SERVICES INTO POVERTY REDUCTION STRATEGIES AFRACA Southern African Sub Regional Workshop Held in Maseru, 11- 13 October 2

2. 1. PRESENTATION STRUCTURE • Background • Developments in the Fight against Poverty • Challenges for Poverty Reduction • The Financial System • Financial Services Legal Framework • Overview of Microfinance Services • Integrating Microfinance to Banking • Current Initiatives • Recommendations

3. 2. BACKGROUND 1.1 Physical • Mountainous Nature of Lesotho • Area 30,355 km2 • Country Structure • Population size 1.2 Political Climate • Democratic state with multi-party representation

4. 1.3 Economy • Percentage aggregate economic indicators at constant 1995 prices ( as per CBL Projections and Bureau of Statistics) are reflected in Table 1 below:

5. Table1: Aggregate Economic Indicators

6. 1.4 Agriculture Arable land constitutes 1/3 Subsistence farming constitutes (80% of the population earn their living on subsistence farming) Natural disaster has decreased output

7. 1.5 Other Sources of Income • Remittances from mine workers • Tax due to improvement on the collection system through Lesotho Revenue Authority (LRA) • Income from textiles clothing

8. 2. Developments in the Fight Against Poverty 2.1 Definition of poverty • Poverty is a state of helplessness and lack of access to essential services i.e food, education, shelter and other essential services.

9. 2.2 Initiatives Towards Poverty Reduction • Improved accessibility • Construction of water dams • Free primary education • The National Health Sector plan • Crop diversification strategy

10. 3. Challenges Facing Poverty Reduction • Meet basic needs i.e shelter, food, improved health services, literacy level etc • Establish financial services providers, e.g microfinance institutions • Address the decline in employment • Encourage rural-based development programmes • Reduce rapid spread of HIV and AIDS,

11. 4. Lesotho Financial Sector • Collapse of State Owned Banks (SOBs) - left a vacuum in rural areas • Presently Financial Sector comprises 5 banks, 5 insurance companies and 21 registered money lenders • 3 banks are subsidiaries of South African banks • Lesotho PostBank recently started operations intended to fill the gap

12. 5.Policy and Legal Frameworkfor Financial Services 5.1 The Institutional Structure • Non competitive • Concentrated • Segmented • According to the CBL 2004 Annual report, rigidities and inefficiencies are as reflected below:

13. Table 2: Market Interest Rates

14. Policy and Legal Framework (cont) • Low quality of customer service (see pie below)

15. 5.2. Importance of the Legal Framework • Strengthens legislation governing financial institutions • Ensures functionality and efficiency of supervisors • Ensures soundness and prudence in the running of financial institutions

16. 5.1.1 The Money Lenders Act 1989 • Prescribes the licensing application and procedure for money lending • Also protects the community at large.

17. 5.1.2 Cooperative Societies Act 2000 • Empowers enlargement of cooperatives’ outreach • Facilitates successful savings mobilisation

18. 5.1.3 Societies Act 1966 • Enables the establishment of societies, registration and dissolution • Allows groups engagement in income generating activities • Not restrictive in terms of type of activities

19. 6. Overview of Microfinance Services • Insignificance of non-bank financial intermediation • 2 development finance parastatals • Past efforts in support of microfinance • Coming into operation of multi-purpose savings and credit cooperatives

20. 6.1 Efforts in RuralFinancing • Rural financial intermediation • Lack of serious efforts in rural financing • Thoughts on sustaining the sector’s needs

21. 6.2 Money Lending • Clientele for Money lenders • No strict credit requirements • Provision of financial services to the sector

22. Money lending continued • Usury practices exacerbating poverty • Non compliance with stipulated rates • Riddling of consumers with debt • Exploitative to ordinary consumers

23. 6.3 The Rural Finance &Enterprise Support Project (RF & ESP) • Project objectives - increase incomes of the rural people - improve standards of living • Strategies: - re-orient financial policies - training & technical support - make financial services accessible - improve rural markets

24. 6.3.1 The Rural Savings & Credit Groups (RSCGs) scheme • Development of the Blueprint for RSCGs • Policy objectives • Promote rural financial intermediation • Guide nationwide rural financial intermediation • Strategies for achieving the objective • Current achievements

25. 6.3.2Need for Financial Services to the Micro and Small Enterprises sector (MSEs) • Practices and behaviour of the informal sector • Realisation of the sector’s potency • Constraints to the sector - access to credit - lack of necessary facilities • Rural associations as financial service providers • Measures supporting community needs

26. 7. Challenges in Integrating Microfinance to the Mainstream Banking • Factors influencing the state of the financial sector • Challenges in integrating microfinance in mainstream banking

27. 8. Current Initiatives • Approval of the rural financial intermediation policy • The new Export Finance and Insurance Scheme • Strengthening of the Supervisory and regulatory function • Lesotho National Payments System • Commercial court • Other form of intermediation – Lesotho Post Bank

28. 8.1. Direct Interventions • Establishment of an RSCGs Credit Guarantee Fund • Establishment of the Export Development Fund

29. 9. Recommendations • Extension of outreach • Capacity building • Participation of all financial players • Networking to counter problems of scarce resources