|Financial Systems for Rural Development (GRET)|
|Part three: Synthesis of thematic debates|
All financial institutions are normally created to last over time. This makes the initiator of any project ask himself questions about a certain number of aspects from the start of his action. These aspects are brought to light in different terms for each financial system (banks, decentralized systems, etc.).
The Post-Project Issue
NGOs or projects that get involved in rural credit must absolutely ask themselves what will happen after they leave. Will the farmers manage the system, do there need to be managers to support the farmers and, if so, how should they be paid, should civil servants be called on or people recruited by the farmers and paid by the interest rates, or will the system be handed over to the traditional agricultural banks?
In Cambodia, the experimental phase in the field of credit is coming to an end. Some operators are working in different provinces and, for all but one, the weight of these structures is relying on NGOs. When a credit operation is launched, several types of actors are involved:
- a local or foreign NGO offers assistance,
- staff is recruited on site
- the beneficiaries
Currently, the NGO and local staff are connected through a structure which is the NGO's and this is only normal for the starting phase. The NGO is, in fact, the operator. However, it becomes quickly necessary to distinguish, or even separate, the NGO structurally as such from what could be a local operator. This structure thus becoming the actual operator, the NGO maintains the support or advisory role. In Cambodia, there is only one Khmer credit NGO, ACLEDA. This NGO receives outside support from the ILO and the UNDP.
Once the basic structures have been established, thought needs to be given to how they should be organized on an intermediate scale. And, at each level, they need to be appropriated by the local staff and beneficiaries. It is only when these local structures exist and have operational responsibilities that the hierarchy of the financial structure can be planned. It does not seem very wise to try setting up a structure before having carried out the basic stage.
As for the banks, they have to bring together some specific conditions to ensure sustainability. The aim of financial self sufficiency entails monitoring the followings:
- control of spending ( salaries, operating costs, etc.);
- loan loss must be limited;
- growth of the equity base through capitalized earnings must enable the bank to reach financial autonomy.
It is in this perspective that the mobilization of savings occupies a strategic place.
When sustainability is an aim, questions should be asked about the interest rate.
The Interest Rate Issue
The interest rate issue gives rise to numerous debates because it is not, and far from it, a strictly technical problem. The governing parties generally try to set the lowest possible interest rates to better satisfy impoverished populations.
Yet, as has been seen, low interest rates challenge the durability of the financial system.
Interest Rate Components
The interest rate for the project conducted by the GRET in Cambodia is 4%/month and can be broken down as follows:
- the cost of resources (line of credit obtained through a loan):0.7%
- operating costs (motorbikes, calories, credit agents, etc.):2%
- compensation for credit committee members: 0.4%
- provision against risk of loan loss: 0.2%
- margin (increase of resources making it possible to raise the ceilings of the loans and to cover new customers: 0.7%
Note: in this case, the sponsor backs the risk related to inflation, that he must cover by the remuneration applied to the cost of the resource ( here, 0.7%).
Covering Operating Costs
Most of the time, the financial systems are not balanced until after a trial and finalization period during which operational subsidies are necessary. In the case of the GRET project in Cambodia, four years after project start-up, over 50% of the operating costs were covered by the financial products. This share is progressively increasing and it should reach 100% by 1998.
Volunteer work by the farmers is not a long term solution. It is hard to ask them, as they already earn so little, to invest fully in the credit programme if they are not compensated. Volunteer work also induces a risk of misuse of funds, with, for example, the volunteer paying himself by granting loans to himself for amounts over the accepted ceiling.
Who Sets the Interest Rates?
The level of the interest rates must take into account several constraints. Some are external (cost of resources, others depend on internal choices Irate of margin sought), for this reason, specific regulations concerning interest rates may not be necessary. As a result, in Cambodia, each individual operator sets his own rate.
In Myanmar, the interest rate at the Central Bank is 13%. The other banks cannot apply a rate more than 6 points higher than that of the Central Bank.
The Pros and Cons of a Subsidized Interest Rate?
- Applying the market interest rate makes it possible to have a financial surface large enough for covering the operating costs and therefore for planning an uninterrupted process.
- Offering improved interest rates to a fraction of the population (in this case, the poor) leads to the misuse of funds. As a result, the people who are in positions of power and authority in a village realize that these loans are quite advantageous and they take advantage of them first, leaving behind the population initially targeted.
- The poor are indeed the targeted population but are, in fact, not the beneficiaries since they cannot be reached. The bankers' main concern is protecting the funds. They therefore prefer to loan to people likely to repay in due time.
- The subsidized interest rate does not motivate the credit agents in their work since they know that their salary does not depend on it.
- The improved interest rate attracts neither savings nor capital for lack of an attractive remuneration. Yet, the lack of capital is one of the banks main constraints. Furthermore, the lack of capital leads to the impossibility of meeting the loan requirements of all the poor who are in need. The policy of the improved rate tends to promote the presence of institutions everywhere, leading to irreducible costs without the possibility of economy of scale.
- The main reason for which subsidized rates are upheld is based on the strong conviction of the policies that the poor cannot bear the market rate. However, numerous experiments show that, on the contrary, even poor farmers can bear the market rate since for them what counts is access to credit for developing an economic activity.
- In Lao PDR, the government's priority is to support production and promote its sale to improve, among other things, the farmers' income and the country's autonomy. It is with this outlook that a subsidized credit system was set up and it is this means that appeared most suitable for reaching this goal.
- Development projects with a credit component are non-profit projects. The project's credit is subsidized since its goal is to help the farmers purchase animals or give them the means to increase their production. The interest rate is not really an issue. If the farmers reimburse properly part of their loans, they will not be obliged to repay entirely, as the NGO will take on the remainder.
As the situation in each country is often different, a policy for improved interest rates can be justified only case by case. Being dogmatic in this matter is not a good tactic.
The importance of the interest rate needs to be recognized and especially the importance of the cost differential of the resource - cost of the credit in the longevity of the structure. Among the examples mentioned of successful agricultural banks, they all have an important differential and positive real interest rates.
For farmers, the issue of access to credit is most often more important than the cost of that credit.
Credit in cash or in kind?
Some projects or organizations have granted or grant credit in kind, in most cases in two forms: rice banks and livestock banks (buffalo or pigs). Are banks in kind absolutely necessary? Isn't cash credit easier?
- One of the goals of a project given as an example in Battambong, Cambodia was to relaunch the production of pigs. Credit in kind came in support of this action but credit was not the initial goal. Yet, after three years, the project organizers realized that 50% of the families had used the pigs as credit: they had very shortly sold them to have cash for financing another activity. This is when it became clear that the families had a real need for credit in cash. Granting monetary credit from the start would probably have avoided a misuse of the credit object.
- Several problems vise with credit in kind when animals are at issue. The farmers do not have access to veterinary care which has repercussions on the mortality of the calves and therefore on credit repayment which relies on births of new calves. When the farmers want to buy males and not females, the entire issue of repayment is challenged. Yet, setting constraints for the farmers may lead to poor repayment. Moreover, credit in kind implies long immobilization of the money before being able to offer credit to another farmer.
- As far as rice banks are concerned, other problems arise. The management committees rarely foresee all the technical problems. As a result, the cost of transporting from the paddies to cooperative silos from the farmers' fields is often forgotten in the budgets (hence empty silos ). When there is enough production, the demand from the cooperative is low (hence full silos ). On the contrary, with a poor harvest, the farmers have trouble reimbursing and the committee no longer has the means of purchasing rice for the following season.
- The farmers' needs evolve. They do not necessarily always need the same thing at the same time. Credit in kind therefore calls for a very close, steady monitoring of the farmers' needs. This job requires major coordination with the bank. These procedures will be administratively complicated and will not allow credit to be granted rapidly.
- In spite of the difficulties, some people think that credit in kind is an appropriate formula for buffalo and rice (on the other hand, for the support of other activities, credit in cash is acknowledged as being easier to manage). Indeed, the purchase and/or rental of buffalo is inaccessible for many farmers, whereas with the system of buffalo banks, they can purchase an animal which improves the quality and productivity of their work and, at the same time, constitutes a form of capitalization. Rice banks play a very beneficial role especially in the case of food emergencies, by purchasing rice when the prices are low and reselling it at moderate prices in the interval period, before the next harvest, when prices soar.
- For remote, mountainous and only slightly monetized regions, credit in kind is perhaps a good technique for initially familiarizing the population with the concept of credit. However, it is difficult to manage on a long-term basis.
Here again, any dogmatic opinions should be avoided. The solutions must sometimes differ substantially between the mountains, the plains and the monetized or non-monetized zones.
However, when possible, it is much easier to offer credit in cash.
To maximize the chances of proper repayment, there needs to be flexibility with respect to the credit object attention paid to the choices of male or female buffalo, and repayment based on income.
If too much is imposed upon the farmers, there is a risk of not meeting their real needs. The failure to meet their needs can cause discontent and increase the risk of poor repayment.