|Financial Systems for Rural Development (GRET)|
Before studying the situation in each country, we found it worthwhile to recall the main experiences and evolution of decentralized financial systems over the last thirty years, in Latin America, Africa and Asia alike.
The presentation was based on studies made by sponsors such as the World Bank, the Asian Development Bank, universities and the seminar leaders' own experiences.
Discussing credit automatically brings to mind banking systems, however, there are different types of banks interested in rural credit to different degrees.
Seeking profits and profitability, commercial banks prefer financing industry, transportation, construction or trade and are hardly interested in agriculture which is considered too risky. The few activities financed are connected to marketing campaigns, export industries or modernization of large operations that offer guarantees. Small scale agriculture is ignored, considered too costly in terms of disbursement, follow-up and loan repayment.
To back their development actions, governments have supported the creation of other types of banks.
Created by Governments to be their financial instrument in the field of development, development banks were, originally, general in character. In reality, they have given priority to financing infrastructures (roads, transportation, energy, etc.) and only rarely has agriculture received more than 10% of the volume of the credit granted. Their capital came from Government or international aid.
Credit policies have often been polluted by political or customer-biased considerations. This explains, on the one hand, their extremely poor rate of repayment, and on the other hand, their failures when Governments stop subsidizing them.
The failure of development banks and the impossibility of receiving credit from commercial banks contributed to the creation of banks specialized in financing rural activities.
The results of specialized banks range widely, but are, for the most part, mediocre. A few of the main reasons are:
- the public reached is often rather limited 15 to 10% of the population; and this minority is made up of wealthy and middle-class farmers, most often located in favorable areas;
- poor rates of repayment;
- financial imbalance of the institution, only owing its survival to subsidies granted by the government and/or international aid;
- often tense relationships between banks and customers.
In Asia, however, some success has been recorded, notably in Thailand ( with the BAAC since 1964), in Indonesia (with the Bank Rakyat Indonesia - Unit Desa) or with the Grameen Bank that can be included in this category of specialized banks. The initial stages of the Agricultural Bank of Vietnam are also promising.
There is not one, unique reason for the success of these banks; their success is more precisely due to the conjunction of several factors. Ten of them are listed below:
Ten criteria for the Success of Agricultural Banks
1 - the economic setting
2 - the general situation of agriculture
3 - the autonomy of the bank
4 - a policy favoring a differential of high interest roses
5 - the number of customers or loan volume
6 - the productivity of the agents
7 - the control of the fees
8 - a law rate of loan loss
9 - the rapidity of the procedures
10 - the savings policy
Stable currency and a contained inflation rate are two components necessary for creating an environment favorable to the development of economic activity and financial movements.
General Situation of Agriculture
Banks are all the more willing to grant credit to agriculture if the latter is diversified and its income is possibly spread out over the year. On the contrary, For agriculture requiring substantial means or done in difficult areas, banks will be wary and reluctant to grant loans.
Autonomy of Bank Policy with respect to the Government
Banks with real autonomy are the successful ones. Based on major, general guidelines of the government's policy, they have managed on their own to develop their choice of customers, the orientation of their credit, the setting up of their regional branches, and their rate of growth.
When banks are submitted to imperative political guidelines, financial self-sufficiency balance is practically impossible to attain.
Interest Rate Policy
The differential between the cost of resources ( internal savings, loans, etc.) and the rate of the credit granted is a key factor of a bank's financial autonomy. In successful experiments, the interest differential is at least 10-15% per year. If savings are remunerated or if capital is loaned at 3, 4 or 5% per year, the credit rate offered is therefore at a minimum of 15 to 20% per year.
However, many banks think that as farmers are poor, they should, on the one hand, have to pay as low an interest rate as possible - sometimes even 0% - and, on the other hand, encourage them to save by remunerating savings at 10, 12 or even 14% per year. Yet, when discussing the issue with the farmers, it has been noted that a 20-30% interest rate per year is not a key issue since their priority is access to credit.
Banks structurally in deficit and therefore subsidized by the State are at the mercy of political changes or changes in policy.
Number of Customers and Volume of Loans
The Grameen Bank has two million borrowers and makes small loans. The BAAC has 4.2 million borrowers with an average loan amount of over $500 US dollars in 1992. The larger the volume of loans and the faster their rotation, the easier the profitability of the capital.
Productivity of Credit Agents
In performing banks, an agent has approximately 300 customers. This figure may occasionally be surpassed. To do so, proper selection and training of the agents, a policy of salaries and bonuses related to the results are necessary. An incentive system is effective if, on one hand, the bank is free to set up the incentive policy that it considers most appropriate, and on the other hand, if part of the employees' salaries is related to their performance, which is not the case for subsidized banks.
Control of Bank Fees and General Costs
The weight of these components varies depending on the country, its level of infrastructures,the concentration of the population, the distance between branches, the means of transportation used, etc.
It can be noted that performing agricultural banks that operate well have one-year repayment rates close to 98%. The BAAC has recorded rates of about 80% but continues to exert pressure on bad debtors up to 5 or 10 years after repayment deadlines. The bank may reschedule repayment but delinquent borrowers remain liable for repayment.
The good rate of repayment can be explained by the implementation of a system of strict guarantees even for poor farmers. In each country, the methods differ but the most common form is the collective liability group made up of 5 to 10 people who choose each other freely. In a larger group, the liability is not as strong, and with less than 5 people, there is no real guarantee.
Procedures: from granting credit to recovering funds loaned
The borrowers' need for credit is immediate. As a result, an effective bank should attempt not to exceed one week between the time of application for a loan and the disbursement of the funds. The number of forms should be kept to a minimum. Once the credit has been granted, there is a regular follow-up of the borrowers, their use of the credit and the repayment schedule, so as to act as soon as a problem arises. The procedures for intervening are often quick and try to offer the borrower a practical solution.
Successful banks have implemented a very progressive process for collecting savings. Often before launching savings products, there is a waiting period during which the credit mechanisms are clearly taught and understood as well as any problems worked out. This establishes a relationship of trust that facilitates savings mobilization.
The savings policies vary depending on the type of farmers. When they are well-off as in Thailand, the savings system is free and voluntary. However, the Grameen Bank adopted a mandatory savings system (through the payment of membership, withdrawal of a percentage of the credit) to feed blocked savings accounts and/or guarantee funds. Poor farmers do indeed prefer to invest than keep their savings, hence the bank's obligation to force savings.
The combination of these conditions often contributes to the success and sustainability of the systems whatever they are. However, the absence of only 3 or 4 of these conditions may lead to failure.
The case of BANRURAL in Mexico
1. Inflation is high.
2. Overall successful farming nevertheless offers a very wide range of differences depending on the region.
3. Banrural is nor fully autonomous with respect to the Government. As a financial instrument of the State for unloading funds in the countryside, the survival of the bank was threatened when the government decided to change policies. Only the farmers having guarantees received access to credit. The number of customers went from 1.5 million to 400,000.
The result is that at least 50% of the credit was not recovered. These unpaid loans were hidden by banking tricks that artificially improve the situation of the bank. As a result, a delay in repayment is considered as being a new loan and, when natural disasters occur, unpaid loans are transferred to a public insurance company.
In addition, collateral does not function well because, through solidarity, the farmers refuse to buy back the equipment repossessed from the farmers in difficulty, which obliges Banrural to stock a lot of equipment.
The period of integrated development projects marked a change in the strategies of sponsors. More and more credit components were financed within the framework of integrated projects.
The credit phase often supports integrated development actions. The object of the loans is oriented within those actions by the project which determines the credit policy.
This limitation encourages misappropriation of the credit object and non-repayment.
Moreover, these projects do not plan for the sustainability of the structures created. The criteria of success for the project is more the amount of credit disbursed than the amount of credit repaid. As the project has a limited life span, and the credit objects are not always in line with the wishes of the beneficiaries, this all contributes to a poor rate of repayment.
Credit and savings cooperatives (COOPEC)
COOPECs were developed notably to find a solution to the limitations of banks by empowerin g the farmers in the financial structure. Therefore, they do not depend on outside subsidies but on savings by their members. This is the theory of "hot money".
Nevertheless, COOPECs have some disadvantages:
- They are open more to the part of the population that can save, that is, the middle class (civil servants, craftsmen, shop owners, middle-class or well-oh farmers ) and thus exclude poor farmers. Studies show that 60 to 70% of the population is excluded from these systems.
- Credit committees or boards are often in the hands of notables.
- The savings are not only reinvested locally.
They nevertheless have the merit of showing that savings is possible and that farmers even have a potential and the ability to manage local unions or even unite in regional and national unions to become cooperative banks.
Schemes inspired by the Grameen Bank
The example of the Grameen Bank has inspired some one hundred experiments around the world and proven that it is possible to grant credit to poor landless farmers without guarantees as well as to women. In 1995, there were 2 million members of which 94% were women.
Professor Yunus who started testing credit with the poor using his personal funds, experimented for seven years before the system became a bank.
The "Grameen Bank model" supports the idea that a period of experimentation is needed in any project, that it is easier to repay small amounts every week rather than large amounts over longer periods of time (even for housing credit), that savings in a mandatory form is possible, that the absence of collateral can be compensated by liability groups, that the customers can also be members of the structure that gives them credit.
Mixed systems: local unions, bank refinancing
There are intermediary systems trying to reconcile the advantages of banks and decentralized participatory systems.
On the ground level, inter-village or village banks and unions involve the farmers in the selection of borrowers, organize, disburse and recover the credit. A committee supervises these various functions.
The unions sign an agreement protocol with the banks to receive refinancing. The cash surplus is deposited at the bank which also grants refinancing facilities at preferential rates |since the risks are limited and the operating costs reduced).
Even if there is not a ready-made solution, respecting a few basic ideas is necessary for the development, and especially the sustainability, of these financial systems.
Above and beyond these basic aspects, the wide variety of experience supports the idea that one must not be dogmatic. The economic, cultural and social contexts determine the differences of approach between each country, or even between each region, with respect to credit amounts, forms of guarantees, and involvement of the beneficiaries, etc.