|Financial Systems for Rural Development (GRET)|
|Part three: Synthesis of thematic debates|
Each country has structures and a history of financial systems that are unique to it. However, the trend, especially seen in Vietnam, is to base the system on a simple one that becomes progressively more complex over time.
Moreover, when rural credit actions were introduced in Lao PDR, a problem arose due to the wide range and numerous actions conducted in the field of credit and the absence of any connections between these actions and the financial authorities of the country. On one hand, some projects did not undertake procedures with the Bank for Agricultural Promotion until they were about to leave or when they had problems. On the other hand, the project supported in Bolimkhamxay by the Quakers depended more on the district officials, since they were close to the beneficiaries, than on the country's financial structures.
The multiplication of financial institutions or structures offering credit aimed at different target populations is a normal phenomenon but to avoid, among other things, overlapping of expertise and geographic competition, questions need to be asked about the connection that they should have between each other.
Furthermore, in terms of financial and operational effectiveness, it would sometimes be worthwhile for the decentralized credit-savings networks and the banks to work together through refinancing agreements. Indeed, the decentralized systems are not competitive with the banks, but most often complementary. It is in the banks best interest, both to limit their costs and to limit loan loss, to rely on organized, liable groups. As for the basic credit unions, it is in their best interest to sign agreements with the banks for refinancing and, as a result, increasing the volume of loans for their members.
It is therefore essential to encourage a "meeting" between these two credit actors instead of them turning their backs on each other as is too often the case.
The discussion then dealt with the procedures for regulations, coordination and institutionalization of the rural credit projects.
- In Vietnam, two different procedures have been adopted to regulate decentralized systems. Credit cooperatives were created by a Central Bank decree. Their regulation was not based on any field experiments. As a result, after two years, these cooperatives reported failures and almost all of them went bankrupt. Currently, the people's unions are adopting a completely different procedure. They started out by letting the unions operate, little by little, and adjusting the system in the field. Only after two years of experimenting could a bill, aimed at regulating these unions, be discussed. The law will be passed after three years of field work and does not impose itself as a prerequisite. It will be in effect for the extension phase and not for the experimentation phase.
- In Cambodia, the effort of coordination and coherence of the system allows substantial initiative at the ground level. There has been progressive coherence that started 4 or 5 years ago. It has materialized through annual forums in which all the partners offering rural credit were in attendance. In addition, there is a structure, the CCRD, through which the government can give specific guidelines and in which the banks, ministries, Women's Union, NGOs and representatives of the basic structures are represented. It is this structure that should create the conditions of institutionalization and brainstorming is done jointly with all the partners. Initiatives can therefore originate from the ground level.
- In Lao PDR, there are regulations for the credit cooperatives backed by the banking system. This financial institution is offered by the bank to interface between the banking system and the farmers. By controlling the form of this structure, the bank is trying to avoid anarchical development of the credit structures and offer a structure for working jointly with the NGOs. The latter can help the farmers organize themselves and join together to set up these structures authorized to offer decentralized credit. The bank could then loan to these cooperatives. This joint work could also materialize through training programmes.
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.
Generally speaking, there are two cases with respect to guarantees: either the borrower puts forward collateral, or he cannot.
For small loans designed for people who do not have collateral, the NGOs, projects and banks request, or even oblige, the borrowers to form small groups. But what is the real role of these groups?
The collective security system invented by the Grameen Bank relies on a moral guarantee between 5 people who mutually guarantee the repayment of each group member. In theory, this practice is also used when the borrower can put forward a guarantee. The advantage of this system is that it creates the conditions of solidarity that binds the beneficiaries together. On a wider scale, the group also becomes a place for training, exchanges of experience, and discussion.
Normally, in the case of non-repayment by one person, the whole group is excluded. In practice, such sanctions are rarely enforced. In Cambodia and Vietnam, the groups often unite members of an extended family.
Should the groups be limited to five people?
More important than the number of people, it is the trust that exists between the members of the group that is important. The people must know each other, be aware of their responsibility, be fully aware of the financial commitment that they are taking, assume the role of mutual counsel. This enables them to exclude people who might not be able to take on this responsibility. Over five people, the bonds of solidarity are not as strong and the involvement of each individual member tends to lessen.
How should the groups be formed?
If it is the village chief who appoints the members of the group, it is normal for them not to feel united. It is preferable to let the groups form spontaneously by affinity. This may cause some to be excluded but all communities exclude on their own people who cannot be trusted. Exclusion causes problems when it involves people who have economic potential and ideas, but experience shows that this is rarely the case.
Should all the people in a group have the same profession anger the same economic situations?
A variety of economic situations within one group may enable the poorer members to have access to loans through the guarantee offered by the more well-to-do. Moreover, if some of the members have an activity with steady income throughout the year, they represent a guarantee in relation to those whose incomes are periodical (as with farming). In this case, complementarity should be encouraged. However, some think that preference should be given to the formation of groups with the same economic situation since when confronted with the same difficulties/ they tend to understand each other better and be more united.
Must the only family of the group having taken out a loan totally repay it before credit can be granted to another member of the group?
This is a cause of discontent in the groups. As soon as possible, more flexibility needs to be introduced into the granting of the loans.
As far as the repayment rate is concerned, it has been noted that it is often far better in groups "whether in the rural world or for micro-businesses). The formula works better for small loans than for big ones. The example of Banrural in Mexico demonstrates that the principle of collateral can pose problems.
Due to their requirements for guarantees and the minimal size of their credit, banks exclude a large part of the population. Should the projects and NGOs offer credit to all social categories or should they only target a fraction of the population?
Credit for Women
Why are we witnessing the appearance of projects or structures that are especially For women?
In the cities, where women have businesses or other small processing activities, it is not as difficult to go to the bank or at least to get credit.
However, in rural areas, it is much harder for women to have access to a financial service. The steps for having access to credit do indeed pass through committees in which women are generally poorly, or even not, represented. It is therefore harder for them to defend their projects.
In addition, women request small loans, whereas men often apply for major loans. Yet, as small loans are more costly than large ones in terms of management, the credit structures prefer managing a few large ones rather than several small ones. They are thus excluded right from the start, whereas their repayment rate is generally better than that of men (in a project in Malaysia, over a two-year period, the repayment rate for women was close to 97% whereas the men's was 55%).
This is the reason why some operators target their projects for women. It should also be noted that in many countries, the Women's Association is often a dynamic, countrywide association which makes contacts easier.
Credit for the Poor
The choice of offering credit to specific customers involves developing credit formulas, procedures and guarantees adapted to each type of customer. Selection methods or criteria also need to be defined.
We have seen two examples of systems targeting specific customers
- The COOPECs which, through compulsory savings, target a rather well-off population(as they have capital).
- The Bank for the Poor, for which the Vietnamese authorities target a fraction of the population that they had not succeeded in reaching with the Vietnamese Bank off Agriculture.
In the COOPECs, a provision establishes the selection, and for the Bank for the Poor a set of criteria is used.
It is not easy to target poor farmers. It can lead to manipulations with some people managing to be on the list to obtain credit at preferential rates. This also requires regular monitoring of the families in order to update the lists from one year to the next, since standards of living can vary quite rapidly.
The role of a financial system is to be the go between the agents who can finance and those who need financing. One person's savings is therefore another's credit. But when should savings begin?
Before granting credit (payment of small amounts over a few weeks ); 2) at the same time as the credit Ipayment of a fee and withdrawal of a percentage on the credit that feeds a guarantee fund - 5% for the Grameen Bank); 3) or later when there is already a certain amount of trust?
For some, the issue of starting a savings scheme prior to credit depends on the type of the institution. As a result, a bank could allow itself to start by granting credit whereas a cooperative has to collect resources first, before being able to offer credit.
The different economic contexts in a country and the myriad of reasons for savings (security, setting up a savings as a precautionary measure, future plans for a costly investment such as housing, access to credit, etc.) can explain various approaches in the field.
Savings before or during credit
The arguments in favor of prior savings are partially those put forward by the COOPECs. Setting up a savings account contributes to the durability of the financial structure in terms of independence and autonomy with respect to outside financing.
Prior savings, and this is the theory of "hot money", from the beneficiaries of the local unions (in comparison with "cold money" that comes from outside sources) allows the farmers to develop the feeling of appropriation of the structures, encourages the farmers' interest in the management of the funds and consolidates the solidarity between the members. The management of THEIR money is at issue. Moreover, savings can be a teacher, teaching forecasting and planning.
Lastly, for a bank, if the COOPEC system is backed by the banking system, prior savings is a proof of seriousness and motivation that reassures it.
Prior savings can be voluntary or compulsory. It will be voluntary if the target population is well off enough and has sufficient means for investing part of its assets. If the structure wants equity but the population is not used to saving, it can count on either fees, or on a percentage of the amount of credit. Compulsory savings can be accepted if it is clearly explained.
However, saving requires more rigor than granting credit, especially for voluntary savings. It requires an irreproachable accounting system, a system of monitoring the funds to avoid misuse, training and awareness of the savers, a more sophisticated management, and therefore, extra cost.
Savings after credit
Good intentions are not enough. It is not always easy to collect savings.
- In the event that the financial profitability, for the saver, is lower than the economic profitability, it is not logical to impose savings since the families can use this money in a more profitable way by investing it.
- Studies made by the GRET in Cambodia show that the economic profitability rate of the activities financed by credit is at about 100%, for loan periods ranging from 6 to 12 months. It is therefore in the farmer's best interest to go into debt to develop an activity rather than invest his surplus in a system that, at best, can offer him a remuneration of about 2%/month. Hence the preference for investment over savings.
- Collection of free savings becomes justified insofar as it concerns surplus resources, often from savings hoarded in gold or in cash and therefore potentially not used on a short- or midterm basis. In this case, conditions of trust should be created so that the depositors accept to transform it into the national currency and deposit it in the credit unions. These savings should, at the very least, be remunerated at the rate of inflation.
- As far as savings is concerned, experimenting and progressivity are most often required. Experimenting makes it possible to identify savings habits, reasons that will encourage people to save, and based on this information, thought can be given to the appropriate forms of collecting savings and the financial products to be offered. Progressivity is made necessary by the importance of the trust factor in everything that is related to savings.