The promotion of economic and financial self-reliance on the part of the rural poor (groups) and the re-direction of financial institutions towards the disadvantaged people requires that the project's financial arrangements of relevance to the beneficiaries contain the following major elements:
1) involvement of the rural poor groups for administering savings and credit.
2) Equal priority to credit activities and mobilization of savings to ensure both economic and financial self-reliance and increased production by the beneficiaries.
3) Social instead of physical collateral for group loans (see Section 9.2); this group guarantee is a major factor in loan security.
4) Placement of a Credit Guarantee Fund (CGF) with the participating banks as an additional security for its loans to the poor and as an incentive for its active collaboration (see Section 9.2).
5) Establishment of realistic interest rates on deposits and loans which are normal in the recipient country, in order to foster group financial self-reliance and ensure that the relatively high costs of the financial services (loan delivery and supervision, etc.) provided by participating institutions are adequately covered. Normal rates would also cushion the withdrawal shock when project support terminates. However, in situations where interest rates are too high for small farmers, it would be necessary to negotiate for lower rates.
6) Provision of financial (including savings) training for groups.
7) Establishment of group emergency funds and food banks as a group insurance system.
8) Planning with flexibility to suit the specific financial and institutional situation in each project area.
Formal or informal group savings are to be encouraged from the outset because they: (a) strengthen the economic base of the groups and their capacity to increase production; (b) discipline the minds of the group members and indicate their commitment to groups; (c) facilitate access to credit; (d) relieve dependency on moneylenders and avoid the danger of over-indebtedness; and (e) foster cooperative spirit and self-reliance.
Group activities should begin with the help of savings rather then credit. Savings may start as a group welfare fund created and controlled by the group itself. Certain rules for managing a group savings fund are necessary, e.g. the ceiling, interest rates and time periods of loans to persons in or outside the group. When a fund becomes sizeable, the group may act against new members. In such cases new members may be allowed access to the fund in proportion to their contribution to the group fund.
It is in most instances beneficial to encourage groups to open a savings account in a nearby bank so that they become familiar with the banking system and can obtain loans in proportion to their savings. In this way savings are linked to loans; they may even be a prerequisite to become eligible for (project) loans. The application of contractual savings - always after consultation with the beneficiaries - is another possibility. In this system a certain percentage (say 10-15%) of a group loan is credited to the group savings account.
A Credit Guarantee Fund (CGF) may be established in a local credit institution (or a suitable substitute like a cooperative, credit union or an NGO) in order to encourage this institution to provide group loans from all its available credit funds. The CGF should ideally thus not function as a revolving fund or form the basis of such a fund created as a special line of credit for low-income people. The credit institution provides loans to groups to finance the inputs for their income-raising activities according to their group plans. An adequate procedure is that the loans are examined and approved by a local Loan Appraisal Committee (see Section 9.6). The loans will be provided against group liability: each member is responsible for the repayment of the total group loan. In other words loans are given with social instead of physical collateral, and as indicated earlier, at locally prevailing and not preferential, lower interest rates.
A Guarantee Fund should be used in accordance with the project document. After the project terminates it needs to be used to finance the same or similar rural poor-oriented participatory projects.
One of the main problems of groups in obtaining a bank loan is the usually considerable time spent to reach a bank and its usually complex credit procedures. On the other hand, some of the main problems of the banks is scarce familiarity with group liability, insufficient savings of the groups, the bank's bad experience with repayment rates in past conventional credit schemes and high transaction costs for a sizeable number of small loans (which are however reduced by giving "package" or group loans).
Practice shows that repayment rates on loans given to the disadvantaged people with group liability are generally higher than those on normal loans to "bankable," non-poor locals. In cases where defaulting occurs, the groups should exert social pressure on defaulting members and not the participation agents who should never perform the roles of loan collectors and controllers.
In various countries, selected banks have convenient small farmer credit schemes which could be tailored to meet the required credit demands for the group activities.
Finally, it should be stressed that the small groups are promoted for self-reliant development and not merely for credit delivery. Loans can only be provided when the groups are cohesive and active and show sufficient self-initiative and capability to prepare production plans.
The main criteria for the selection of a suitable bank are that the bank:
1) has a widespread network of branches in rural areas, in particular in or near the project areas;
2) is willing to provide group loans to the so-called unbankable low-income people with social instead of physical liability;
3) accepts to incur initially higher transaction costs to attract new clients;
4) is agreeable that part of its top and field staff receives training in key participatory development issues;
5) is able to provide services through mobile loan officers; and
6) has preferably experience in working with low-income rural people.
The establishment of linkages with suitable financial institutions in a project area is difficult and time-consuming as they have no or scarce experience with credit for the rural poor and usually a low level of financial consolidation. Evidence in various countries shows that rural poor groups can administer finance provided training is given to them according to well-defined area-specific guidelines. This role is particularly important where the beneficiary groups carry out jointly an income-raising activity, which requires more elaborate financial management.
In some countries the group savings approach is followed, while in others individual savings are emphasized and individual deposits accepted by the collaborating banking institution.
The initial credit recovery rates vary considerably between participatory projects, but are usually far beyond normal loan recovery rates. This is because loan security is provided partly or totally through social collateral as a replacement of physical collateral which the rural poor usually cannot provide.
The general tendency in participatory projects is to apply statutory or normal interest rates for group savings and credit. In some countries where the project itself operates the credit activities, a special interest structure has been developed ranging from interest free loans for tools to 25 percent interest (including transport and marketing costs) for repayments made in kind.
In any case, in projects where area-specific guidelines for the financial component of a project are absent, the financial training of both group promoters and beneficiaries is reportedly primarily of the ad-hoc, on-the-job type.
There are so far only a few instances of the formation of special group emergency funds and/or food banks for insurance and food security purposes. However, certain groups have retained a large proportion of the surplus generated from group production activities as collective savings or investments. These resources, which cannot be drawn upon for individual purposes, could be used as emergency funds in case of accident, illness, death or crop failure of one or more group members. With current, unfavourable climatic conditions in many countries, the question of insurance coverage acquires added importance.
The differences in the design and operation of the financial component in various participatory projects reflects the necessary adjustment and flexibility in relation to local socio-economic conditions, as illustrated by the following examples.
Particularly at the beginning of the implementation of a participatory project in Ghana, the country suffered from extreme inflation and the shortage of foreign exchange. To facilitate project operations, the guarantee fund was increased and transferred into an Input-Import Fund held in convertible currency outside the country, while the Ghanaian Government allocated funds sufficient to cover most local currency costs. The collaborating bank receives the inputs, which are then distributed to the beneficiaries on credit. The price of the inputs in local currency is determined by an agreement between the government, the project and the bank.
In Sierra Leone, where a participatory project itself provides the required credit, a detailed system has been developed for provision of loans and their recovery in cash or kind. In Kenya credit has also been administered by a participatory project, while in Zambia this is done by cooperative organizations.
Other local level project-specific arrangements include group marketing of surplus in Ghana to bypass middlemen who previously provided usurious loans; the formulation of by-laws to regulate financial and other group operations in Sierra Leone; and preparations for forming local credit unions in Ghana and Lesotho.
The Nimba County Rural Development Project in Liberia has been able to base its local financial activities on a modified form of traditional savings and credit groups ("susu"), thus exemplifying an imaginative adjustment to the socio-economic environment.
In Zimbabwe the Savings Development Movement constitutes a genuine grassroot action, where local people - mainly women - organize themselves in savings clubs for financial self-reliance and self-help production purposes. This movement was found to have an impressively decentralized structure and self-propelling capacity rooted in the local social system and culture, making it an interesting example of local arrangements for the financial component of a participatory project. It is now planned to establish a Savings Development Bank to provide the clubs with safe access to savings deposit facilities and to utilize the savings mobilization of the clubs more effectively for rural development purposes of value to the clubs. The proposed bank structure appears to have an interesting and viable set-up that could provide an example to participatory projects, particularly in their expansion phase, of a large and growing number of groups with expanding savings and credit activities, and which show a considerable degree of financial self-reliance. The participation of savings club members in the design and operations should be structured in such a way that the benefits go primarily to members of the savings clubs, with less emphasis on creating bank surpluses for general rural development purposes. Moreover, club members' savings deposited in such a bank should not be required to cover all credit issued.
Selected rural banking institutions are to be sensitized, for example through specific seminars on participatory principles in general, and the feasibility of group-based rural finance operations for participatory projects in particular. The banks should be included to enter into collaboration with participatory projects also by the following means:
1) Full briefing about financial guidelines for participatory projects, including the benefits of the group approach.
2) Detailed information about the financial arrangements and achievements of relevant on-going participatory projects.
3) Channelling group savings to the prospective bank partner.
4) Encouraging credit repayment in cash to facilitate an increase in bank deposits.
5) In case a revolving fund should initially be necessary, the establishment of a revolving fund account with the bank should be given preference, with a view to transforming it as soon as possible into a fund in support of regular credit for rural poor groups from the bank. If no initial credit relationship with a bank is possible, the operation of the credit guarantee fund as a project revolving fund could be undertaken to show banks the feasibility of group credit.
6) Exposing bank officials to participatory project operations by inviting them to participate in field workshops and coordination committees.
Project operations for credit delivery at local level should not begin until the financial arrangements are organized satisfactorily. Clear criteria for credit eligibility, size and duration are to be worked out together with adequate procedures for assessing credit applications based on group production plans. Training should be given to project and bank staff as well as beneficiaries on the project-specific financial procedures.
A small Loan Approval or Credit Committee could be established in the Project Coordination or Participation Committee in order to give technical guidance to prepare group production plans and approve the required loans. The Credit Committee should include the concerned participation agent, extension worker, local bank branch manager and any other technical officer, as and when required.
Finally, credit from whatever source is essential for participatory development, but should not breed over-dependency on credit or constitute the main incentive for group formation. In order to avoid these risks in various projects groups become only eligible for credit after a certain period during which they show their capacity to form a cohesive group, to work with their own very small resources and to create a group fund from their (tiny) savings.
For further information on group loans and related issues, see the Small Farmer Development Manual, Chapter 2, Section 4.5 on "Total" and group-channelled credit; Chapter 3, Part IV on Funding the receiving/utilizing mechanism, and in particular Chapter 6, Section I, on Credit operations of grassroots groups.
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[8] Various elements in this
chapter are adapted from: "Financing Development Activities of the Rural Poor -
Guidelines for Action", by Paul Ojermark, FAO/PPP, Rome 1984 (draft). |
