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2.3 Successful MFIs Rerving Rural Areas and Agriculture

In the absence of a comprehensive rural finance data base, insights about the magnitude of MFI activities and their performance have to be gleaned from selected case studies.[1] This section highlights MFIs for which information concerning their rural operations is readily available. Undoubtedly there are other successful but less well publicized examples.

Three Acclaimed Pioneer Asian Institutions

Three Asian institutions are frequently suggested as models for successfully supplying loans and other financial services in rural areas: Bank for Agriculture and Agricultural Cooperatives (BAAC) in Thailand; village banks (Unit Desas) of Bank Rakyat Indonesia – BRI-UD; and Grameen Bank (GB) in Bangladesh. GB is the only one commonly known as a MFI, but all three reach millions of clients, many of whom are poor, and they serve agriculture directly or indirectly. Their success contributed to the change in the agricultural paradigm.[2]

Common features of the three that contributed to their success include:

x Operating in areas of high population density;

x Reasonably favorable economic, rural and agricultural policies;

x Fair to good rural infrastructure;

x High degree of management autonomy, including charging positive and often high loan interest rates;

x Staff policies that stress training and accountability;

x Innovative and low-cost operating systems;

x Appropriate loan terms and conditions;

x Close monitoring of loan performance;

x MIS adequate to facilitate planning, control, and monitoring;

x Strong savings mobilization to reduce or eliminate the need for external funds.

Several features are noteworthy. BAAC is a state-owned bank created in 1966 that was restricted to agricultural lending until recently. BRI was also state-owned with a network of village banks established as separate profit centers in 1984. GB was established in 1983 as a specialized financial institution with its own banking ordinance. All three serve millions of clients but in different ways. Grameen pioneered joint liability five-person groups mostly comprised of women, a method subsequently copied widely around the world. BRI-UD uses individual lending while BAAC uses group lending for small loans and individual lending for large loans to reach 80 to 90 percent of farmers in the country, and also lends to cooperatives. GB revised its rigid loan and savings products after the 1998 flood and created the highly successful Grameen II.

BRI-UD has emphasized voluntary savings mobilization and its savings volumes have been double that of outstanding loans, demonstrating that more rural people will benefit from secure places to save than to borrow. BAAC initially relied on government funds and bank loans but savings mobilization slowly expanded. GB was slow to mobilize voluntary savings but under Grameen II introduced attractive savings and pension products. BRI-UD channeled substantial savings and profits to the home office. As a result it had a negative subsidy dependence index (SDI) (it could have lowered interest rates on loans and still covered any subsidies received).[3] The SDI was slightly positive for BAAC because of subsidies, while the SDI was highly positive for GB because of huge subsidies received in its early years.[4]

Surprisingly, the average depth of poverty of the clients served (measured by ratio of average outstanding loans to GDP per capita) was somewhat lower for BAAC and BRI-UD even though Grameen reportedly serves the poor. All three have achieved good loan recovery with relatively few write-offs in spite of financial crises, although GB experienced problems due to the 1998 flood. The three have controlled costs and losses so their interest rates are relatively low compared to MFIs elsewhere.

ProCredit Bank El Salvador (Formerly Financiera Calpia)

ProCredit Bank El Salvador, one of 22 banks of ProCredit Holding, evolved from an NGO in 1988 to become a financiera and finally a bank in 2004. It initially served urban micro entrepreneurs but modified its individual lending technology to fit the demands of rural clients beginning in 1992. The initial target area was based on three criteria: accessibility, proximity to a branch office, and secure water supply to minimize crop failure. Technical assistance for designing the technology was provided by the German consulting firm Internationale Projekt Consult (IPC), one of the founding shareholders.

Agricultural loans were made for an average of ten months and livestock loans for 15 to 18 months. Interest and partial principal payments were scheduled periodically for clients with the necessary cash flow; otherwise, a single-bullet payment was required at maturity. Annual nominal interest rates ranged between 12 and 27 percent charged on the unpaid loan principal. Disbursements and payments were made in branch offices to minimize potential fraud by loan officers. The bank preferred to hire loan officers around 30 years of age who were about to receive degrees from local universities, with little or no banking experience. Training and/or experience in agriculture was deemed necessary to effectively evaluate loan applicant management capacity, potential yields, and production risks.

Bonuses were an important part of loan officer compensation so efficient officers earned bonuses up to 100 percent of their base salary. The incentive formula consisted of portfolio size, number of borrowers, number of new borrowers, and loan arrears (Navajas and Gonzalez-Vega, 2003a). Incentives generated high productivity but also led to “burn out” of loan officers. IPC replaced the system in 2005 with improvements in benefits and insurance for all employees, rewards of up to two months of salary for exemplary conduct, and profit sharing for selected middle managers (Zeitinger, 2005).

Agricultural loans totaled over US$15 million in 2009, representing about 7.5 percent of the loan portfolio (Annual Report 2009).[5] The bank reported about 76,000 total loans and almost 290,000 deposit accounts. Profits fell compared to 2008 due to the economic downturn so return on equity fell to 2.7 percent. An analysis of rural and urban branches in 2006 revealed that rural loan officers averaged more clients (320 compared to 289) but lower average loan sizes (US$1,130 compared to US$1,686) due to many small agricultural loans. Operating costs were a bit higher (6.2 percent compared to 5.8 percent), but loan loss provisions were lower (1.3 percent compared to 2.9 percent). Rural branches generated an income margin similar to urban branches demonstrating that rural operations could be an attractive business. The bank successfully adapted to problems created by Hurricane Mitch in 1998 and an earthquake in 2001 that damaged homes and affected the living conditions of about 20 percent of the rural customers (Buchenau and Meyer, 2007).

Centenary Bank, Formerly Centenary Rural Development Bank Ltd. (CERUDEB), Uganda

Centenary was established by the Catholic Church of Uganda in 1983 as a trust fund to serve economically disadvantaged people especially in rural areas. It experienced problems, undertook reforms, and was transformed into a commercial bank in 1993. The Catholic Church continues to hold a majority of shares. Individual microlending was developed, including agricultural loan products and procedures patterned after the ProCredit Bank El Salvador, and it became the pioneer bank in making individual loans to small farmers.

Cash flow analysis was used to evaluate borrower repayment capacity. Loans started small at roughly US$60 or less for three to six months, and borrowers could get repeat loans of increasing size and longer term. After three successful loan cycles, borrowers could graduate to “automatic” loans with substantially lower interest rates. Collateral requirements were flexible combining fixed assets and guarantors. Poor customers could provide guarantors, land without a secure title, movable items like livestock, household items including nondurables and business equipment. Software was introduced for computerized loan processing and monitoring, staff performance analysis, calculation of incentives, loan provisioning, and loan tracking (Seibel, 2003).

One branch began agricultural lending in 1998 in an area of small farmers with one to four acres who were raising coffee, maize, horticultural crops, cows, goats, and pigs.[6] Some engaged in processing and petty trade, and most had multiple sources of income. There are two production seasons per year and rainfall is fairly reliable. Loan officer projections of cash flows were used to estimate balance sheets and monthly cash flows. Loan collateral was often customary land titles, livestock, and household goods expected to value a minimum of 150 percent of the loan amount. The initial four loan officers were university graduates of agronomy or agricultural economics with little previous work experience.

In the first season, 388 loans were made averaging about US$200 for an average term of six months, usually with a three-month grace period followed by three equal monthly loan installments. Interest was charged at 1.8 percent per month on the declining balance, an application fee of about US$3 was charged along with a monthly inspection fee of 2 percent, reduced to 0.5 percent for the fourth loan if the borrower made on-time payments for previous loans. Loans were disbursed into saving accounts opened by the borrowers. A special current account was also opened so post-dated checks could be drawn for loan installments. This encouraged good repayment since it is a criminal offense to issue a check with insufficient funds. By the end of that first season, 92 percent of the borrowers repaid in full on time, but several faced difficulties because of low commodity prices, and a few were unwilling to pay. Over 1,000 loans were made in 1999, but arrears were higher because a large harvest depressed commodity prices.

Agricultural lending expanded in 2000 to eight branches with the additional incentive of a donor-funded guaranteed program. New loan officers were hired but much of the lending was done by existing loan officers with little agricultural experience. Many of the new clients were maize farmers recommended through donor projects that also suggested loan sizes, and donor officials approved each loan guaranteed. Due to the guarantee, collateral requirements were reduced, loans were granted to many first-time borrowers, new loans were given to some farmers in default (contrary to the guarantee agreement), and loan sizes tended to be larger. With low maize prices in 2001, arrears shot up, and the bank sought to recover roughly 29 percent of the portfolio from the guarantee. This experience demonstrated how donors can induce financial institutions to over-expand into new markets without adequate experience and trained staff and systems for control and monitoring (Meyer, Roberts, and Mugume, 2004).

Centenary embarked on another reform in 2002 by adding larger loans for medium enterprises as well as corporate finance. The portfolio soon included several hundred commercial loans, enabling the bank to continue growing with many new borrowers. The higher profitability from larger loans was expected to enable the bank to further expand outreach to the poor (Seibel, 2003) but this has not been confirmed. Centenary began to pilot test two-year farm loans in 2008 for purchasing draft animals for cultivation (Roberts and Ocaya, 2009).

Centenary reported 43 billion Uganda shillings in agricultural loans in its 2009 annual report, representing about 12 percent of its total portfolio. Only 8.7 percent of its impaired loans were classified as agricultural, suggesting the earlier recovery problems had been resolved. The MIX Market data for 2009 reports a gross loan portfolio of US$187 million and 109,000 borrowers, deposits totaled more than US$236 million from 875,000 depositors, a 4 percent return on assets, and a 26.1 percent return on equity.

Opportunity International Bank of Malawi

Opportunity International operates regulated MFIs and NGOs in 27 countries, and it is actively testing innovations to expand rural financial access and reduce risk. It provides weather-based index insurance to producers, offers crop, loan, health, life and property insurance through a subsidiary, and is developing a model for mbanking (Berger, 2009).[7] Several innovations are being tested by Opportunity International Bank of Malawi (OIBM). It began operation as a commercial bank in 2003 to serve all market segments as a savings-led institution, although it targets economically active but underserved people in semi-urban and rural areas. Lending is frequently done through “trust groups” of ten to 30 entrepreneurs, usually women. Members undergo four to eight weeks of training before borrowing and provide a group guarantee for each other's loans. Individual loans are available for experienced business owners who provide collateral or a personal guarantor.

OIBM expanded into rural areas in 2007. Loans are generally made through farmer groups that contract with crop buyers. The farmers' land and resources are evaluated to estimate profits for loan servicing. The buyers receive the crop, sell it, deduct the cost of inputs, and deposit the balance directly into the borrowers' accounts. Risk mitigating techniques include crop insurance and warehouse receipts. The 2009 Annual Report revealed a gross loan portfolio of US$30.4 million of which 10.5 percent was agricultural. Sixty percent of more than 45,000 borrowers were women. Total savers exceeded 252,000 with deposits of over US$31 million. It achieved operational self-sufficiency and positive profit margins in 2008, but both measures dipped in 2009 while its portfolio at risk > 30 days climbed to 7.25 percent (MIX Market).

Multiple delivery channels to expand financial access are being tested. In 2007, they included: 1) seven fixed outlets (mobile units, kiosks, satellite centers) and two mobile vans; 2) eleven large and ten small scale ATMs; 3) over 1,000 Point of Sale (POS) devices via the Malswitch network (through participating retail outlets, gas stations, agricultural supply shops, competitor banks); and 4) over 100,000 smart cards issued with biometric identification (Kalanda and Campbell, 2008).[8] Testing of electric bicycles (e-bikes) for loan officers began in 2010 (Opportunity Blog, 2010).

The mobile vans are equipped with electrical generators, computers for inputting and backing up data, biometric reading devices, a POS terminal to read smart cards, a webcam to take passbook photographs, and a fingerprint scanner. Security cameras and armed guards ensure safety and GPS tracks vehicle movements. The vans stop once or twice per week at fixed locations so clients can deposit and withdraw funds and make loan payments. They return to branch offices at day's end to upload data into the head office database. Vehicle start up and operating costs are high, but the first van reached 3,000 clients in three months compared to approximately 18 months for a satellite branch (Opuku and Foy, 2008).

Smart cards help solve the challenge of client identification. Most commercial banks require an official identification but there is no national ID card. Driver's licenses and passports cost about US$30 so OIBM and other institutions use Malswitch smart cards to store cardholder fingerprints and a photo to match cards to cardholders. The cards are used to store savings, disburse loans, and make money transfers. A drawback is the cost of about US$7 per card.

Intensive evaluations are being undertaking to improve understanding of how innovations affect access to and impact of financial services. For example, rural market women preferred savings passbooks so they can check balances without using biometric card readers, and some readers in banks do not always read the OIBM cards. The women also found weekly mobile bank visits too infrequent, prompting them to simultaneously maintain savings accounts with commercial banks (Nagarajan, 2010). A baseline study was implemented for use in evaluating the mobile vans and related technology (McGuinness, 2008). Studies will test the value of bringing the bank to customers, offering one-stop-shopping for several financial products, diversifying risks by reaching both poor and non-poor clients, and providing better service. One study assessed the impact of marketing strategies on the uptake of products in areas served by a mobile bank. A marketing campaign using field-based promotion assistants significantly increased new client registrations compared to a mass media campaign (Nagarajan and Adelman, 2010).

An experiment with fingerprinting found that borrowers most likely to default (worst borrowers) raised their repayment rates dramatically, partly as a result of choosing lower loan sizes as well as devoting more agricultural inputs to paprika, the crop intended for the loan. A rough cost-benefit analysis produced favorable returns for the system (Giné et al., 2010). Preliminary analysis of an experiment with commitment savings accounts that allowed customers to restrict access to their funds led to larger amounts of savings and agricultural input use (Brune et al., April 2011).

  • [1] The annual reports of the 22 ProCredit banks (procredit-holding.com) show the agricultural share of their total loan portfolios ranged from less than 1percent to more than 26 percent. Unpublished data for investments made by the Rural Impulse Fund managed by Incofin Fund Management in 22 institutions showed a range of agricultural loans from 1 percent to 77 percent.
  • [2] There is a large literature about these three institutions by Yaron and other authors. Meyer and Nagarajan (2000) analyzed them in a study of Asian rural finance.
  • [3] Yaron (1992) created the SDI to calculate the overall financial cost of operating a financial institution. It is calculated by dividing the annual subsidy received by the annual average interest rate earned on the annual average loan portfolio. A negative SDI implies that the institution has achieved full self-sustainability, while a positive number indicates that interest rates need to be raised to cover the subsidies received.
  • [4] For the period 1985 to1996, it was estimated that GB would have needed to raise nominal rates on ordinary loans from 20 to 33 percent to become free of subsidies (Morduch, 1999)
  • [5] As of November 2010, the average maturity of agricultural loans had risen to 30 months and livestock loans to 39 months. Total agricultural loans had fallen to just over US$7 million representing only about 4 percent of the total loan portfolio. This decline was due to refocusing the business by selling off all loans equal to or below US$1000, many of which were agricultural (personal correspondence with the bank).
  • [6] This information about the evolution in agricultural lending is based on interviews undertaken in 2004 (Meyer, Roberts, and Mugume, 2004).
  • [7] Early in 2010, Opportunity announced a US$16 million program co-funded by the Bill& Melinda Gates Foundation and The MasterCard Foundation to provide over 1.4 million people in Sub-Saharan Africa with access to savings accounts and agricultural loans, including more than 90,000 smallholder farmers. Programs operating in Malawi and Ghana will be expanded to other countries.
  • [8] The Bank of Malawi facilitated innovations by introducing a national switching and smart card payment system with biometric fingerprinting identification (Opuku and Foy, March 2008).
 
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