Rural Finance: Innovative Products and Service Delivery

Day 5: Block 1

Reaching Remote Areas: Case Study of XacBank in Mongolia

Rural Finance Practices: Products and Service Delivery

Day 5: Block 2

Reaching Remote Areas Through Savings-led Methodologies

Examples: Reaching Remote and Very Poor through Savings-based

Approaches

• Savings based approach in next slides

– CARE’s MMD Accumulated Savings and Credit Approach

• Other types of savings-based approaches

– SACCOS

– Self-Help Groups (SHGs) in India linked to banks

– SHGs linked to Credit Unions

• HIV

– CARE’s SIMBA program for HIV/AIDS families

CARE International’s Village Savings & Loans (VS&L)

Programme in Africa

Microfinance for the Rural Poor that Works

Poor are Risk AverseThe Theory Behind the Program

• The poor are risk averse• Credit increases risk as the poor assume liabilities• Savings decrease risk: the poor work with their own

assets• Savings are a more desirable service for the poor than

debt finance. Evidence for this is:

– Demand as measured by participation numbers– Some studies on satisfaction

Thus, savings first, credit second and insurance third. (Often poor takes credit as a surrogate for insurance.)

Poor are Risk Averse:What Do They Want?

Characteristics of Services

• Accessible and secure services based in the community

• Transparency and simplicity of transactions

• Low cost services

• High yields on savings

• Ownership and control over profits

Traditional Financial ServicesROSCAs (Rotating Savings and Credit Assoc.)

• ROSCAs provide credit with

– Low transaction cost

– Efficient service delivery

– Transparency

– Safety for savings

• ROSCAs cannot provide:

– Credit matched to investment needs

– Business or emergency loans when needed

– A real return on savings invested

Traditional Financial Services ASCAs (Accumulated Savings & Credit Assoc.)

• ASCAs permit:

– Variable savings rates (although usually fixed)

– Credit when it is needed

– Return on savings, usually in excess of inflation

– Insurance

• Some limitations of ASCAs are:

– Greater complexity

– Elevated risk of theft/robbery

Evolution from Traditional to Formal System

• Flexible > less flexible

• Informal structures and training > formal

• From verbal and visual systems >

Substitution of formal records

Methodology

• Group Formation

• Training

• Graduation

• Operations

Start-up

• Agents hold village meetings to explain the project and basic principles and obtain assent of the local leaders

• Agents explain the need for participants to form themselves into groups. Agent requests them to approach the agent personally once a group is formed, with a Chair, Secretary and Treasurer already selected by the members

Group Formation

• Groups are formed of as few as 5 members (Zimbabwe) and as many as 30 (Niger).

• If more than 30 members, they are encouraged to sub-divide groups.

• Once a group is formed, the Agent agrees to take them on and agrees on a time and place for the training to take place.

Phase 1: The Intensive Phase• 3 Months

• Meetings are usually held weekly or monthly : agent attends all meetings

– Roles of the group and the general assembly

– Role of the members of the management committee

– Group objectives

– Internal code of conduct

– Conflict management

– Cash box credit and savings processes

– Role of technical offices, NGOs and other actors

Phase 2: Development Phase

• 4 Months

• Weekly Meetings: agent attends fortnightly

– Agent takes back seat as the group takes responsibility for meetings. Agent acts as advisor when needed

– Other messages introduced related to health, education etc

– Group evaluated prior to graduation

Phase 3: Maturity & Graduation

• 2 Months

• Weekly meetings

• Agent and Supervisor visit only at end of phase to evaluate readiness for graduation

• Group graduates and shares out portfolio amongst members

Program Comparisons: Generic Variations

• Niger: Basic model. Mostly recall records. Moderate efficiency. Uses BDS providers to spread.

• Zanzibar: Shareholding model. Needs complex records. Relatively low Agent efficiency.

• Zimbabwe: ‘Turbo’ model. Has only monthly meetings for both savings and credit. Clusters groups for meetings. Simple but thorough records. High Agent efficiency

• Many groups moving towards longer-term loans

• Many groups moving towards larger contribution levels

Growth

Annual Growth in the Number of Members

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

1 2 3 4 5 6 7 8 9

Years

Me

mb

ers

Financial Impact:High-Low Scenarios

1.64149.3491.31%Return on average value of savings

1.594,8523,056Average net benefit per member

1.6475%46%Ratio of savings to revenue

0.976,4996,694Savings per member

1.5811,2777,129Average portfolio value per member

2.07372,157179,354Portfolio value at time of ‘liberation’

1.313325Number of members per group

RatioKonniZinderConsolidated Data – 2 Regions in Niger

Use of Loans

Uses of Credit: Zinder

0

10

20

30

40

50

60

70

Activitees

We

igh

ted

No

mb

re d

es

Re

sp

on

se

s

Oil processing Livestock fatteningPetty Trade Stocking grainGrow ing beans and peanuts

Use of Shared-Out Funds

Consolidated inform ation. Uses of Shared Out Funds: Zinder

0

50

100

150

200

250

Activitee

No

mb

re d

es

Re

sp

on

se

s

Food Childrens' Clothes Agricultural Production New Activities

Livestock Clothes Debt repayment Household utensils

Husband's business Business Holidays Marriage

Medical Expenses Transport to seek w ork

Social and Household Impact

• Substantially improved ability to weather shocks to livelihoods

• Increased stability of household enterprises

• Improved social status/social capital

Basic Conclusions

• The VS&L approach works in a wide variety of settings

• It can reach high outreach and scale in poor rural areas

• It is enthusiastically supported by its members, principally because of its responsiveness and flexibility

• It is easily replicable because it is uncomplicated and transparent

• It does not require the establishment of an MFI to be sustainable

• It does not need a specialist organization to implement

• It can be inserted into a non-financial services programme as a separate component

Lessons Learned (1 of 2)

• Long-term programme costs are between $18 and $30 a client, compared to $300-400 for a standard credit-granting MFI

• The longer and more intensive the training the better the quality of the portfolio and the long-term survival

• There is a need for best practice performance standards for each program

• There is potential for more flexible adaptation than is practiced at present, particularly in terms of loan term and variable contributions

Lessons Learned (2 of 2)

• The methodology is adapted to the needs of the poor

• Programs are easily run by non-specialist local staff

• Returns on savings are highly competitive with the formal and quasi-formal sectors

• Sustainability is very quickly achieved and is inherent in the methodology

• Program growth is usually very fast

• Most programs need better record-keeping and tracking systems

Rural Finance: Linking with other Institutions for Service

Delivery

Day 5: Block 3

Successful Rural Linkage Models

Rural Finance Linkages

Private Banks

State Banks

Postal Banks

Insurance Cos.

Non-bank financial institutions

Investment funds

MFIs

NGOs

Credit Unions

Village Banks

Agro-processors

Input Suppliers

Marketing Companies

Leasing Companies

Warehouse Operators

Supermarket Chains

Clients

Farmer

Associations

Banks and Ag Processing Firms

• Land Bank of South Africa and Cotton Processing Firms - providing credit to big & smaller farmers

• Commercial Banks and Ag Processing Firms in Kenya, Zambia, Mozambique – providing credit to farmers

• Role of mills in facilitating finance to small and

medium scale farmers.

Banks and Supermarkets

• Farmers access to loans due to purchasing arrangements with supermarkets – HortiFruiti in Costa Rica

• Banks use supermarkets as delivery channels for range of services, including deposit mobilization - Nedbank and PicknPay Chains in S. Africa

Banks and Pension Fund Delivery

• Social pensions paid out in rural areas through commercial bank mobile units – S. Africa

Banks and Inputs Suppliers

• Teba Bank (S. Africa) using point of sales terminals to provide banking services through rural trader shops and MFIs

• Drumnet-Pride Africa linking farmers to financial service (primarily lines of credit through the use of smart cards) with input suppliers coupled with access to market information

Bank – MFI Linkage Models

• MFI linkage to banks which collect deposits that MFI mobilizes

• Post Office Bank in S. Africa acts as payment receiver for a range of MFIs and credit unions

• Partnerships

– Bank holds loans, while MFI monitors and collects payments

Wholesale Finance Models to Rural Finance Institutions

• Investment funds - debt and equity instruments for MFIs

– NCDLF Fund provided third tier financing to Nicaraguan MFI and coops, etc.

– Oikocredit is the largest credit source in world for MFIs

– MicroVest, LA-CIF, Blue Orchard, etc.

Wholesale Finance Models

• Portfolio buyouts

– One time purchase of MFI portfolio

• Securitization

– Rating of longer term loan portfolio so investors will buy

• “On tap Securitization”

– Continuous buyout of MFI portfolio

** Systems based on incentives and risk sharing arrangements – default limits and guarantees

Rural Finance: Diverse Products & Service Delivery

Day 5: Block 4

Product Adaptation and Innovation

Diverse Rural Finance Services

Covered in next slides:

1. Credit before planting

– Trade credit

– Out grower advances

2. Insurance

– Index-based insurance

– Case study in Mongolia

3. Warehouse receipts

4. Leasing

Other types:

• Working capital loans

• Lines of credit

• Emergency loans

• Term finance loans

• Point of sale arrangements

Credit before Planting: Trader Credit and Out grower Advances

Trade Credit:

Short term or seasonal loans between farmers and sellers of inputs and products

Out grower advances:

Cash advances or inputs provided

by buyers to farmers, through to formal purchase agreements

Insurance

• Agriculture – indexed weather based instruments

• Health

• Life

• Example of linkage with other institution: Life insurance firms using post office banks as payment facility for rural clients – S. Africa and Kenya

Index-Based Insurance

• Traditional Insurance – compensates for losses from independent events

Examples: fires, car wrecks

• Index-Based Insurance – covers correlated risk – from an event that causes widespread damage or losses

Examples: drought, flooding

Index-Based Insurance

Issues in protecting against natural disaster risk with traditional insurance:

• Correlated risks are difficult to price and insure

• Extreme event risks are rare; create ambiguity for both buyer and seller of insurance products

• High transaction costs because of asymmetries of information, high monitoring costs

• Need to transfer highly correlated natural hazard risk out of the local community

Index-Based Insurance –Advantages over Traditional

Insurance

• Low adverse selection

• Low moral hazard

• Low administrative costs

• Objective determination of payments

• Standardized and transparent structure

• Availability and negotiability

• Manages correlated risk

• Reinsurance function

Index-Based Insurance

• Indicator of loss – defined by the event.

Examples: Measurement may be in days, temperature, wind speed, Richter scale readings

• Trigger or strike, and limit – set the range over which indemnity payments are made

Example: index contract against excess rainfall –payments made once strike level is reached in a defined time period (day, month, season), and increase as rainfall increases. Maximum payment is made if rainfall reaches the limit.

Index-Based Insurance -Preconditions

• Homogenous impact within a (small) defined geographic area

• Infrequent, severe events (e.g., 1 in 10 year)

• Correlation of measurable event and measurable loss (basis risk)

• Reliable historical time series data (30 years, min 15)

• Secure, objective, reliable source of data for measurements

• Legal framework for contract enforcement

• Regulatory and supervisory framework for financial and insurance sectors

• Acceptance of concept by potential stakeholders

• Reinsurance away from smaller insurance providers

• Mongolia Livestock Insurance Case study

Warehouse Receipts

Definition:

Warehouse Receipt:

• Document listing goods or commodities kept in safekeeping in a warehouse;

• The warehouse receipt can be used to transfer ownership of the commodity, instead of physical

delivery

Warehouse Receipts

Participants:

• Producers and traders who deposit commodities in warehouses

• Warehouse operators who provide secure storage and issue warehouse receipts

• Lenders who accept receipts as collateral

• Inspectors who certify that warehouse standards are met

• Insurers who insure contents against loss

Leasing

Definition:

• A method of financing the acquisition/use of fixed assets, predicated on the concept that the value of the asset is in its use in the

business rather than through ownership.

• Leases are typically used to finance equipment, but can also be used for buildings and improvements and are commonly used to finance vehicles.

Leasing

Financing Lease – alternative to a bank term loan

Operating Lease – more comparable to rental

Most leases are financing leases. Lease financing

is an alternative to borrowing, not to renting.

Leasing – Types of Entities

• Private Leasing Companies

• State-owned Leasing Companies

• Commercial banks and subsidiaries

• Microfinance Institutions

• Equipment Manufacturers

Leasing – Special RAF Issues

• Recovery costs greater – down payment may be increased to compensate

• Monitoring

• Equipment maintenance

• Availability of insurance

• Used equipment leasing

• Repossession costlier

• Enabling environment

Producer Business Models

New Delivery

Channels

Innovative Linkages and Delivery Channels

Other Business Service Models

Bank - MFI

Wholesale Models