A Technical Guide toRural Finance

A Technical Guide toRural FinanceExploring ProductsExploring Products

Tackling Rural Finance

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The historical focus of rural financehas centered on the extension ofcredit, often subsidized anddirected, to rural areas. In fact, ruralpeople demand a diverse array offinancial services, including savings,money transfers, insurance andcredit. These financial services sup-port wider real goods sector production, contributing to employ-ment, economic growth andincome generation. Today’s finan-cial systems approach to ruralfinance recognizes that sustainableinstitutions offering a menu offinancial services priced to covercosts reach the greatest number ofrural producers and enterprises.

Current initiatives in the field raisethe level of development of ruralfinance systems, including financ-ing, as one element of a broaderfarmer support package. Promisingarrangements suggest that the finan-cial and non-financial componentsof service to a rural producer house-hold must remain separate for theservice providers to attain financialsustainability and for both institu-tions and clients to know the costsof each service.

Unlike many large commercial agri-

cultural producers, most rural pro-ducers are not solely dependent onagriculture income – they diversifytheir income generating activities.Given that rural households havediverse strategies for accumulatingassets and minimizing their vulnera-bility, rural finance institutions needto:• Assess the demand of rural clients

for multiple financial services;• Identify and examine all income

sources and expenses of theirclients at the household level; and

• Assess environmental credit risksassociated with production andmarket cycles.

Sparse and geographically dispersedpopulations characterize the ruraloperating environment, making it

difficult for financial institutions toachieve economies of scale.Financial products and servicesneed to suit the rural agriculturalenvironment where production andmarket cycles affect client incomeand expenses.

This guide discusses a spectrum ofrural finance products and deliverymechanisms that contribute toadvancing the provision of the fol-lowing financial services to ruralareas:• Lending• Savings• Leasing• Insurance• Remittances

WWhat is a Credit Union?Credit unions, or savings and credit cooperatives, are user-owned financial institutions that offer savings, credit, insur-ance and money transfer services to their members. Membership in a credit union is based on a common bond, alinkage shared by savers and borrowers that can be based on a community, organizational, religious or employee affil-iation. Depending on a country’s legal framework, credit unions may be authorized to mobilize member-client sav-ings either by the Superintendency of Banks, the Central Bank, the Ministry of Finance, the Ministry of Cooperativesor a freestanding law. In countries where they have legal authority to do so, credit unions serve non-members withdeposit and remittance services.

Lending

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“Rural lending requires greatereffort to assess and design loansthan in urban lending due to the greater complexity of ruralhouseholds’ economies whicharises from seasonality anddiversified incomes.”

Juan Buchenau, “Innovative Productsand Adaptations for Rural Finance,”2003, p. 6.

Families in rural areas seek todiversify their sources of incomebeyond agriculture. Householdsoften have a number of incomesources that include agriculturalproduction, non-agricultural pro-duction and both on and off-farmlabor income. Lending to ruralhouseholds requires tailoring prod-ucts to meet client demand andassessing client repayment capacitybased on multiple income streams.

The assessment of a client’s repay-ment capacity should include ananalysis of projected cash incomesand expenditures for a household’sdifferent economic activities. Oncerepayment capacity has been deter-mined, a payment schedule can beagreed upon and from this infor-mation, a tailored loan repaymentschedule is drawn up (Buchenau,2003). Rural finance institutionsmust consider the time necessaryfor the research needed to providea realistic assessment of incomeand expenditure.

Large enterprise farmers generallyare able to gain access to formalfinancial services and capital mar-kets. Rural households with multi-ple income sources have restricted(if any) access to formal financialservices and rely on informalproviders such as traders, money-lenders and agricultural processorsfor financing. This section on rurallending discusses long-term agri-culture investment loans, short-

and price (market) risks beforeloan approval: • Production risk includes climatic

disaster, such as drought orflood, as well as incidence ofpests and diseases.

• Market risk depends on the sta-bility of future pricing of agricul-tural commodities, and may behighly variable depending onregional and/or global supply, inaddition to government pricingpolicies and trans-border tradeagreements.

Successful repayment of loans is inpart dependent on careful meas-urement of:• Conditions for agriculture pro-

duction related to climate andpests;

• Future prices and markets;• Borrower management capacity;

and• Value of collateral and constraints

in the legal framework related tomortgages (Buchenau, 2003).

term rural enterprise and farmloans, lending against warehousereceipts, group-based lending andbuyer and supplier credit.

Long-term agriculture investmentloans finance production, process-ing and marketing of agriculture-related businesses (Buchenau,2003). Yet, insufficient forms ofcollateral and uncertainty aboutlong-term agricultural outputrestrict the availability of agricultur-al investment loans for smaller agri-cultural enterprises.

The repayment of long-term agri-culture investment loans is project-ed not only from existing income,but also by the outputs of the long-term agriculture investment.(Buchenau, 2003). A loan officermust assess the yield (production)

Long-term Agriculture Investment Loans

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The Sistema de Crédito Cooperativo(SICREDI) provides financially sus-tainable rural finance to its agricul-ture community common bondmembers. The savings-basedSICREDI system operates in fiveBrazilian states: Mato Grosso, MatoGrosso du Sul, Paraná, Rio Grandedu Sul and São Paulo. The system,characterized by vast outreach andgeographical coverage, serves592,978 members through 128credit unions and their 774 pointsof service as of December 2002.

SICREDI provides loans to meetthe demands of rural agriculturalmembers who want to develop acrop, an agribusiness or upgradetheir production technology orequipment. The system does notfinance non-agriculture activity.There are different types of loansfor purchasing livestock, livestockfeed, equipment, aquaculture(fish), rice and vegetable crops.Approximately one-third (35%) ofthe loan portfolio is invested in riceproduction.

Brazil – Succeeding With Traditional Agriculture Credit

The loan amount approved for arice crop is determined by the pro-jected return on sale at harvest. Ifthe credit union deems that theamount requested is unusuallyhigh, then it will conduct a site visitto ensure that the potential bor-rower has the capacity to producethe amount projected. The creditunion will finance up to 50% ofwhat the producer needs.

Each loan requires collateral (typi-cally production machinery) andanother credit union member mustserve as a co-guarantor. All bor-rowing applicants are checkedwith the credit bureau. The bor-rower must present receipts forinputs financed with the loan andhas up to 60 days to submit thesereceipts.

SICREDI has achieved outreachand self-sufficiency while servingclients specifically engaged in ruralagriculture. Cautious to preventterm mismatches in assets and lia-bilities, the SICREDI system relieson member savings deposits tofund short-term agriculture and off-farm productive activities. SICREDIcredit unions access long-termcredit to finance long-term loansfor lengthy crop production cycles,livestock raising and equipmentacquisition.

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Repayment Schedule Frequency of Interest Payment Repayment of Loan Principal

Bullet All interest paid at maturity All principal paid at maturity

Regular Interest Monthly interest payments All principal paid at maturity

Irregular Interest Uneven size and frequency based on Uneven size and frequency based onborrower’s projected income pattern borrower’s projected income pattern

Up-front Interest with Client follows individual payment scheduleFlexible Maturity All interest paid at start of borrowing period in accordance with maturity date

(Buchenau, 2003)

Short-term Rural Enterprise and Farm Loans A working capital loan for rural family enterprises is geared to households with diversified income sources fromagriculture and/or other rural enterprises. This type of loan is comparable to an individual urban microlendingproduct, yet differs due to flexible/tailored loan repayment plans subject to a client’s repayment capacity(Buchenau, 2003). A loan officer defines a repayment schedule based on a households’ projected cash incomefrom and expenditures on economic and non-economic activities. Specific repayment schedules are listed in thetable below:

Flexible short-term rural loan products that cater to borrowers with seasonal income and consider householdrepayment capacity have permitted regulated microfinance institutions such as Caja Los Andes in Bolivia andFinanciera Calpiá in El Salvador to serve more rural clients and to disburse larger loan amounts than what wouldhave been permissible with a traditional microenterprise working capital loan product (Buchenau, 2003).

Lending Against Warehouse Receipts

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Legal and supervisory preconditions need to be estab-lished for this type of lending to be successful. Theregulation and supervision of grain warehousing is bestdone by an independent government agency, a poten-tial constraint in many countries.

Group-based LendingGroup-based lending, wherein group liability replacesfixed asset collateral requirements for borrowing, provides a credit product to clients who would not beconsidered creditworthy on an individual basis.Group-based lending (loans approved generally for 16-week terms) is useful to finance rural productive activ-ities such as supplying inventory for food vendors. Inthis case, the short term is an appropriate match for theduration of the activity and the cash flow of the bor-rowing households. Short-term lending may excludeactivities related to an agriculture season or a multi-year investment required for certain types of livestockand crops.

Institutions considering group-based lending must con-sider the higher operating costs of this type of credit, ascompared to individual lending products. Group-based lending in the rural context needs to offer an advantage over individual lending due to its higher delivery costs. One such advantage could bereducing transaction costs for low-income individualswho live in remote locations. If group-based lending is implemented in local villages, then the group-basedlending methodology reduces the travel time costs to borrowers.

A grain-specific form of rural lending is offered throughwarehouse receipts. In order to access this type ofcredit, a farmer delivers a minimum grain quantity to agrain warehousing facility that then produces a receiptto document the quantity of grain delivered. Thefarmer pays a monthly storage fee. The farmer canthen sell grain during favorable market conditions or asis needed to meet expenditures. Warehouses oftenhave minimum grain requirements for storage. Smallfarmers not able to meet minimum grain storage quan-tities independently may be able to overcome this con-straint through affiliation with a cooperative or othertype of farmer association.

In addition to providing a storage mechanism forgrains, the warehouse receipt may be used as collater-al by the producer to obtain a loan from a financialinstitution (Buchenau, 2003). For a financial institution,lending against warehouse receipts reduces the need to assess repayment capacity (Buchenau, 2003). The success of using warehouse receipts as collateraldepends on:• Sound warehouse management facilities that will pre-

serve the quality and condition of the stored good(pest control monitoring, humidity control, air move-ment, bacteria control); and

• Reliable futures prices of grain for assessment of thevalue of the warehouse receipt.

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Building on the restructuring ofthese Mindanao credit unions,CUES partnered with Freedom fromHunger (FFH) to launch Savingsand Credit with Education (SCWE),a credit union village banking product. SCWE provides poor, eco-nomically-active women in ruralenvironments access to financialservices and non-formal education.Credit unions offering the SCWEproduct provide access to savingsand credit services by forming sav-ings and credit associations (SCAs)of approximately 30 clients, com-posed of five or six sub-groups.Each subgroup is made up of fiveto six clients. Each SCA becomesone member of a credit union.

Rural Filipino microentrepreneursparticipating in SCWE have theoption to borrow individually, toborrow as a sub-group, or to save only. The SCWE technology focuses on savings mobilization,capacity-based lending and non-formal education on health andnutrition. SCWE borrowing is con-centrated in five types of short-termproductive activities: • agricultural production; • animal husbandry; • agricultural commerce; • non-agricultural commerce; and • handicrafts.

SCWE and individual member-clients increased from 34,716 inDecember 1998 to 156,273 in July2003. Among the total member-clients, SCWE members increasedfrom 1,717 to 24,103 in the sameperiod.

Transferring the technology and les-sons from SCWE in the Philippines,WOCCU’s Programa Crédito conEducación Rural (CREER) inEcuador is working with pilot credit unions to introduce the SCWEproduct and deepen the creditunions’ outreach to poor ruralwomen.

The WOCCU Philippines Credit Union Empowerment and Strengthening (CUES) program funded by USAID hastransformed eleven credit unions from small and insolvent institutions to self-sustainable credit unions.

The Philippines to Ecuador – Deepening Rural Outreach

Batch 1 Key PEARLS Ratios Standards of Excellence 12/98 12/00 7/03

P1. Allowance for Loan 100% 10% 100% 100%Losses/Delinquency >12 months

P2. Net Allowance for Loan 35% 0% 35% 32%Losses/Delinquency of 1-12 months

E1. Net Loans/Total Assets 70-80% 60% 59% 66%

E5. Savings Deposits/Total Assets 70-80% 32% 54% 58%

E6. External Credit/Total Assets Max 5% 7% 2% 0%

E9. Net Institutional Capital/Total Assets Min 10% -17% 4% 11%

A1. Total Loan Delinquency/Gross <=5% 63% 12% 8%Loan Portfolio

A2. Non-earning Assets/Total Assets <=5% 20% 19% 10%

R7. Total Interest (Dividend) Cost on Market Rates >=R5* 8% 9% 21%Shares/Average Member Shares

R9. Total Operating Expenses/Average =5% 8% 11% 9%Total Assets

L1. ST Investments + Liquid Assets – 15% 24% 36% 36%ST Payables/Savings Deposits

S10. Growth in Membership >12% 10% 32% 22%

S11. Growth in Total Assets >Inflation 6% 24% 10%

Inflation Rate (Annualized) 11% 7% 3%

*R5 = Total Interest Cost on Savings Deposits (Market Rates > Inflation).

Buyer and Supplier Credit

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Product-market credit extended tofarmers by input suppliers, retailtraders, wholesalers, processorsand exporters addresses an unmetdemand for formal financial servic-es in rural areas. Product-marketcredit enables farmers to accessshort-term advances, seasonalcredit for the purchase of produc-tion inputs, and technical advice(Pearce, 2003). This type of pro-duction financing enables the sup-plier/trader to secure a certainquantity and quality of producefrom the farmer.

Contract farming is one type offinancial arrangement in which awholesaler extends financial creditand may also offer technical assis-tance to the producer. The farmerobtains credit upon contract signa-ture. The contract specifies theproduction calendar, required vol-ume and produce quality (Pearce,2003). While no interest rate isexplicitly stated, there is usually adiscount on the selling price for theproduce built into the contract.

Trader credit provides farmerswith in-kind advances or cashadvances, contingent upon repay-ment at harvest or an agreed uponselling price of goods at harvest.Trader credit is not intended forfinancing long-term investments,such as purchasing equipment orproperty, expanding operations,improving quality standards orstarting new activities (Pearce,2003). The trader benefits fromthis extension of credit because itsecures a local supply of produceand generates income from therelated interest gained from theloan transaction. While trader

credit may help farmers with build-ing relationships and obtainingcredit, product-market credit isshort-term, incurs high transactioncosts, and offers little to no trans-parency (Pearce, 2003).

Pearce notes that formal financialinstitutions will be more likely to

enter into financing arrangementswith organized farmer cooperativesor producer associations. Organiza-tions such as these that borrow oneumbrella loan reduce the monitor-ing costs and credit risk to a ruralfinance institution.

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WOCCU is implementing a pro-gram (2000-2004) of restructuringand institutional strengthening ofthe Rwandan second-tier creditunion federation, the Union desBanques Populaires du Rwanda(UBPR), and a number of pilotbanques populaires (credit unions)with support from USAID/Rwanda.As of December 2002, the networkoffered financial services to 318,784member-clients. The UBPR’s cen-tral finance facility that managesthe liquidity of its 148 affiliatedbanques populaires, finances coop-erative coffee producer associa-tions which have coffee washingstations and a harvest purchasecontract.

The initiative began after USAIDalerted the UBPR that a coffeecooperative needed funding tofinance its harvest in 2002. USAIDhad provided funds to a) build acoffee washing station, b) contracta technical consultant to assistAbahuzamugambi de Maraba cof-fee cooperative with supervisingthe coffee washing and c) hire amarketing consultant to exhibit thecoffee at several international tradefairs to find buyers.

In 2003, UBPR financed three cof-fee cooperatives in rural areas.Each of the coffee washing stationsare located close to individual banques populaires. All of the cof-fee farmers who form part of thecoffee cooperatives join their localbanque populaire and open a sav-ings account. At harvest time, theindividual producers bring theircoffee beans to the washing sta-tion. The coffee cooperative takesnote of the contribution of eachmember. The coffee cooperativeseach use one large loan from theUBPR because the loan sizes are

too large for individual local banques populaires to finance. Thecoffee cooperatives use these loansto pay each of their members fortheir coffee. Two weeks after theproducers have deposited their cof-fee for sale at the washing stations,the funds are deposited in mem-bers’ savings accounts at their localbanques populaires.

The sales contract between the cof-fee cooperative and the purchaserstipulates that payment must bemade through the coffee coopera-tive’s savings account at the UBPR.The UBPR deducts the loan repay-ment from the transferred purchase

payment; all surplus funds aredeposited in the cooperative’saccount. This arrangement limitsthe risk of default to the UBPR andreduces corruption at the level ofthe coffee cooperative when fundsare paid to the farmers for theirproduce. The arrangement deep-ens and broadens credit union out-reach by incorporating all farmermembers of the borrowing coffeecooperatives into banques popu-laires. After joining a credit union,a member has the opportunity notonly to save, but also to accesscredit on an individual basis fromthe local banque populaire.

Rwanda – Financing Cooperative Producer Associations

Savings Mobilization

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At the client level, millions of ruralpeople continue to lack access tosafe, reliable and convenient sav-ings services. At the rural financeinstitution level, savings depositsprovide a relatively stable source of funds that can enable an institu-tion to become a sustainable andself-reliant financial intermediary.Savings mobilization increases thesupply of internally generated funds that can be invested in ruralmicroenterprise, off-farm smallbusiness loans and shelter improve-ments.

WOCCU savings-driven credit union development programs worldwide illustrate that rural and urban member-clients of diverse income levels will amass substantial voluntary savings deposits – if provided with a safe andconvenient place to do so. In most cases, the savers earn real positive rates of return on their deposits. This stable source of funds fuels the ability of well-managed credit unions to invest the savings in productive credit.

“Savings mobilization is just as important as credit in meeting the financialneeds of the rural population.”

James Boomgard and Kenneth Angell, The New World of Microenterprise Finance, 1994, p. 226.

Institutions that are successfullycapturing savings consider the features most salient for savers to be: Safety, Convenience andReturns.

Savings services are built in threeways. Savings products are:

• Designed to balance the trade-offbetween convenience (liquidity)and return (interest rate);

• Tailored to the demands of par-

WOCCU TECHNICAL ASSISTANCE PROGRAMS JUNE 30, 2003

Country Number of Number of Total Savings Deposits/ Total Passbook PassbookCredit Unions Member-clients Deposits Member-clients Deposits Deposits/

(millions US$) (millions US$) Member-clientsBolivia 14 96,314 $46.0 $478 $22.4 $232Ecuador CGAP 2 110,069 $23.1 $209 $18.2 $166Ecuador II USAID 7 100,287 $24.0 $240 $17.3 $173Guatemala 26 484,365 $176.9 $365 $85.0 $176Mexico CPM 1 622,327 $508.9 $818 $68.3 $110Mexico Libertad 1 380,061 $293.4 $772 $45.7 $120Mexico Sagarpa-Veracruz 6 27,138 $16.1 $593 $12.3 $453Nicaragua 14 26,645 $3.0 $113 $2.2 $84Philippines 16 265,883 $24.0 $90 $10.8 $41Romania 26 119,859 $12.1 $101 $1.1 $9Rwanda* 148 318,784 $32.6 $102 $27.2 $85Uganda 15 17,980 $1.9 $106 $0.4 $20

Weighted Average Weighted Average

TOTAL 276 2,569,712 $1,162.0 $452 $310.9 $129

*Data from Rwanda is as of December 31, 2002.

ticular market niches; for exam-ple, farmers who save in largeblocks after a harvest and with-draw savings gradually duringthe remainder of the year; and

• Tailored to the purposes forwhich clients save; for instance,to pay school fees for their chil-dren or to cover large expenseitems such as livestock or shelterenhancements (Klaehn, Branchand Evans, 2002).

Providing Savings Services

Accumulating Deposits in Credit Unions

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Savings products exist along a continuum of trade-offs between liquidity (access and convenience) and return (compensation).Some products offer complete access to deposits. Other products restrict liquidity and consequently offer high-er returns in exchange for the reduced liquidity. A mix of products offers savers options of fully-liquid, semi-liq-uid, fixed short-term and accumulating long-term accounts.

Short-term AccumulatingFully Semi Predictable Frozen Long-termLiquid Liquid Flows Deposits Accounts

Passbook Limited Programmed Certificates RetirementAccounts Withdrawals Saving of Deposit Accounts

(Branch and Klaehn, 2002)

Lower-income savers often seek small accounts that offer high levels of liquidity. These savers exhibit strong pref-erences for accounts such as passbook accounts, with low minimum balances and complete access to savings.These small and lower-income savers have proven willing to sacrifice a return for open access to their funds.Alternatively, wealthier savers seek to maximize their return on savings and have proven willing to sacrifice liq-uidity for higher return. Rural finance institutions need to mobilize savings from both of these groups in order tobe sustainable.

When a rural finance institution has a loan portfolio dominated by medium and long-term agricultural lending,it needs to avoid a term asset-liability mismatch. That is, an institution funded by short-term voluntary depositsshould not finance long-term lending with those short-term liabilities.

Strengthened by WOCCU Nicaragua with funding fromUSAID/Nicaragua, the network of Nicaraguan credit unionsaffiliated to the second-tier Central de Cooperativas de Ahorro yCrédito Financieras de Nicaragua (CCACN) ranks third in geo-graphical coverage to rural areas among the country’s financialinstitutions. Offering 23 points of service in 13 of Nicaragua’s 17departments, the 14 credit unions served 26,645 member-clientsas of June 30, 2003. More than 70% of these member-clients arerural.

CCACN is marketing its “Agriculture Salary” savings product to farmers. The goal of theproduct is to smooth the flow of income from the proceeds of an annual or semi-annualharvest. Each credit union works with its farmers to identify their individual expenses anddetermine a monthly “salary” (portion of harvest proceeds on deposit combined with anabove-market interest rate) to be withdrawn from the credit union. In its infancy stage, thecredit unions have noted an interest from agriculture-based clients in such a savings man-agement program; however, most farmers continue to keep their savings in fully with-drawable passbook accounts.

Nicaragua – Promoting Agriculture Salary Savings

Leasing

“Leasing can allow new businesses with limited capital andcredit history or small businesses without a history of finan-cial statements to quickly boost their operations, as long asthe cash flow from operations is sufficient to cover the leaseservice payments.”

Juma Kisaame, “Case Study of DFCU Leasing Company”, 2003, p. 2.

A Financial Lease:1. Requires that the client (les-

see) pay in installments thefull cost of the institution’s(lessor) purchase cost inaddition to market-pricedinterest on the purchaseamount.

2. Provides the lessee with theopportunity to buy theequipment at the end of thelease term for a nominal fee.

3. May not be cancelled unlessboth parties agree; however,the lease is pre-payable bythe lessee (Westley, 2003).

A financial lease allows a ruralfinance institution to purchaseequipment and rent the equipmentto a client until the client has repaidthe purchase cost of the equipmentand interest on those installments.When leasing equipment instead oflending funds to a client to pur-chase equipment, the financial insti-tution will possess the title to theequipment until its purchase costsare completely repaid with interest.In the legal frameworks of somecountries, if the lessor maintains thetitle to the equipment, then seizureand repossession of the piece ofequipment in the case of repaymentdefault by the lessee will be facili-tated. The lessor insures the equip-ment and the lessee is responsiblefor equipment maintenance.

The clients who prefer leases toloans are typically those individualswho would not meet an institution’s

credit criteria for borrowing thefunds to purchase the same item ofequipment. Through leasing, clientscan surmount intense capital invest-ment requirements for direct purchase and strict collateralrequirements for borrowing funds.Leasing can make equipment acces-sible to new or small businessesthat do not have sufficient capital orborrowing history to purchase effi-cient equipment (Kisaame, 2003).

At the Development FinanceCompany of Uganda (DFCU), leas-es range in amounts of $25,000 to$250,000 for periods of two to fiveyears (Kisaame, 2003). On average,an equipment lease at DFCU isthree years and a deal is processedwithin two weeks. The lessee isexpected to make a down paymentin cash of 10-15% of the total equip-ment cost. Kisaame notes that leasing has allowed for transfer of

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technology and added efficienciesin production and processingmethods.

Insurance

Savings Life is another credit unioninsurance product that offers anindemnity to the beneficiary of thedeceased member-client in the formof a multiple of the amount of vol-untary savings on deposit at thecredit union. Savings life is madeavailable to all savers. The productis paid for as an operating cost ofeach credit union.

Nicaragua – Expanding Insurance OfferingsIn partnership with the Americas Association of Cooperative andMutual Insurance Societies (AAC/MIS), 14 credit unions affiliated toCentral de Cooperativas de Ahorro y Crédito Financieras de

Nicaragua (CCACN) offer credit life and savings life insurance as abenefit to their individual members. The credit unions pay CCACN apremium of 0.65 Nicaraguan Cordobas for every 1000 Cordobas oftheir total loans, savings and shares. In the event of a member death,any outstanding balance on a member’s loan is covered by theindemnity and the member’s family receives three times the amountthe member had accumulated in savings.

In May 2003, CCACN rolled out a pilot insurance program, “FamilyProtection,” in six credit unions. For annual premiums rangingbetween $12-$40, credit union members can elect coverage for theirnuclear family between $500-$1000 in the case of death of theinsured. The pricing of the new insurance product was establishedbased on the findings of an actuarial study carried out by AAC/MISassessing Nicaraguan national data on mortality and comparing it tothe credit union member profile to examine age, gender and occu-pation to determine risk levels. The elective insurance product will beoffered by all 14 credit unions by year-end 2003.

The individual credit unions pool their risk at CCACN. In turn,CCACN reinsures with the International Cooperative and MutualInsurance Federation (ICMIF).

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In order for an insurance programto be viable, total premiums collect-ed must outweigh total indemnitiespaid plus administrative and operat-ing expenses (Skees, 2003). Toachieve viability, there must be acritical mass of policy subscriberswho do not all have the same riskprofile. When risks cannot be fur-ther mitigated at the program level,then the next step to reducing risk isto reinsure the insurance portfoliowith a global reinsurer. This sectiondiscusses three types of insurance,each with a different type of protec-tion for a specific client.• Credit Life • Savings Life• Funeral/Burial Insurance• Crop Insurance

Credit Life is an insurance productoffered by credit unions to protectthe institutions from default in theevent of death by a member-clientthat has an outstanding loan. Loanshave credit life insurance premiumsbuilt into the interest rate structureof each loan so that funds can beavailable to cover the default of adeceased member-client. With cred-it life, debt “dies” with the debtor;thus, the burden of debt repaymentwill not fall on family members orco-guarantors.

“Successful insurance programsrequire that the insurer have ade-quate information about thenature of the risks being insured.”

Jerry Skees, “Risk Management in RuralFinancial Markets: Blending RiskManagement Innovations with RuralFinance,” 2003, p. 13.

Funeral/Burial Insurance is anelective product offered by creditunions. The member-client pays amonthly premium for individualcoverage and additional monthlypremiums for elective coverage forany dependents. The indemnitypaid upon proof of death con-tributes to the costs incurred by thefamily of the deceased for funeraland burial expenses.

12,000,000

10,000,000

8,000,000

6,000,000

4,000,000

2,000,000

02000 2001 2002

Immunosupression Tuberculosis AIDS

63%

27%

4%

6%

ISS TB & AIDS

Malaria

Pneumonia

Others

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Causes of Death 2000-2002CIC Group Life Insurance Claims (in Ksh)

HIV/AIDS challenges the viability of rural finance institu-tions. Savings life, credit life, funeral and life insuranceare products that can mitigate the risk of the pandemic.

A WOCCU study on savings and credit cooperatives (SACCOs) inKenya indicates that HIV/AIDS poses high levels of risk to ruralfinance institution soundness. The risks include increased: member-client and staff deaths, delinquency, loan defaults, absenteeism andsavings withdrawals associated with the pandemic.

Some rural finance institutions have begun to self-manage benevolent funds (a type of funeral insurance) in aneffort to meet client needs. There is substantial risk involved with self-managing insurance schemes without actu-arial expertise and reinsurance, particularly if mortality rates increase and insurance premiums do not riseaccordingly.

Kenya—Insuring Credit Unions in the Context of HIV/AIDSOne risk mitigation strategy is for credit unions to offer credit life and funeral insurance through a professionalinsurance provider that offers specialized expertise. The Cooperative Insurance Company (CIC) insures over halfof Kenya’s more than one million credit union members. CIC offers a variety of insurance products to credit unionmembers subscribed to policies through their credit unions. Individual credit unions subscribe to group policieswith CIC. CIC has been grappling with the pricing, coverage and design of its insurance products, particularlygroup life insurance, in order to cover its costs while claims related to HIV/AIDS have risen dramatically sincethe year 2000 (see charts below).

In response to the pandemic, CIC has excluded HIV/AIDS claims made in the first six months from coveragestart date and has made two reinsurance arrangements with global reinsurers. Also, CIC has implemented a rat-ing structure where the pricing of each insurance product is adjusted upward based on its particular claim expe-rience. In addition, CIC asks questions directly related to HIV/AIDS on their policy applications in order to incor-porate appropriate premiums for higher mortality risks. CIC has also established a special reserve fund that it isbuilding up in anticipation of losses related to HIV/AIDS associated with its existing portfolio. The cost of thefund is paid for by existing policy holders and shareholders.

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Crop Insurance is a type of insur-ance product offered to farmers toprotect them against unexpectedlosses in agricultural earnings fromproduction and/or market shocks.

Many countries have providedfarmers or their financial institutionswith multi-peril crop insurance,intended to cover income loss due

to shocks in production from natu-ral disasters such as flood, droughtor tornado. Historically, this producthas failed due to expensive admin-istrative costs and high losses. Thelosses stem from asymmetries ininformation, where the client pur-chases insurance with better infor-mation about the likelihood of pro-duction shock than the insurancecompany (Skees, 2003). Once theinsurance is purchased, moral haz-ard may play a factor, whereby theinsured farmer sees no incentive forhigh performance behavior such ascareful crop management, since theinsurance will pay for any losses atthe end of the season. The lossesnegatively affect the financial insti-tution’s rate of return.

Skees, in addition to Wenner andArias (2003), document and recom-mend a more cost-effective insur-ance product for farmers: indexinsurance. Index insuranceaddresses moral hazard and asym-metric information by providinginsurance based on regionalindices, with indemnities based onarea yields or weather information.An example of this type of insur-ance product is insurance for acrop indexed to a certain level ofrainfall. In this case, the indemnitypaid on the policy is related only torainfall. Farmers still have incen-tives to tend their crops to the bestof their ability and information isconstant for the insurance companyand the farmer.

Remittances

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“The demand for financial serv-ices by remittance receivinghouseholds represents the inter-section between the role ofmicrofinance institutions, suchas credit unions, and rural sec-tor development.”

Manuel Orozco, “Remittances, the RuralSector and Policy Options in LatinAmerica,” 2003, p. 1.

During the last three decades,many countries have seen a grow-ing inflow of capital in the form ofremittances, particularly in LatinAmerica. Remittances are a vehiclefor deepening financial markets inrural areas. They contribute to thefinancing of agricultural and non-farm productive activities.Remittances provide alternativefunding to rural businesses andsupplement household incomeneeds (Orozco, 2003). They maypay for farming inputs, may allowrural households to tide them-selves over in order to sell theircrop later in the season for a bet-ter price, may permit rural enter-prises to purchase inventory andmay finance school fees for youth.

Remittances sent by immigrants totheir homelands far exceed officialdevelopment assistance. For-prof-it companies are the leadingproviders of money transfer servic-es. Certain remittance marketshave begun to experience pricingcompetition. This competitioncomes from new market entrantsincluding commercial banks, regu-lated financial institutions andcredit unions.

CCentral America – Incorporating RemittanceReceivers into Financial Institutions

In late 1999, WOCCU, in partnership with Vigo, a moneytransfer firm, launched the International RemittanceNetwork (IRnet). Using IRnet, federations of creditunions in El Salvador, Guatemala and Honduras have dis-tributed more than 255,000 remittances amounting to

over $110 million. Since the first transfer, the average size of remittancessent to 62 Central American credit unions was $432.

In 2003, IRnet remittance distribution by credit unions expanded toJamaica, Mexico and Nicaragua. As of June 2003, 173 credit unions in 29states offer IRnet, expanding the possibilities for sending remittancesthrough 800 US credit union points of service.

The Central American credit unions distribute remittances primarily to ruralclients (members and non-members). The distributing credit unions helpto integrate remittance recipients into the formal financial sector throughtrained staff who cross-sell services. When a non-member enters a creditunion to pick up a remittance, a staff person will encourage this person tobecome a credit union member and save a portion of the remittance in aninterest-bearing voluntary savings account.

$10.0

$5.0

0

$15.0

$20.0

$25.0

$30.0

$35.0

$40.0

$45.0

$41.2

Volume of Remittances Distributed by62 Central American CUs in US$ millions

Q4 01 Q1 02 Q2 02 Q3 02 Q4 02 Q1 03 Q2 03

$24.0

$17.1

$13.5

$9.6

$4.1

$1.2

30,000

20,000

10,000

0

40,000

50,000

60,000

70,000

80,000

90,000

100,000

92,860

Number of Remittances DistributedThrough 62 Central American CUs

Q4 01 Q1 02 Q2 02 Q3 02 Q4 02 Q1 03 Q2 03

56,990

42,351

30,831

20,930

9,1673,014

1. Buchenau, Juan. “Innovative Products and Adaptations for Rural Finance,” prepared for Paving the Way Forwardfor Rural Finance: An International Conference on Best Practices, held June 2-4, 2003. Available to download at:http://www.basis.wisc.edu/live/rfc/theme_products.pdf.

2. Sistema de Crédito Cooperativo (SICREDI). Data from Brian Branch personal interview conducted in Brazil,December, 2002 and website: http://www.sicredi-com.br.

3. Sasuman, Luis. “Rural Financial Institutions Restructuring and Post Restructure Results, Credit Union Empowermentand Strengthening (CUES) Philippines” prepared for Paving the Way Forward for Rural Finance: An InternationalConference on Best Practices, held June 2-4, 2003. Available to download at:http://www.basis.wisc.edu/live/rfc/cs_12b.pdf.

4. Pearce, Douglas. “Buyer and Supplier Credit to Farmers: Do Donors Have a Role to Play?” prepared for Paving theWay Forward for Rural Finance: An International Conference on Best Practices, held June 2-4, 2003. Available todownload at: http://www.basis.wisc.edu/live/rfc/cs_15b.pdf.

5. Evans, Anna Cora. FOCUS – Rwanda: Extending Rural Finance in Post-conflict Economies, Washington, DC:WOCCU, 2003. Available to download at: http://www.woccu.org/development/guide/focus_rwanda.pdf.

6. Boomgard, James and Kenneth Angell. “Bank Rakyat Indonesia’s Unit Desa System: Achievements andReplicability.” The New World of Microenterprise Finance. Otero, Maria and Elisabeth Rhyne, eds. West Hartford,CT: Kumarian Press, 1994, p. 226.

7. Klaehn, Janette, Brian Branch and Anna Cora Evans. A Technical Guide to Savings Mobilization: Lessons from theCredit Union Experience, WOCCU Technical Guide #1, March 2002. Available to download at:http://www.woccu.org/development/guide/savings_techguide.pdf.

8. Branch, Brian and Janette Klaehn. Striking the Balance in Microfinance: A Practical Guide to Mobilizing Savings.Washington, DC: PACT Publications., 2002. Available to purchase at: http://www.pactpublications.org.

9. Kisaame, Juma. “Case Study of DFCU Leasing Company – Uganda,” prepared for Paving the Way Forward forRural Finance: An International Conference on Best Practices, held June 2-4, 2003. Available to download at:http://www.basis.wisc.edu/live/rfc/cs_09c.pdf.

10. Westley, Glenn. “Equipment Leasing and Lending: A Guide for Microfinance,” Washington, DC: Inter-AmericanDevelopment Bank, 2003. Available to download at: http://www.iadb.org/sds/mic/publication_159_e.htm.

11. Skees, Jerry. “Risk Management in Rural Financial Markets: Blending Risk Management Innovations with RuralFinance,” prepared for Paving the Way Forward for Rural Finance: An International Conference on Best Practices,held June 2-4, 2003. Available to download at: http://www.basis.wisc.edu/live/rfc/theme_risk.pdf.

12. Evans, Anna Cora and Geza Radu. “The Unpaved Road Ahead: HIV/AIDS and Microfinance, an Exploration ofKenyan Credit Unions,” Washington, DC: WOCCU, 2002. Available to download at:http://www.woccu.org/pubs/monograp.php.

13. Cooperative Insurance Company. Data from Brian Branch personal interview conducted in Kenya, July, 2003.14. Wenner, Mark and Diego Arias. “Agricultural Insurance in Latin America: Where are We?” prepared for Paving the

Way Forward for Rural Finance: An International Conference on Best Practices, held June 2-4, 2003. Available todownload at: http://www.basis.wisc.edu/live/rfc/cs_03b.pdf.

15. Orozco, Manuel. “Remittances, the Rural Sector and Policy Options in Latin America,” prepared for Paving the WayForward for Rural Finance: An International Conference on Best Practices, held June 2-4, 2003. Available to down-load at: http://www.basis.wisc.edu/live/rfc/cs_15a.pdf.

SSources

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Authors: Anna Cora Evans and Catherine FordEditor: Brian BranchCopy Editing: Janette KlaehnPhotos: Anna Cora Evans, San Jóse Obrero

(COOSAJO) Credit Union, WOCCU EcuadorCREER, WOCCU Rwanda

Layout & Design: Custom Designers, Inc.Printing: ColorCraft of Virginia, Inc.

The US Agency for International Development (USAID) together with theUniversity of Wisconsin BASIS Collaborative Research Support Program (CRSP)and the World Council of Credit Unions, Inc. (WOCCU) organized Paving theWay Forward for Rural Finance: An International Conference on Best Practices,held June 2-4, 2003. Theme papers, case studies and a synthesis paper with pol-icy recommendations are available at http://www.basis.wisc.edu/rfc.

Advancing Rural Finance

ABOUT WOCCUWorld Council of Credit Unions, Inc. (WOCCU) has credit unionaffiliates and programs in Africa, Asia, the Caribbean, CentralAsia, Central and Eastern Europe, Latin America, North Americaand the South Pacific. WOCCU affiliates commit to InternationalCredit Union Operating Principles and to InternationalPrudential Standards of Safety and Soundness. WOCCU man-ages long-term technical assistance programs to develop,strengthen and modernize credit unions around the world.WOCCU also works to create appropriate regulatory environ-ments for safe and sound credit union operation.

Madison Office5710 Mineral Point RoadPO Box 2982Madison, WI 53701-2982 USAPhone: (608) 231-7130Fax: (608) 238-8020

Washington Office601 Pennsylvania Avenue, NW South Bldg., Ste. 600Washington, DC 20004-2601 USAPhone: (202) 638-0205Fax: (202) 638-3410

Websitewww.woccu.org

E-mailmail@woccu.org

A Technical Guide to Rural Finance:Exploring Products WOCCU Technical Guide # 3, December 2003http://www.woccu.org/development/guide/RF_tech.pdf

A Technical Guide to PEARLS: A Performance Monitoring System WOCCU Technical Guide #2, November 2002http://www.woccu.org/development/guide/PEARLS_techguide.pdf

A Technical Guide to Savings Mobilization: Lessons from the Credit Union Experience WOCCU Technical Guide #1, March 2002 http://www.woccu.org/development/guide/savings_tech.pdf

Also available from WOCCU:Strengthening Credit Unions, December 2002http://www.woccu.org/development/guide/techserv_brochure.pdf

Credit Unions: Vehicles for Providing Sustainable Microfinance, July 2001http://www.woccu.org/development/guide/microfinance_techguide.pdf