Financial cooperatives

Early cooperatives were mostly the result of spontaneous efforts by people to help themselves. Before long, however, the value of cooperation and the organisations it produced was noticed by governments and their advisers, and steps were taken to lay down standards for their operation. The first step was the passing of a cooperative law. Such laws are now to be found, carefully amended and adapted over the years, in the vast majority of countries throughout the world. Under these laws cooperatives become legal entities and are able to own property, trade, borrow and lend money. Cooperatives can be important providers of financial services but they have often faced greater crises of financial instability than the formal banking sector usually due to weak supervision. Cooperatives have also been damaged by being used as political instruments or being forced to implement government policies. However, financial stabilisation and institutional development programmes have led to a resurgence of viable credit unions in a number of countries and cooperative organisations have the potential to play a significant role in rural financial markets.

Library Resources

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Providing Financial Services in Rural Areas: A Fresh Look at Financial Cooperatives Report 2007

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In order to assess prospects for supporting further outreach by financial cooperatives to the rural poor and to identify determinants of success of such endeavors, the World Bank’s Agriculture and Rural Development Department (ARD) commissioned four country case studies (in Burkina Faso, Kenya, Brazil and Sri Lanka) and organized four regional workshops in 2004 and 2005. This report is based on the findings of these studies and workshops as well as international experience evidenced in the literature.

The studies showed that financial cooperatives are significant providers of financial services in rural areas, in both developed and developing countries. In the successful cases, this success is based on a tried and tested institutional and business model: democratic, bottom-up, autonomous, self-financing, and savings-based. Vertical integration has brought strength and efficiency to most financial cooperative sectors.

Many financial cooperative sectors have driven and financed their own growth. In some countries, however, governments and donors have intervened to promote, often using inappropriate instruments, and to control. In other cases, there has been heavy influence from political actors. There has also been a history of government and donor interventions - largely unsuccessful and sometimes fatal to the concerned financial cooperative - of using these institutions to channel funding to specific target groups, without regard to the sustainability of the financial institution in the long run. Therefore, wherever possible, the sector should depend on itself for its own institutional strengthening and growth.

The report concludes that there is enormous growth potential for financial cooperatives in rural areas in many countries. However, expanding outreach spells risk, and sectors have to build their growth strategies on solid governance structures and a sound financial situation. Extending outreach has to be driven by the membership. External agencies committed to rural development and poverty reduction may explore ways to help the financial cooperatives in developing countries to grow and increase their outreach, particularly to the rural poor. Developing, motivating, and training the human resources needed for good internal governance is a massive challenge. Networks can play a big role in this and it is one area where public or external support can certainly make a contribution.

Other steps for development agencies might be to link to the international financial cooperative sector to identify particular windows of opportunity. Based on this, partnerships could be set up to carry out regional and country analyses to pinpoint the areas for potential growth and the likely catalysts. Where external support is indicated, areas and the catalytic inputs could be identified in country action plans, and country agreements for sustained partnerships could be set up. In all this, mechanisms for coordination between external partners are critical.

For financial cooperatives to function as sustainable institutions, governments need to provide an enabling environment, not exercise excessive control that restricts growth and consolidation, and not use them as channels to provide subsidized credit. A sound legal framework is essential, which gives clarity on the powers and duties of financial cooperatives as member-owned financial institutions, on governance and supervisory responsibilities, and on protection of depositors. Regulations need to address the unique nature of financial cooperatives, as both financial institutions and cooperatives, and adequate supervision needs to be put in place.

This report should be very useful for the staff and management of international development agencies, policy makers and regulators in developing countries, and the financial cooperative sector and other rural finance practitioners both in developing countries and worldwide.

Reaching Rural Areas with Financial Services: Lessons from Financial Cooperatives in Brazil, Burkina Faso, Kenya and Sri Lanka Paper 2007

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Access to financial services contributes to rural development and poverty reduction by promoting income-enhancing and vulnerability-reducing investments, enabling better management of cash flows and risk, and facilitating remittances. However, financial access is limited in most rural areas in developing countries because of high transaction costs and risks attributed to low levels of economic activity, poor infrastructure, high levels of production and price risks in agriculture, and poor public policies, such as interest-rate caps and debt write-offs.

In many developed economies, Financial Cooperatives (FCs) and their networks are well-developed and have large shares of the financial services market. However, FCs in most developing countries are underdeveloped and have negligible market shares. Financial cooperatives in developing countries are typically constrained by anachronistic legal frameworks, low capacity, lack of an appropriate regulatory framework, and poor supervision.

This paper presents four cases of financial cooperative networks in developing countries with significant rural outreach. The four cases are:

  1. SICREDI (Sistema de Cooperativa de Crédito) in Brazil
  2. SANASA in Sri Lanka
  3. RCPB (Réseau des Caisses Populaires du Burkina) in Burkina Faso
  4. KERUSSU (Kenya Rural Savings and Credit Cooperative Society Union) in Kenya

These cases represent examples of FC networks with significant outreach in rural areas, but operating in widely varying economic contexts. Through a case study approach, this paper attempts to answer such questions as: Can FCs provide financial services in rural areas in developing countries and still be profitable? Do FCs provide services to low-income clients? How does the regulatory environment affect FC performance? How does the business model of FC networks affect FC performance?

Supervision of Savings and Credit Cooperative Societies (SACCOs) Editors Note 2006

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Ahmad Jazayeri starts this Note by emphasising the important role of SACCOs in bringing financial services to the poor and to rural areas. He points out that they can mobilize local savings and offer loans with low information costs, low enforcement costs and low operating costs and that they contribute to building social capital and providing opportunities for effective collective action. However, he goes on to identify a range of problems they may face that are constant threats to their reliability, financial sustainability and growth and can therefore undermine their potential impact.

External supervision as a means of identifying problems is especially important for member-owned financial institutions such as the SACCOs because of the dual nature of member incentives which affect the governance of such institutions. In the second part of this Note Jazayeri lists the key risk factors which affect SACCOs and need to be effectively monitored.

The Design and Role of Financial Cooperatives – Learning from History Editors Note 2006

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Historically, member-owned cooperative banks have played a major role in smoothing the challenges of rapid economic transformation and have contributed to a high degree of economic and social integration. In this Editor's Note Ahmad Jazayeri describes the development of two alternative models of financial cooperatives in Germany. He compares and contrasts the Schulze Delitsch model and the Raiffeisen model. Raiffeisen wanted his cooperatives to be strictly driven by high social ideals of service, voluntary labour by officeholders, and social incentives. They had an entirely volunteer board of directors with a small paid office staff. Raiffeisen banks emphasized the growth of institutional reserves and most of the surplus was reinvested as opposed to paying dividends to shareholders. The Schulze Delitsch cooperatives were operationally similar to for-profit finance companies and had much less social cohesion. The Raffeisen model proved most durable and today Raiffeisen banks are amongst the largest in Germany.

Finance and Guarantees in Rural Development Paper 2005

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In this brief paper, Zvi Galor explores the role of guarantees in credit policies and the potential for cooperation. He observes that the Grameen Bank became famous for the introduction of mutual guarantees to overcome the lack of security for lending to poor people. However, the Moshav in Israel relied on the mutual guarantee of its members to obtain credit back in the 1920s. While mutual guarantees are useful to facilitate access to credit, Mr Galor is of the view that many other factors are also important to ensure the success of rural investments. For example he commends the mixed farm approach which spreads employment and cash flow throughout the year and explains how this effect is enhanced by being part of a cooperative group as in a Moshav. The group is able to facilitate the movement of funds between members by providing a savings and credit service.

Mr Galor points out that farmers participating in a Moshav were further benefited by the marketing and input supply services. Thus members received competitive rates of interest on their savings, competitively priced inputs and good returns on their produce. He argues that these cooperative benefits would assist development projects today and an emphasis on credit alone is inadequate.

Rural Finance in Conflict Environments Article 2005

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In recent years much has been published on the subject of microfinance in post-conflict countries. However, very few experiences have been documented with regard to microfinance operations in on-going conflicts. This short paper describes how the Small Farmer Cooperatives Limited (SFCLs) of Nepal have reacted to the conflict in the country. There may be a number of lessons to be learned for other microfinance organisations in conflicts around the world.

The microfinance sector of Nepal is very rural-focused and quite diversified. The state has a large share in rural microfinance (Rural Development Banks), while there are a number of private Microfinance Banks and the cooperative movement. The Maoist rebels have caused severe problems for the banks, private MFIs and many SFCLs. Only community based Savings and Credit Cooperatives, informal savings and credit groups and women-managed SFCLs have not been attacked by the rebels. Thus it is clear that the the rebels are choosing to tolerate MFIs which they perceive to be not-for-profit, people-owned, non-exploitative and not affiliated with the government. Although SFCLs are member-owned, they originate from a former government development programme and thus, many have been attacked.

It is interesting that the conflict has had a "cleansing" effect on the microfinance sector of Nepal. Commercial banks, government MFIs and weak cooperatives have been driven out or further weakened, while non-government MFIs and SFCLs with active members, capable leaders and sound practices have been left alone or have recovered quickly from an attack. If members really feel that the MFI or cooperative is theirs they will stand up to the conflict parties or re-build their organisation after an attack.

This message has led to the GTZ-implemented project Rural Finance Nepal (RUFIN) introducing conflict transformation training for SFCLs. The training has one core message: SFCLs can protect themselves from the conflict and even help to solve it by ensuring their cooperatives work properly and according to their mandate (helping the poor), clearing up all internal conflicts, empowering women to take part in decision making and trying to include disadvantaged groups, such as ethnic minorities and low castes, better.

In the future, GTZ-RUFIN will focus on building capacities of SFCLs and their federations and raising conflict sensitivity amongst their leaders and members. Building capacity for good financial and operational performance is nothing new to microfinance practitioners. It entails training and advice on issues such as e.g. loan appraisal, product development, accounting, internal controls, business planning etc. In the case of SFCLs cooperative-specific capacities are also needed: members must learn to actively control their leaders through the annual general assembly; leaders must learn that they are accountable to their members; cooperative managers must learn how to run their operations like businesses. Business planning training for SFCL managers will also cover aspects of corporate social responsibility, stressing the importance of addressing conflict root causes through women empowerment and social inclusion.

What is the future for financial cooperatives? Editors Note 2005

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Ahmad Jazayeri comments on a paper by M.S.Sriram entitled "Financial Cooperatives for the New Millennium: A Chronographic study of the Indian Financial Cooperatives and the Desjardins Movement". This paper contrasts the development of financial cooperatives in India and Quebec during the last century and Sriram arrives at his own conclusion about the way forward. Ahmad disagrees and puts his own case in this Editor's Note.

Working with Savings and Credit Cooperatives Brief 2005

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This short brief begins by highlighting that savings and credit cooperatives provide financial services to millions, including poor and low-income people in many countries. As a result, it notes, donors who want to increase access to financial services, especially savings, often support savings and credit cooperatives. Despite the advantages, the paper also suggests that to be effective, donors must learn how to overcome several unique challenges.

The brief begins by considering the advantages that savings and credit cooperatives offer for increasing microfinance outreach. It then sets out and discusses four key challenges faced by savings and credit cooperatives:

  1. Governance weaknesses
  2. Inadequate regulation and supervision
  3. Limited menu of products
  4. Damage done by external credit

The final section of the brief sets out key recommendations for what donors can do to strengthen savings and credit cooperatives:

  • Focus on deposit mobilisation first
  • Invest in building capacity rather injecting external funds for lending
  • Encourage sound governance policies
  • Support savings and credit cooperatives that want to learn new techniques to reach poorer customers
  • Keep financial standards at the core of internal management and external supervision
  • Support competent, independent external supervision of savings and credit cooperatives
  • Concentrate resources on savings and credit cooperatives that are willing to implement sound policies and standards
A Decade of Pro Poor Institution Building in Nepal - Innovations and Lessons Learned from Small Farmer Cooperatives Ltd. Paper 2004

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In 1975, the Agricultural Development Bank of Nepal (ADBN) started to form joint liability groups of small farmers through its Sub-Project Offices (SPOs). Twelve years later, the ADBN introduced an action research Institutional Development Programme (IDP) with the support of GTZ. In 1993, as a result of the IDP, the first four SPOs were transformed into Small Farmer Cooperatives Ltd.

The Small Farmer Cooperatives Ltd. (SFCLs) is the largest provider of microfinance services in Nepal, alongside Grameen - it is estimated that by 2007 the SFCLs will reach out to close to one million people. A SFCL is defined as a multi-service cooperative designed to deliver primarily financial, but also non-financial services to its members in rural areas. SFCLs are civil society organisations that pool their joint resources to meet basic needs and defend their members’ interests. They are member owned and controlled and have an open membership policy towards “poor” farmers.

The purpose of this paper is to present details of the most significant innovations that have emerged from the SFCL system. The paper also attempts to outline the most important lessons learnt from a decade of institution building efforts in rural Nepal. While the experiences, insights and lessons learned are from Nepal, the overall conclusions may be of interest to readers with respect to other countries too.

Following an introduction, the second chapter gives a brief history of the SFCL system. Chapter three presents the three prerequisites of a successful MF programme: a systems approach, vision and ownership. The next chapter outlines four major innovations that emerged over time from the SFCL system, with the following chapter identifying some of the lessons learned from the SFCL for MF practitioners and scholars beyond Nepal. The penultimate chapter deals with the visible impact of SFCLs on the village level and addresses the adverse effects of the armed conflict on the ongoing operations of the cooperatives. The conclusion sums up the main points.

Cooperatives in social development Report 2001 English (en)

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This report was prepared in response to resolution 54/123 of the General Assembly which required the Secretary General to seek the views of governments on the draft guidelines aimed at creating a supportive environment for the development of cooperatives. The main body of the report has details from a number of countries about their progress in supporting cooperative development but the most useful component is the revised guidelines which can be found in the Annex.

The guidelines cover such issues as policy - including legal, judicial and administrative provisions, research, statistics and information, education, provision of public funds and institutional arrangements for collaboration and partnership. The importance of financial self-reliance, total responsibility and full independence for effective cooperative enterprise is emphasised.

un website  -  English (en)

Teaching Old Dogs New Tricks: The Commercialization of Credit Unions Paper 2001

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The potential of credit unions as financial service intermediaries is often ignored because they are seen as failed models, a legacy of the production credit programs of the 1970s and 1980s, when international donors such as the U.S. Agency for International Development (USAID) used credit unions as channels for credit to small farmers. Those programs left credit unions with misguided operating policies and procedures, a belief that borrowers were more important than savers and a dependence on external capital, which brought many to the verge of collapse when donor support was turned off. Rather than building viable, community-based financial service institutions, the donors and government bureaucrats had used them as single purpose channels for subsidized production credit programs. The potential for savings was ignored because the poor were thought to be unable to save, and lending policies were designed to transfer as much credit as possible to small farmers, often ignoring capacity-to-pay and/or guarantees to ensure good loan recovery. When loan delinquency rates increased and donor interest shifted, credit unions that relied on donor resources to finance their lending were left illiquid, unprofitable, and insolvent. This image has remained frozen in the minds of many microfinance professionals who have no apparent desire to revisit the credit union paradigm and look for new ways to make these 150-year-old institutions relevant for poor people living in our time.

The purpose of this paper, which is also published as a chapter of the book "The Commercialization of Microfinance", is to share with the reader a powerful, new operating methodology that has revolutionized credit unions. This methodology has transformed them into commercially vibrant, highly efficient microfinance institutions (MFIs) that often reach many low- and middle-income clients with a broader mix of financial products and services at more favorable interest rates than do many of the leading microfinance nongovernmental organizations (NGOs) around the world. Even though reformed or ommercialized credit unions are still a small minority in emerging nations, there are enough concrete examples of these reformed institutions in different cultural and economic settings to suggest that they are worthy of a second look, because many of these ideas and principles are relevant not only for credit unions but for NGOs as well, as they embark on a strategy to operate on more market-based, commercial principles. As credit unions and NGOs become more commercial, there emerges a great convergence between the two entities, as they both have very similar operating policies, financial products and services, and clientele. Their collective goal is to maximize their outreach to the poor and disenfranchised people of the world.

The methodology described involves improved accounting and reporting transparency, financial discipline and prudential standards, operating efficiency, financial restructuring, savings mobilisation, product diversification, aggressive marketing and physical image enhancement. The paper also tackles the issue of whether a commercial and a social mission can be merged into one and argues that it is possible to achieve both objectives, but only if the commercial aspects are operating correctly. In conclusion, the authors suggest that there is a unique opportunity for credit unions and microfinance organisations to learn from each other and thus, go forward with greater vigour to reach those in need of their services.

Author Richardson, David C.; Lennon, Barry L.;
Publisher USAID, Development Alternatives, Inc. (DAI)
Number of Pages 21 pp.
Primary Language English (en)
Region / Country Global
Keywords Credit Unions, Agricultural Microfinance
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Safe Money: Building Effective Credit Unions in Latin America Book 2000 English (en)

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Policymakers in Latin America increasingly are turning to policies that have high economic rates of return and a favorable impact on income distribution. By providing financial services to small businesses and poor households —which normally lack such services — credit unions help secure growth with equity. The challenges faced by Latin America’s credit unions today are likely to force them to further modernize and consolidate, fine tune their inherent advantages, improve mechanisms for prudential regulation, and find ways to increase their share of low and middle-income markets. Safe Money presents the new thinking on how credit unions can compete effectively in modern financial markets while still retaining their social mission.

“Once seen by many donors as ideal vehicles for serving large numbers of low-income households, credit unions practically vanished from donors’ and researchers’ road maps in the 1990s. Safe Money puts credit unions squarely back on the table for consideration in development circles, especially those concerned with the small end of financial markets. This book addresses major issues in financial development, including professionalism and grass roots voluntarism, scale economies in retail finance, responsiveness to clients, balance between the interests of savers and borrowers, and government regulation.”J.D. Von Pischke, President, Frontier Finance International

This is a paid publication. Please contact Inter-American Development Bank (IADB) for a copy.

iadb publication  -  English (en)

Author Westley, G.D.; Branch, B.
Publisher Inter-American Development Bank
Number of Pages 272 pp.
Primary Language English (en)
Region / Country Global
Keywords Credit Unions, Financial Sector
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Financial Co-operatives for the New Millennium: A Chronographic Study of the Indian Financial Co-operatives and The Desjardins Movement, Quebec Paper 1999

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This paper presents a chronographic study of the financial co-operative movement in India and compares it with a chronographic study of the Desjardins (credit union) movement of Quebec. These movements emerged around the same time, at the end of the nineteenth century, but have developed along very different paths, and have had different levels of success. In documenting the significant events of the 20th century the author examines the strategy adopted at each phase and how it led to the direction which the co-ops took. The chronological study is broken down into four key phases; 1900 to 1930; 1930 to 1950; 1950 to 1990; and 1990 to 2000. One key observation is throughout the history of the co-op movement of Quebec, it can be seen that the legislation came in only after the movement had laid down the basic operating procedures in the field. The State was being responsive in helping co-ops rather than assume an activist role in promotion of one form of business or the other. This contrasts significantly with the Indian situation where the State was heavily involved in promoting coops and eventually became the major shareholder.

Thus while the Desjardins credit union movement was becoming the largest financial service provider in Quebec, the Indian cooperatives were led into a dependence trap with too much State intervention and poor management. Since 1990, however, a silent parallel co-op movement has been picking up all over India, which has started very much on the basic operating principles the Desjardins movement started off with nearly a century ago. These principles are based on mutual aid, with thrift as a basis. Some states have enacted new laws to govern these new generation coops. In Canada, Desjardins also have problems to solve. They are facing intense competition from the private sector and their members are moving away from the traditional savings products which were the main source of resources for the movement. Furthermore, automation, cost cutting, downsizing and adoption of cutting edge technology is becoming essential and this is altering the fundamental member-coop relationship which was once so important. The personal knowledge that credit committee members used to have of members' finances is being replaced by computers and credit scoring models.

In the final section of his paper, Prof. Sriram, outlines the shape of things to come for the two cooperative movements. He notes that the Indian financial cooperatives are almost a century behind the Desjardins movement, in terms of being autonomous and self-reliant, but believes they can readily catch up given the wealth of experience there is to draw on. However, he does not believe they should follow the route that Desjardins followed last century and thus arrive at the same problems that Desjardins have today. He thinks the future for financial cooperatives in India will be in their ability to function at local level, satisfying local needs. It will be a structure where the members play a pivotal role and not technology. With the penetration of the internet, the role of intermediaries benefiting from arbitrage is going to diminish, so the coops would need to move more towards fee-based activities rather than fund-based activities. All sophisticated financial products and services can be outsourced with the village level cooperative acting as an interface.

As for Desjardins, they have little option but to mimic their corporate counterparts and get their costs under control. It is probable they will have to consolidate so that the movement becomes a single cooperative and all the individual "Caisses" become merely branches. This has significant implications for member involvement and member control but there may be innovative ways of retaining member interest - perhaps the internet offers a new way for discussion and democracy in the coop movement in Quebec.

This is an extremely informative paper that provokes much reflection about the nature of financial cooperatives, how they have evolved and where they are going in the two contrasting contexts of Canada and India.

ICA website Website English (en)

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The International Co-operative Alliance (ICA) is the apex organisation of the international co-operative movement. ICA has regional and project offices in Africa, the Americas, Asia and Europe. A number of sectoral organisations have also been set up as centres of expertise. They exchange experiences, promote and develop co-operatives worldwide. The following sectors are currently represented by active ICA Sectoral Organisations: agriculture, fisheries, banking, consumers, health, housing, insurance, tourism and workers. This site is mainly useful for the links it provides to its regional offices and sectoral organisations, plus other sources of information.  -  English (en)

Primary Language English (en)
Region / Country Global
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