MICROBANKING BULLETIN - Microfinance Information Exchange

FEATURE ARTICLESBy redirecting financial services to the rural poor,credit unions can improve utilization andcirculation of idle assets. In some regions, creditunions have a limited capability to transformsavings into loans and operating income. This isdue to the structural nature of their other loanproducts. Without a poverty-focused product, theyare oriented to markets with limited demand andoften carry high transaction costs for the borrower.When Freedom from Hunger began working withthe Réseau des Caisses Populaires in BurkinaFaso in 1993, the loan-to-savings ratio, or thesavings transformation rate, was 22 percent. In1998, the transformation rate was 150 percent. 11This vast improvement was partly due to Credit withEducation, which offered a product that fit thedemands of the rapidly growing market niche of therural poor. It allowed credit unions to transformsurplus urban savings into loans for a rural market.These new clients generate regular income for thecredit unions through interest payments on theseredirected savings while achieving the socialmission of the credit union to serve the community.Working with the very poor provides opportunities toachieve important efficiencies. In many markets,there is still limited, if any, competition for ruralmicrofinance providers. This lack of competitionpartly explains the willingness of the very poor toorganize groups of 25 or 30 members to obtainservices. Efficiency in terms of the ratio ofborrowers to field agent is high, averaging 285 forcredit unions in West Africa and the Philippines.The administrative expense per borrower for KafoJiginew’s Credit with Education product was justUS$16 in 1999.Staff costs can also be lowered while maintainingthe same quality of services by hiring literatewomen from the community. Group-based povertylending requires staff with the capacity primarily tobuild trust and strong relationships, as well asrecord and track simple financial transactions. In arecent staff assessment of Kafo Jiginew’s Creditwith Education product, women field agentsselected from the groups' management committeesperformed as well or better than field agents fromthe city with a high school education. The averagestaff cost per borrower in the village promotersystem is US$5.96 compared with US$8.20 for onethat uses high school graduates. 1211 “Study Design to Assess the Institutional Impacts of Credit withEducation on Credit Unions in Mali, West Africa,” Freedom fromHunger, 1998.12 “Evaluation du système de dotation du personnel de la ligne duproduit du Crédit avec Education de Kafo Jiginew,” Freedomfrom Hunger, May 2000.Extension of financial and educational servicesdeep into rural communities promotes credit unionmembership growth and diversification. Womenlearn to use financial services successfully andmany “graduate” to individual membership byopening their own savings accounts and takinglarger loans. In Burkina Faso and Mali, some groupmembers have been elected to boards of creditunions and/or hired as field staff, strengthening theparticipation of women in the credit union’smanagement. The percentage of women membersat Kafo Jiginew has increased from 1 percent to 20percent since Credit with Education was introducedfour years ago.The most important business rationale for servingthe very poor may be portfolio quality. Manycredit unions have a history of poorly performingloans and high delinquency rates. This is often dueto the business risk associated with the loan, thecredit risk associated with the client, or thebreakdown of selection and collection practicesassociated with the service delivery system. Creditwith Education provides a reliable screening anddelivery system to serve a low-risk market. Fear ofsocial castigation and strong rural communityinterdependence make poor clients terrific loanrepayers.The Case of the PhilippinesThis business approach to deepening outreach isexemplified by the preliminary accomplishments ofcredit unions in the Philippines that now offer Creditwith Education thanks to the Credit UnionEmpowering and Strengthening (CUES) Project ofthe World Council of Credit Unions (WOCCU).The first "Savings and Credit with Education"(SCWE) loans, as they are known in thePhilippines, were made in August 1998. From 1998through the first quarter of 2000, the program grewfrom four cooperatives and less than 2,000 clientsto eight cooperatives and over 13,000 clients. TheSCWE product line for six of the eight cooperativeswas operationally self-sufficient by that time.In terms of product share, SCWE is now one of sixor seven loan products offered by these eightcooperatives. At the end of 1999, SCWEaccounted for 33 percent of the total clients and 8percent of their outstanding portfolio.WOCCU's strong business-minded approach forworking with financial cooperatives set the contextwithin which Credit with Education was integrated.By implementing a more accurate measurement forportfolio quality, for example, the CUES programhelped to market the SCWE product. CUESMICROBANKING BULLETIN, SEPTEMBER 2000 11