Financing the Rural Poor:
Savings and Loan Network in Benin
Luciano Mosele for the World Bank/AFTDR
The rural poor can save, although commercial banks are rarely able to mobilize these savings in financial form. Rural credit demand is also high, not only to survive drought and other periodic disasters but also to help move out of poverty through investments that improve productivity and tap into economic opportunities. Yet the high perceived costs and risks of intermediation have deterred formal financial institutions from serving the rural poor. The experience of the World Bank-assisted Rural Savings and Loan Project in Benin shows that well-designed investment in grass roots financial institutions can fill this gap on a sustainable basis.
Benin's Financial Sector
Rural savings and loan associations were originally established in 1975 on the French mutual credit model, which emphasized local ownership and a democratic, bottom-up system of regional and national groupings. However, the government's decision to put the network under the jurisdiction of a public agricultural development bank undermined the mutualistic principles by shifting decision-making from elected members to government-appointed management. A disproportionate share of clients tended to be those who were not so poor--cotton farmers, traders and artisans. The agricultural development bank channeled savings from the network to public enterprises, but poor management and lack of rigorous credit appraisals led to the collapse of the agricultural development bank. After Benin's state-owned banking sector collapsed in 1990, it was restructured to comprise 5 private commercial banks, which operate in the major urban centers, and a national savings bank and postal checking service with wider outreach but limited deposits and loans.
Reaching the Rural Poor
Sixty-five percent of Benin's 5.4 million people live in rural areas, most of them poor or vulnerable (especially just before harvest season). In the past, most of the poor had difficulty accessing the rural savings and loan network because of distance, lack of information, low confidence, and economic and psychological barriers. They also tended to hold savings in tangible assets. With the collapse of the banking system, a program to build on rural savings and loans and better serve the rural poor was designed on the following 'best practice' principles derived from experiences worldwide.
- Savings is at least as important as credit, for precautionary purposes and for safe placement of assets.
- Financial discipline tends to be greater when local savings are the main source of credit funds.
- Personal reputation, group lending and peer pressure can be effective collateral substitutes.
- Convenient access to savings and credit services is more important than interest rates. Successful micro credit programs often charge real effective interest rates (after inflation) on the order of 2 percent to 5 percent per month without affecting high repayment rates.
- Short-term savings and credit are generally preferable to meet immediate needs and opportunities.
- Prudential policies, regulation and supervision are important to identify problems and ensure long-term sustainability.
Rehabilitation of Rural System
The rehabilitation program launched in 1990 aimed to restore the savings and loan system to its original mutualist principles, with the government withdrawing from management. Measures to rebuild people's confidence included:
- Decentralization and empowerment of local members in managing (as well as owning) local cooperative banks.
- Individual as well as group membership.
- Security and financial discipline.
- Deposit-taking from the general public.
Loans are provided to members only after six months of savings, and cannot exceed double the amount on deposit. The decentralized decision-making structure helps reduce the screening, monitoring and enforcement costs of lending, and empowers members to both take decisions and help ensure repayment. Under the new structure, banking services could be provided only by local cooperative banks, which were grouped into regional unions and federated in a national governing body. Regional unions provide technical assistance to local banks. The national federation provides institutional support and liquidity management. Although interest rates to borrowers are not subsidized, the revenues generated are not yet sufficient to cover these capacity-building costs. These have been treated as development expenditures under the project, accompanied by a monitorable plan to reach financial sustainability as portfolio size expands.
Over the period 1990-1995, membership increased by 360 percent to 127,000 (an additional 100,000 depositors), share capital by 160 percent, deposits by 240 percent, and loans by 2300 percent [see Table 1]. Growth is accelerating, with loans more than doubling in 1995 and deposits and share capital rising by half. Loans account for 64 percent of deposits. The recovery rate has risen to above 98 percent in the years 1993-95. While the network includes relatively poor regions such as Atacora, Oeume and Mono, the cotton-producing regions such as Borgou and Zou represent 50 percent of deposits and 60 percent of loans. Table 1: Benin Rural Savings and Loan Network: Performance Parameters
Indicator 1989/90 1994/95 Number of: Members 27,700 127,329 Depositors 76,889 185,131 Loans 3,977 48,471 Value of (CFAF billion): Deposits 2.8 9.4 Loans 0.2 6.0 Share capital 0.1 0.4 Average (CFAF '000): Deposit 36 51 Loan 51 124 Ratios (%): Loans/deposits 7 64 Loan recovery 96 98
Note: 1 billion = 1,000 million; CFAF = CFA Franc; 1 billion
CFAF = Approximately US$2 million.
The training of local members and empowerment of their elected officials has led to some differences of opinion with the government technocrats who, ironically, have promoted this empowerment process. The success of the network raises the interest of government and donors in using it as a channel to further their own objectives. There is some concern that accelerating expansion through external lines of credit-often oriented toward particular objectives of the providers-could undermine the orientation toward savings mobilization and autonomy that has motivated the network's success. Can Benin's experience be replicated ? While no single model is generally applicable, the principles listed above can be adapted to each local situation. The Benin experience indicates that it is especially important to empower local members through training and sensitization, develop a corporate culture and ethical business environment, and strive toward self-sustainability to maintain autonomy.
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