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In order to insure the sustainability of credit activities within the projects, IFAD has tried to involve a number of banking institutions (agricultural development banks and commercial banks). The level of branch representation in poor rural areas by the formal financial institutions is extremely sparse in many countries (Mali, Niger, Senegal, Burkina); and the financing that is available is limited and only covers cash crops such as cotton. Under these circumstances, IFAD suggested the following approach: Management of an IFAD-financed credit line is theoretically the bank's task; producers are organized into groups or village associations as intermediaries with the banks; the project must collaborate with the banks in following up the loans. A line of credit is opened up for the bank with institutional support to set up field branches. During the start-up period, the bank assumes none of the risk associated with non-repayment by borrowers (generally assumed by the government).
In practice, the bank's role in managing the loans is an artificial one. In fact, the project field staff takes responsibility for group training, providing the credit, and following up and recovering the loans. Often, these multi-functional producers groups are incapable of playing the expected role of financial intermediary. The bank often restricts itself to simply preparing the accounts of operations. As far as the bank is concerned, the entire operation is a profit-making one: It does not bear any risk; the project takes on most field work for extending credit; and the difference between the interest rate at which the bank receives IFAD funds and the interest rate charged to creditors gives the bank a comfortable profit margin. In some cases, the establishment of local branches has not been viable (SRS 004 ML, SRS 001 BF, SRS 009/023 NG, and 245 CA). At times the bank may even withdraw entirely from the project activities (SRS 004 ML and SRS 011 BF). The project then has to manage the entire credit program as well as supply inputs and equipment according to its objectives, in total disregard for institutional sustainability. The Banque Nationale de Développement Agricole (BNDA) involvement in Segou, Mali (103/278 ML), is partly successful. The branch office which has opened is diversifying its activities to operations not linked to the project. In the second phase, the BNDA is also bearing the risk associated with default. However, branch field offices have not yet opened and the project is still obliged to play an intermediate role between the BNDA and the project beneficiaries. So far, none of the projects using this approach have achieved institutional sustainability, even when rates of repayment are good. While the repayment rate of loans for motorized pumps in the Komadougou Valley, Niger, is 518, the Banque Internationale pour lAfrique de lOuest (BIAO) refuses to open field offices.
When
a banking institution has no active presence in the field, institutional
support and credit lines will not guarantee its lasting involvement in
the area concerned. The establishment of multi-functional village associations
is no guarantee of financial intermediation.
When banks are not present in the field, implementing the credit components has to be achieved through the support of decentralized and specialized rural financial systems, capable of guaranteeing a localized service to individual beneficiaries. There are two main types of decentralized financial systems that can achieve this:
- systems that can coordinate with the banking system and act as intermediary between the beneficiaries and banks [The Centre International de Développement et de Recherche (CIDR) village schemes, having generated their own capital with members deposits, negotiate refinancing with banks. The Promotion of Small Rural Credit Project in Burkina Faso is refinanced by the Caisse Nationale de Crédit Agricole (CNCA). Institutional support and credit lines can be supplied by IFAD. In fact, this is the approach developed in the recent appraisal of the Income Diversification Project in southern Mali)]; and
- systems that are, by definition, independent to the banking system, such as networks of cooperative savings and credit schemes [Caisses Régionales/Caisses Locales de Crédit Agricole Mutuel (CRCAM/CLCAM) in Benin and Credit Mutuel in Guinea]. Resources are mobilized from the savings of depositors. IFAD's own input consists of institutional support and, in some cases, a credit line (for medium-term credit, for instance) or a risk guarantee fund. This is the approach developed by IFAD, notably, in Benin and Guinea.
Select any of the following related project profiles for background information: 056 GU, 101 BE, 103 ML, 187 CG, 198 GH, SRS-011 BF, SRS-012 GU.
