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IFAD's creation of Village Development Funds (VDFs) managed by multi-functional village associations (VAs) has been an innovative approach to rural financing over the last ten years. The objectives of this approach were:
- to allow VAs to obtain classic bank loans (mutual credit, in Guinea) by establishing a VFD deposited with the banking system, to serve as collateral, and a Village Committee for Credit (CVC) to manage the loans at the village level;
- to develop an alternative source of financing bank loans and to provide local services for all types of investments chosen by the VA, such as "internal credit" to members, collective commercial operations, and investments in community infrastructure; and
- to encourage the "mobilization of savings" for a self-managed and self-financed local development.
About 500 VFDs of varying size have been created in Mali, Guinea, the Central African Republic (CAR), and in Niger. In 1995 in Segou, Mali (103/278 ML), the 179 VFDs totaled 240 million Francs CFA (FCFA) after 10 years, including an initial grant of 37 million. In Bouca, CAR (245 CA), VFDs for 50 Village Associations reached 15 million FCFA in the fourth year. The VAs have benefited from sizable bank loans, except in Guinea. These funds have permitted the financing of food-crops marketing operations (103/278 ML and to a lesser extent 245 CA). The provision of "internal credit" has been developed mainly in Fouta Djallon (SRS 012 GUI). Community investments have been financed (village shops, literacy centers...). Hundreds of CVC members have become literate and have acquired some management skills. Nevertheless, these multi-purpose funds have encountered some difficulties:
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With the exception of the Guinean case, the mechanism established to create
these funds has been closely linked to bank loans (103/278 ML, 292 NG,
245 CA). The main contribution of the villages to the VDFs is a personal
contribution representing 10% of the loan accorded by the bank. Moreover,
at Segou (103/278 ML), commissions are paid into the VA account for every
bank loan taken out (2.5%). This is an incentive for the VA to use bank
loans, and favors projects which give priority to input supply objectives
rather than the sustainability of the financial system. The observed phenomenon
of over-indebtedness and the raising of default rates at Segou cannot
be disassociated from this approach. On the other hand, if loans are granted
more cautiously, as in Phase II of the Segou program where the Banque
Nationale de Développement Agricole (BNDA) lends at its own risk, the
VDFs develop too slowly (278 ML).
- Individual savings mobilization is not promoted by the VDFs/CVCs. The initial 10% down payment on loans is a pre-condition for access to credit and not a saving mobilization measure. There are no individual savings accounts for VA members. Members cannot withdraw their contribution from the collective account. Aside from marketing margins, the VDFs grow mainly through the interest on deposits. The group nature of these revenues certainly does not encourage individual savings by members.
- The management capacity of the VAs and the use of their funds remains limited. A certain confusion remains about the size of the VDFs, their ownership, and their guarantee role. VDFs can be blocked in a bank account for a long time. In Aguie, Niger (292 NG), the Sonibank blocked their use until the mid-term evaluation. The control exerted by a project over the use of funds can be quite strict. The amount of VDFs actually disbursed and used remains very low (103/273 ML). The Fouta Djallon case (SRS 012 GU) has made the best use of VDFs, with 60% of the funds being used, mainly for the provision of internal credits.
- In terms of targeting, most of the credit provided under the Fouta Djallon project has been given to traders and prominent citizens (most recently, horticulture groups). Most VA loans (short-term) are of large amounts and small numbers, with high interest rates. Women and young people rarely benefit. The VAs mimic the existing social hierarchies within villages.
- The management of VDFs lies with CVCs (which are, theoretically, voluntary organizations). Without training and supervision they are not able to carry out this task satisfactorily. Accountability is rarely safe-guarded. Through a lack of initiative and competency and because of the multi-purposes of the VDFs/CVCs, projects have been unable to establish proper accounting systems, record operations, monitor loans performance, or even draw up a balance sheet and a budget. Once funds have been disbursed, the absence of a monitoring system reinforces the power of group leaders and often leads to irregularities. As indebtedness increases, banks begin to distrust the VAs.
- There is a contradiction in the multi-purpose tasks of the VDFs: Credit and marketing operations are ostensibly profitable activities, capable of generating a financial return and encouraging the development of VDFs. This is not the case for community investments or the financing of social services, such as education and health. At the moment, such expenses are financed by the down payment (10% of the loan amount), the interest on deposits and the profits of operations. However, in the absence of a suitable local tax system, it is hard to see how the VDF "social" financing can be maintained. This contradiction is inherent by the very nature of the VAs whose communal and social vocations appear to be incompatible with the requirements of providing a financial intermediary service.
On the basis of evaluation reports, three elements of the VDF approach are worth keeping: (i) financial service available locally to complement national networks; (ii) village schemes coordinated with national networks; and (iii) matching grant arrangements to finance start-up capital in areas with a weak savings mobilization capacity. However, given development objectives and the need for a sustainable financial system, the VDF/VA approach appears, for the time being, to be less promising than other models, such as Village Savings and Credit Associations (VISACAs) or Crédit Solidaire. The VDFs/VAs were designed to carry out, simultaneously, complementary but very different tasks, such as financial intermediation at the village level, community investment funds (infrastructure, literacy campaigns, ...), and cooperative revolving funds (input supply and marketing). Despite the lack of information on the effective use of village funds, it does not seem that the VDFs and the CVCs that run them can assume this triple responsibility effectively. In fact, in Mali (evaluation of 278 ML and design of 376 ML), Guinea (Lower Guinea 378 GU) and Niger (292 NG), the approach now is to separate the functions of financial intermediation - left to Caisse Mutuelle dEpargne et de Crédit (CMECs) or village financial associations - agricultural production and local community activities. This corresponds to the developments observed in southern Mali, the birth place of the VA, where local financial intermediation has been followed by the emergence of specialized and professional organizations (Kafo Jiginew) independent of other financial structures (VA/Tons, Local Investment Funds, and the BNDA).
- Tasks should be well defined. The smooth functioning and sustainability of a village-level financial system will be encouraged by separating the economic functions (input supply/marketing), communal infrastructure (equipment/public services) and financial intermediation (savings/credit) into distinct structures. Supplying inputs and marketing should rest with producer groups (Groupement dIntérêt Economique), able to federate themselves into professional organizations. The financing of communal investments and services can remain the responsibility of VAs, financed by new local mechanisms or even Local Investment Funds. Financial intermediation, on the other hand, should be carried out by a specialized and autonomous financial institution.
- The principle of creating the village schemes using capital from different sources - individual savings and project subsidies - could be retained to allow rapid start-up in areas with limited savings capacity: In the Sahel area, the Village Saving and Credit Associations (VISACAs) of the Centre International de Développement et de Recherche (CIDR) are slow to establish themselves. Any link and dependency between the creation of funds and bank credit should be avoided.
- The presence of a village financial service does not guarantee its access by women and the very poor. Targeting these groups requires tailored financial instruments and the promotion of specific groups.
- The sustainability of the financial system at the village level depends on the rigorous management of credit and savings. Individual records should be kept. This requires prolonged efforts in accounting and management training, monitoring, supervising and auditing. These tasks should be given to specialized professionals and operators, not the staff of government services or agricultural projects.
- Coordinating with national financial institutions [Coopérative dEpargne et de Crédit (COOPEC), agricultural banks] will allow the refinancing of local activities, better placement for savings deposits, and (eventually) training, monitoring and supervision.
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.
