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Financial equilibrium is the essential prerequisite for a sustainable decentralized financial system (DFS). The necessary pre-conditions for establishing this equilibrium are:
Interest charged for loans Interest paid for deposits
+ Interest received on investments < + Operating costs
+ Fees charged loan administration + Provisioning for bad debts
There are seven important variables: (i) volume of transactions, (ii)share of lending from mobilized savings, (iii) return earned on surplus resources invested, (iv) rate of interest paid on deposits, (v) interest rate charged for loans, (vi) operating costs and (vii) provisioning against bad debts. The DFSs have no control over certain variables, such as the rate of return on investments. Through prudent management, DFSs can establish appropriate interest rates on savings and loans and can control costs, such as salaries and transport, and loan recovery rates, while avoiding irregularities.
DFSs have evolved on the fringes of the financial sector and its legislative framework. The growing importance of these systems required a suitable regulatory framework for their operation. Existing regulations in the Francs CFA (FCFA) monetary zone countries establish reserve requirements and lending rates at 17%, which is double the Central Bank re-lending rate. Only a few DFSs can actually comply with these rules. Most of them must lend at a rate above 2% per month to cover the costs of providing a service in the remote rural areas where their customers are found, while paying a high enough interest rate to attract savings. Notwithstanding, the interest rates charged by DFSs are far below those charged by usurers and are quite reasonable for small short-term loans and suitable for their rural clients.
Experience
has shown that about 4-5 years are required for local credit schemes to
reach a state of financial equilibrium; 10-15 years are needed for regional
networks to reach this balance. Time periods are longer than the expected
project period at appraisal (6-7 years), although the implementation period
of most IFAD projects is actually longer. In fact, when loan closing date
extensions and continuations into a second phase are considered, the field
presence of IFAD-financed projects can often reach up to 15 consecutive
years (Segou, Mali; Atacora, Benin; Siguiri, Guinea, etc.). If this fact
was an acknowledged reality, project planning could be undertaken with
a medium-term perspective, allowing support of DFSs until they have reached
"full" development.
- Whatever model of DFS is used, efforts should be made to balance savings and credit. The need for credit encourages savings, which can stagnate if the distribution of credit is too cautious. Initially, credit should be available quickly but only on short term and a small scale.
- Serving many poor rural people spread out over wide areas costs more than financing wealthy urban dwellers concentrated in cities. DFSs should be allowed to fix their own interest rates on savings and credit so that margins are large enough to cover operating costs (10-15%). Reference to the current usury law in the Union Economique et Monétaire Ouest Africaine (UEMOA) should be avoided, since interest rates must be set at a realistic level.
- Operating costs should be contained. As voluntary work of credit agents appears unsustainable, even at the village level, they should be remunerated. Salaries could be divided into a minimum fixed payment and a commission, determined by the performance of the local scheme (increase in deposits, rate of loan recovery, etc.).
- Lending operations should be transparent and equitable. A 518 recovery rate should be the expected norm, resulting from the prudent choice of borrowers and the halt to credit if conditions are not met.
- The regional and national networks should be limited to essential activities and they should remain within the control of the local schemes.
Supporting an emerging DFS requires a continuity over a time frame which surpasses that of usual projects. Programmes should be planned for execution over the medium term (10 to 15 years for a new DFS). In addition to investments, which are required for the development of local schemes, and the regional and national networks, international support should be tailored to include a decreasing grant element for operating costs during the growth phase. Any grant element should have been completely eliminated by the time "full development" is reached. Any grant element should be established on the actual expenses of the system to avoid any unbalances.
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.
