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Each level in the credit ladder needs to receive an adequate profit or incentive from its activities to enable the continuation and possible replication of the credit system after project closure. Evaluations conducted in Asia underline the importance of consistent interest rate margins being provided to this end. This has to be achieved through an appropriate and adequate interest-rate spread for all parties in the project, including the beneficiaries, their groups, the non-government organizations (NGOs), and the bank/lending institution. High and sustained repayment rates are also necessary, requiring discipline from all loan recipients. Evaluations have found that it is the ease of access to credit facilities, rather than the interest rate charged, which hinders the poor from entering the more formal credit systems. A credit revolving fund should be established early in the project: This would help to continue credit to all the later project entrants, who might only have received one or two loans before the end of the project and would provide the means to launch new groups after the project has closed.
Experience shows that successive credit cycles have progressively increased the incomes and returns on investment of the beneficiaries and that they should eventually be in a position to afford market rates of interest. At this point, they could be introduced to banks for credit at market rates of interest, on a sustainable basis. In Indonesia (215 ID) and Sri Lanka (219 SR), this appeared feasible after around six to seven years of project support. However, an important pre-requisite is that the groups should be encouraged to save regularly, with a view to building up some collateral that would facilitate their easier acceptance by banks for credit at the conclusion of the project, as well as providing them with emergency funds.
In Bangladesh (194 BA), on-lending costs were estimated to be as high as 20% (to which the cost of money needs to be added) and were unsustainable for the on-lending bank. In Nepal (166 NE), the incentive structure established by the project (the highly subsidized interest rates to beneficiaries) placed a premium on expanding credit, with too little attention to savings and credit recovery, seriously jeopardizing replicability and sustainability. While in Bangladesh (the Grameen Bank projects), India (240 IN), Sri Lanka (219 SR) and Indonesia (215 ID), the high rates of savings and credit recovery, aided by an interest rate regime which provided incentives to all parties, aided sustainability and replicability.
The
Pakistan Country Portfolio Evaluation (CPE) suggested that interest rates
above normal banking rates should be charged, if necessary, for small
loans to cover high transaction costs, while the Bangladesh CPE also suggested
that a specific project-related service charge should be considered for
the same purpose.
- Adequate interest rate margins need to be provided to all financial intermediaries to ensure project sustainability.
- The possibility of successive loans needs to be included in the project - preferably so that maturing groups graduate to more profitable enterprises and can be introduced to the formal banking sector.
- Savings need to be included as a project objective, both to provide emergency funds for the groups that they also manage and to demonstrate the groups financial stability to the banks.
- A credit revolving fund is a necessary feature of project design, to ensure replicability and to finance loans to new groups after project closure.
Select any of the following related project profiles for background information: 166 NE.
