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Combining Supervision with Strengthening of Local Credit Organisations
Local supervision arrangements for community based credit organisations are vital to guarantee proper financial management and hence to assure members of the safety of their funds. Only when the village organisation grows on a firm basis can it eventually hope to receive outside funds for on-lending, or to form linkages with the formal financial sector, or even to develop into a bank. This requires a capable supportive mechanism both to nurture the village organisation and to ensure that regulatory controls are being respected.
In Tanzania (SRS-O24-TZ, 242-TZ, 324-TZ), IFAD credit components initially tended to be directed through existing banks, which were government owned and had little experience of rural micro-finance. Also the banking system was itself subject to major change as a result of restructuring. The overall result was an unsatisfactory performance and the eventual withdrawal of the banks from the provision of small-scale rural credit. One of the favoured organisations to replace them were Savings and Credit Co-operatives (SACCOs). However, SACCOs, which for administrative purposes came under the Ministry of Agriculture and Co-operatives, suffered from all the hereditary shortcomings of small, locally owned organisations based on limited skills and capacities.
Community owned savings and credit organisations need to cater for the total requirements of the community and cannot be tightly tied to project activities. When local organisations are to be promoted they need to be carefully supported, and this requires that there is both a sympathetic and knowledgeable development agency, and also an effective supervisory mechanism. It may be possible and desirable to combine these roles. The technical capacity and knowledge available at the village level is often extremely limited in the beginning, and takes time to develop. In the case of Tanzania, the co-operative status of SACCOs allowed them to obtain a legal status, but also meant that their development relied on the co-operative authorities, which actually had very limited capacity in micro-finance.
- Local savings and credit organisations are to be preferred as the mechanism for channelling credit to typical IFAD target groups, but there needs to be a detailed assessment of the support required by such organisations in order for them to be sustainable. The need for regular local supervision is vital, and this can provide the opportunity for the development of the local organisations, providing that the supervising agency is also able to undertake the development role. Hence formulation missions need both to identify and assess the local supervising agency, as well as being concerned with the mechanism for developing the village savings and credit organisations.
- To comprehensively support local village organisations often requires collaboration between a supervisory agency and another service provider which can supply the more general development needs of the members. The supervising agency needs to have the capacity, skills and authority to undertake its designated role, and needs a degree of independence; e.g. a rural finance unit in the Central Bank might be appropriate. NGOs can promote and support the development of village organisations in terms of training and mobilisation, but may need capacity building within the project or programme to do this.
eferences:
1. Tanzania - Smallholder Development Project for Marginal Areas, SRS-O24-TZ S024TZBE, Interim Evaluation, 1998.
2. Tanzania - Smallholder Support Project in Zanzibar, 242-TZ R242TZBE, Interim Evaluation, 1998.
3. Tanzania - Southern Highlands Extension and Rural Financial Services Project, 324-TZ R324TZBE, Interim Evaluation, 1998.
