World bank - Strategic Alliances to Scale Up Financial Services in Rural Areas.

World bank working paper no.76, 2007

Authors : Joselito Gallardo ; Michael Goldberg and Bikki Randhawa

Joselito Gallardo is Consultant to the Financial Sector Operations and Policy Department of the World Bank.

Michael Goldberg is Senior Microfinance Specialist in the Latin America and Caribbean Region of the World Bank.

Bikki Randhawa is Senior Financial Specialist in the Financial Sector Operations and Policy Department of the World Bank.

Marguerite Robinson (Emeritus Fellow,Harvard Institute of International Development), Mary Elizabeth Valenzuela (Senior Microfinance Specialist, EASRD, The World Bank), and Jennifer Isern (Lead Private Sector Development Specialist, Consultative Group to Assist the Poor) performed the tasks of peer reviewers for the concept paper and the series of drafts of this report. Their expert and knowledgeable assistance are acknowledged and deeply appreciated. Robert Vickers (formerly with LCSFR) provided research assistance in the gathering and processing of data and information on rural finance institutions in Guatemala and other countries in Latin America.Anna Cora Evans of the World Council of Credit Unions generously shared data and information on international remittances through credit unions using the WOCCU IRNet® program, as well as on institution and capacity-building programs being carried out by WOCCU in several countries. Much of the data and information on rural finance institutions' experiences in Guatemala and the Philippines were generated by Jacobo Nitsch and Magdalena S. Casuga, field consultants for the study. Finally, colleagues from various rural and microfinance institutions in Ghana,Kenya, and India generously provided access to data that was invaluable in preparing this study.Any errors and omissions that remain are those of the authors.

World bank - Reaching Rural Areas with Financial Services : Lessons from Financial Cooperatives in Brazil, Burkina Faso, Kenya, and Sri Lanka.

Agriculture and Rural Development, 2007

Authors : Ajai Nair and Renate Kloeppinger-Todd

Ajai Nair is a consultant working on rural finance and microfinance, and can be contacted at This e-mail address is being protected from spambots. You need JavaScript enabled to view it and This e-mail address is being protected from spambots. You need JavaScript enabled to view it . Renate Kloeppinger-Todd is the rural finance adviser at the Agriculture and Rural Development Department, World Bank, and can be contacted at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

This paper is based on the four case studies of financial cooperatives prepared by three consultants. The three consultants-Bonnie Brudsky, independent consultant; Chet Aeschliman, rural finance and marketing officer, Food and Agricultural Organization; and Graham Owen, G.R. Owen Consulting Inc.- were kind enough to clarify several queries, collect additional information for some of the queries, and read through an initial draft of the synthesis paper. Valuable comments were provided by three reviewers-Anne Gaboury, president and chief executive officer, Développement International Desjardins, Canada; Aarón Silva, former vice president for strategic planning and evaluation, BANSEFI, the Development Bank for the Savings and Credit Sector, Mexico; and Eustacius N. Betubiza, lead rural development specialist, World Bank. Sushma Ganguly provided management guidance. Lisa Lau coordinated the publishing process.

This publication was financially supported by the Government of Netherlands through the Bank Netherlands Partnership Program. The authors express their profound thanks to all concerned.

Context And Key Questions Access to financial services contributes to rural development and poverty reduction by promoting income-enhancing and vulnerability-reducing investments, enabling better management of cash flows and risk, and facilitating remittances. However, financial access is limited in most rural areas in developing countries because of high transaction costs and risks attributed to low levels of economic activity, poor infrastructure, high levels of production and price risks in agriculture, and poor public policies, such as interest-rate caps and debt write-offs. In many developed economies, Financial Cooperatives (FCs) and their networks are well-developed and have large shares of the financial services market. However, FCs in most developing countries are underdeveloped and have negligible market shares. Financial cooperatives in developing countries are typically constrained by anachronistic legal frameworks, low capacity, lack of an appropriate regulatory framework, and poor supervision. This paper presents four cases of financial cooperative networks in developing countries with significant rural outreach. The four cases are SICREDI (Sistema de Cooperativa de Crédito) in Brazil, SANASA in Sri Lanka, RCPB (Réseau des Caisses Populaires du Burkina) in Burkina Faso, and KERUSSU (Kenya Rural Savings and Credit Cooperative Society Union) in Kenya. These cases represent examples of FC networks with significant outreach in rural areas, but operating in widely varying economic contexts. Through a case study approach, this paper attempts to answer such questions as: Can FCs provide financial services in rural areas in developing countries and still be profitable? Do FCs provide services to low-income clients? How does the regulatory environment affect FC performance? How does the business model of FC networks affect FC performance? The Cases SICREDI SICREDI is the second largest FC network in Brazil. As of December 2005, SICREDI had 130 affiliated cooperatives, with a consolidated membership of 959,531. These cooperatives administered US$1.47 billion deposits and US$1.38 billion in loans, and made a consolidated profit of US$64.1 million. The portfolio quality of SICREDI was excellent; only 0.1 percent of its portfolio was delinquent for over 15 days. Forty-nine cooperatives in the network that are located in rural areas represented 41 percent of members, 40 percent of deposits, and 39 percent of loans. The SICREDI network includes the FCs, five Central Cooperatives, a Confederation, a Cooperative Bank, and four auxiliary institutions. SICREDI is a fully integrated network, with the cooperatives mutually responsible for each others' debts. The Central Cooperatives coordinate and supervise the activities of the FCs, with an emphasis on controls and institutional development. The Confederation develops corporate policies, designs tools to implement these policies, and represents SICREDI nationally and internationally. The Central Bank supervises the FCs via the Centrals (auxiliary supervision), and directly supervises the Central Cooperatives. SANASA SANASAis Sri Lanka's largest FC network. In 2004, the network had more than 8,440 FCs with 850,000 members. Nearly one out of five households in Sri Lanka had members in SANASA. In 2004, the FCs in SANASA reported a total of US$32.97 million in savings and US$35.67 million in loans. However, only an estimated one-third SANASA FCs are financially sustainable. At a consolidated level, a large share of loans (23.5 percent) was reported to be past due in 2004. The SANASA network includes FCs, 25 District Unions (DUs), a Federation, and several affiliated institutions, including a bank and an insurance company. The DUs and the federation only provide services to the FCs and have no control functions. All cooperative organizations in Sri Lanka, including FCs, are regulated by the Ministry of Cooperatives, and supervised by the Cooperatives Department. They are not subject to any financial regulation and supervision. This creates financial weaknesses in cooperatives and DUs that are not addressed in a timely manner. RCPB RCPB is the largest financial cooperative network in Burkina Faso. In 2005, the RCPB network had 100 FCs that served nearly 630,000 clients, savings of US$50.5 million, and outstanding loans of US$33.2 million. The estimated outreach of RCPB in Burkino Faso is nearly 9 percent of the adult population. RCPB has 81 percent share in savings and 74 percent share in loans in microfinance institutions. The portfolio at risk for urban FCs was 4.3 percent and for rural FCs was 5 percent. RCPB FCs are profitable and solvent, both when consolidated network-wide and as a rural group. However, the majority of rural caisses make losses. The RCPB network includes FCs, Regional Unions, and a national federation. Although network-wide policy making is the responsibility of the federation, the roles of the regional unions and the federation overlap and both have developmental and control functions. All FCs in Burkina Faso are under the supervisory authority of the Ministry of Finance and the Central Bank of West African States. However, effective supervision is limited by capacity and resource constraints. KERUSSU KERUSSU is a network of rural FCs in Kenya. KERUSSU has a membership of 45 rural FCs, out of the estimated 110 rural FCs in existence. Together,KERUSSU's member FCs have more than 1.2 million members, savings deposits of more than US$78 million, and outstanding loans of more than US$34.2 million. Consolidated portfolios at risk and profitability information are not available. KERUSSU's member FCs have an average membership of more than 25,000 members. Some have rural networks covering several districts, operate mobile banking units, have automated teller machines (ATMs), and provide a broad range of financial services including remittances. However, despite being relatively large financial organizations that compete with banks, Kenyan FCs lack a specialized legal, regulatory, and supervisory framework tailored to the needs of the financial cooperatives. The Cases - A Comparative Summary All four financial cooperative networks have a significant rural outreach in their respective countries. RCPB and SANASA are the largest private provider of financial services in rural areas in Burkina Faso and Sri Lanka respectively. In Brazil, over half a million of SICREDI's members are estimated to be in rural areas and in Kenya, rural FCs serve over a million clients. The cases are also similar in other ways: all have rural and urban clients, although the proportions vary; all serve a mixed-income clientele, although the level of outreach among low-income clients varies; and, all are part of networks that have professional staffing. The cases differ significantly in the level of integration of the networks and the level of regulation and supervision. While SICREDI and RCPB are highly integrated networks, SANASA and KERUSSU are less integrated. FCs in the SICREDI and RCPB network mutually guarantee each other, pool significant amounts of resources, and delegate strategic planning and control to the secondary and tertiary organizations in the network. There is less pooling of resources in SANASA; and secondary and tertiary organizations in the network do not have strategic planning responsibilities for the entire network or the control authority over the FCs. Of the four discussed FCs, KERUSSU is the least integrated network with the apex organization's role restricted to representation and demand-based training and advisory services. Sri Lanka and Kenya have the weakest regulatory environments in which neither prudential regulation nor financial supervision of FCs exists. Burkina Faso has a special law for FCs, prudential regulation requirements, and arrangements for financial supervision, but has inadequate resources and capacity for effective supervision. In contrast, Brazil presents a case of welldeveloped regulation and effective supervision. Lessons and Conclusions The cases show that FCs can provide financial services in rural areas in developing countries and be profitable. Although the majority of rural FCs in RCPB still makes losses, a significant number is profitable and, as a group, rural FCs have recently become profitable. Profitability data disaggregated by rural and urban FCs is not available for SICREDI. However, rural FCs in SICREDI are estimated to be profitable as the average volume of business in rural FCs is similar to that in the urban FCs and SICREDI FCs have consistently been profitable at a consolidated level. Diversification, on a geographic basis and on income levels of clientele, seems to have helped all the FC networks grow their clientele. A mixed clientele allows FCs to serve lower-income clientele without having to charge very high interest rates and fees typically charged by MFIs that exclusively serve lowincome clients. The level of integration among FCs and between FCs and their federations appears to determine the level of support services available for FCs, which is likely to impact how FCs respond to market competition. FCs that are part of networks with a high level of integration, such as SICREDI and RCPB, also provide a broader range of financial services and have better operational systems. RCPB's case suggests that the benefits of a higher level of integration may also be available in a country with a low level of financial sector development. Strong performance of higher-level organizations, such as the bank and insurance company of SANASA, and the cooperative bank in Kenya, co-existing with weak performance of FCs is a dichotomy observed in the less integrated networks. Lastly, the cases reinforce that FCs operate better in environments with prudential regulation and financial supervision. Even in a context with limited resources, as in the case of RCPB, the existence of prudential regulations contributes to improving the FC performance.

World bank - Cooperative Financial Institutions.

QIssues in Governance, Regulation, and Supervision, 2006

Authors : Carlos E. Cuevas and Klaus P. Fischer

This paper is a product of ongoing work on Cooperative Financial Institutions at the Financial Sector Operations and Policy Department of the World Bank. The views expressed in the paper are those of the authors and not necessarily those of the World Bank or its affiliate institutions. The authors gratefully acknowledge valuable and elucidating comments on earlier drafts from Messrs/Mmes. Brian Branch (World Council of Credit Unions), Anne Gaboury (Développement international Desjardins), Renate Kloeppinger- Todd and Andre Ryba (both World Bank), and from participants at an IMF/MFD Seminar in November 2005. Remaining errors and opinions, however, are sole responsibility of the authors.

The paper addresses topics on which an agreement is necessary to arrive at consensus guidelines or "principles" of regulation and supervision of cooperative financial institutions (CFIs) in developing countries. Specifically we identify those aspects related to CFI industry structure, governance, legislation and regulation over which a well established base of knowledge exists;we point out the most important gaps in understanding and those over which a considerable degree of disagreement among stakeholders appears to exist and that require research to consolidate opinions. Three main topics covered are: (i) the fundamental structure of the sector in terms of its internal (micro) and inter-CFI (macro) organization,with focus on the agency conflicts inherent in the mutual structure, the extent to which they contribute to failure risk, and to whether and how these conflicts are controlled by existing governance mechanisms; (ii) the existing legal frameworks in an international context, their origins and the implications for the functioning of CFIs; and (iii) the regulatory frameworks under which CFIs operate and the different propositions by stakeholders about what should be an appropriate regulatory framework and an effective supervision mechanism. The main propositions that emerge from the paper requiring verification are the following: 1. The CFI present advantages over investor-owned financial intermediaries in the provision of financial services through breaking the market failure that leads to credit rationing, thus contributing to a "functional financial system" in the sense of Merton and Bodie (2004). 2. (By extension of 1) a financial system that presents a diversified institutional structure, including institutional types, among other CFIs,will be more efficient in promoting economic growth and reduced poverty. 3. Expense preferences (EP) by managers-or equivalently the member-manager conflict-is the principal source of CFI failure.Control of expense preferences should be a central theme of prudential supervision of CFIs. 4. Inter-CFI alliances (federations, leagues, and so forth) are hybrid organizations that allow CFIs to exploit economies of scale and manage efficiently uncertainties in the procurement of intermediation inputs. Thus, the legal framework should facilitate the formation of such alliances and provide legal support to the inter-cooperative contracts that result. 5. Inter-CFI alliances that include private ordering mechanisms and separate strategic from operational decisionmaking between the base units and the apex contribute to the control of expense preference, thus enhancing the resiliency of the system to failures and crisis. 6. Mutual financial intermediaries require a specialized regulatory environment that supports the special nature of the contracts imbedded in the institutions. 7. Indirect supervision (auxiliary/delegated) is a powerful tool to: (i) adapt supervision to specific needs of the CFI; (ii) facilitate integration of the CFI to a supervision environment with financial sector standards; and (iii) encourage integration. 8. Tiering (splitting) the CFI sector into two groups, one being a large/open CFIs under banking authority supervision and another a small/closed CFI, is (is not) a reasonable strategy to creating an appropriate regulation and supervision (R&S) environment for CFIs.

World bank - Regulation and Supervision of Cooperative Financial Institutions : the Debate over Delegated and Auxiliary Supervision

A Newsletter Published by the Financial Sector Vice Presidency, June 2006, Issue No. 12, Access to Finance Thematic Group, The World Bank Group.

Carlos E. Cuevas is Advisor in the Financial Sector Vice Presidency of the World Bank. Klaus P. Fischer is Professor of Finance at Laval University.

This article partially excerpts from the forthcoming World Bank Working Paper No. 82, "Cooperative Financial Institutions: Issues in Governance, Regulation, and Supervision."