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Report - English

Providing Financial Services in Rural Areas: A Fresh Look at Financial Cooperatives

In order to assess prospects for supporting further outreach by financial cooperatives to the rural poor and to identify determinants of success of such endeavors, the World Bank’s Agriculture and Rural Development Department (ARD) commissioned four country case studies (in Burkina Faso, Kenya, Brazil and Sri Lanka) and organized four regional workshops in 2004 and 2005. This report is based on the findings of these studies and workshops as well as international experience evidenced in the literature.

The studies showed that financial cooperatives are significant providers of financial services in rural areas, in both developed and developing countries. In the successful cases, this success is based on a tried and tested institutional and business model: democratic, bottom-up, autonomous, self-financing, and savings-based. Vertical integration has brought strength and efficiency to most financial cooperative sectors.

Many financial cooperative sectors have driven and financed their own growth. In some countries, however, governments and donors have intervened to promote, often using inappropriate instruments, and to control. In other cases, there has been heavy influence from political actors. There has also been a history of government and donor interventions – largely unsuccessful and sometimes fatal to the concerned financial cooperative – of using these institutions to channel funding to specific target groups, without regard to the sustainability of the financial institution in the long run. Therefore, wherever possible, the sector should depend on itself for its own institutional strengthening and growth.

The report concludes that there is enormous growth potential for financial cooperatives in rural areas in many countries. However, expanding outreach spells risk, and sectors have to build their growth strategies on solid governance structures and a sound financial situation. Extending outreach has to be driven by the membership. External agencies committed to rural development and poverty reduction may explore ways to help the financial cooperatives in developing countries to grow and increase their outreach, particularly to the rural poor. Developing, motivating, and training the human resources needed for good internal governance is a massive challenge. Networks can play a big role in this and it is one area where public or external support can certainly make a contribution.

Other steps for development agencies might be to link to the international financial cooperative sector to identify particular windows of opportunity. Based on this, partnerships could be set up to carry out regional and country analyses to pinpoint the areas for potential growth and the likely catalysts. Where external support is indicated, areas and the catalytic inputs could be identified in country action plans, and country agreements for sustained partnerships could be set up. In all this, mechanisms for coordination between external partners are critical.

For financial cooperatives to function as sustainable institutions, governments need to provide an enabling environment, not exercise excessive control that restricts growth and consolidation, and not use them as channels to provide subsidized credit. A sound legal framework is essential, which gives clarity on the powers and duties of financial cooperatives as member-owned financial institutions, on governance and supervisory responsibilities, and on protection of depositors. Regulations need to address the unique nature of financial cooperatives, as both financial institutions and cooperatives, and adequate supervision needs to be put in place.

This report should be very useful for the staff and management of international development agencies, policy makers and regulators in developing countries, and the financial cooperative sector and other rural finance practitioners both in developing countries and worldwide.