WOCCU: Stimulating Agricultural Lending Through Credit Unions and Savings Groups
In the last but not least of a series of events to promote knowledge sharing on agricultural finance on Agrilinks this February, the USAID Bureau for Food Security invited the World Council of Credit Unions (WOCCU) to speak about their work to advance agricultural lending across their member network, which covers an impressive 68,000 credit unions in 109 countries worldwide.
The leading trade association of its kind, WOCCU promotes self-sustainable development of credit unions and other financial cooperatives around the world to empower people through access to high-quality, affordable financial services. Its technical assistance programs introduce new tools and technologies to strengthen credit unions' financial performance and to increase their outreach.
Jean Thiboutot, Director of the World Council's Cooperative Development Program, spoke specifically about a USAID-funded program entitled Improving Small Rural Producers' Income through Integrated Access to Financial Services and Agricultural Markets. In phase one of this five-year project, World Council worked with credit unions in Guatemala and Mexico to develop an innovative toolbox that addressed the financial needs and market barriers of rural producers. Now in the second phase, this model is being applied in Kenya.
MICOOPE: Financing for Guatemala’s Farmers
In Guatemala, WOCCU worked with MICOOPE, a cooperative model serving 17 million members through a multi-pronged service delivery model that included point of sale terminals near markets, ATM machines and independent agents operating in privately run shops. MICOOPE serves 46 percent women, and 47 percent of their members are under 35 years old, a notable demographic given the large numbers of unbanked women and youth.
The WOCCU project aimed to improve access to finance, introduce new technology and distribution channels, and provide technical assistance to farmers and credit union staff to increase and improve agricultural lending through the credit union network. MICOOPE already had a considerable loan portfolio in housing and businesses but needed help to extend its reach into rural communities with agricultural loans, which weren’t even 1 percent of their portfolio.
With the help of the project, MICOOPE has now provided 20,000 loans in 21 different crops through a methodology introduced by WOCCU to include a extensive information gathering phase, loan application process and loan servicing and follow up, including potentially providing bridge loans for the lean season. MICOOPE boasts a lower default rate than ever, in large part because they also made crop insurance integral to their financing model. A guarantee fund similar to the US Development Credit Authority also helped to minimize the risk MICOOPE was taking on. MICOOPE’s loans serve farms of all sizes, with loans ranging from microloans of $400 for inputs to $15,000 for land, equipment or other large-scale investments.
KUSCCO: Funding Farming through Kenya’s Savings Groups
In Kenya, the WOCCU model was applied to credit unions, which operate under similar principles but on a smaller scale, through KUSCCO, a network of 2,000 SACCOs.
KUSCCO provides loans to regulated credit union which apply the agricultural lending methodology and disbursed loans through ATMs and mobile money applications, notably the mPESA electronic payment system, and focused on “character-based lending,” which relies on the borrower’s character and cash flow to determine creditworthiness more so than assets and credit history.
With the help of WOCCU’s methodology, modified from the Guatemalan model to adapt to Kenyan context, KUSCCO has helped farmers diversify from standard cash crops like coffee and tea into specialty crops such as Irish potatoes, thereby integrating into supply chains of local and regional businesses, such as a popular Kenyan French fry chain.
In closing, Thiboutot cautioned that agricultural lending, done wrong, can have a host of negative consequences, such as make poor farmers poorer and bankrupt credit unions as well as damage the credit worthiness of small producers and the reputation of WOCCU as an effective practitioner of rural and agricultural finance.
He also outlined “ten commandments” for success:
1. Treat borrowing households as a repayment unit instead of linking repayment to only loan use.
2. Character-based lending technology combined with technical criteria to select borrowers, set loan terms and enforce repayment.
3. Savings mechanisms are provided to help borrowers manage resources.
4. Loan Portfolio Risk is highly diversified.
5. Loan terms and conditions are adjusted to accommodate cyclical household cash flows and investments.
6. Contractual arrangements reduce price risks and help guarantee payment.
7. Financial services are delivered on existing institutional infrastructure or using improved technology (mobile banking, smart cards, ATMs, cell phones).
8. Member-based organizations may be viable in remote areas (volunteers, farmer associations).
9. Insurance do protect against some production risks.
10. Agricultural microfinance must be insulated from political interference (debt pardoning, interest rate subsidies, poor repayment).
While no lender can serve all financing needs, the program demonstrates an effective model for reaching the small but growing farm operation and help them make sound investments to scale up and increase their incomes.
To learn more, download the presentation deck from the righthand sidebar, or read Thiboutot’s blog on New Approaches To Smallholder Lending.