USAID/Guinea: CLUSA Credit Intermediation Successful in Maritime Guinea

DECEMBER 24, 2003

CLUSA Credit Intermediation Successful in Maritime Guinea

With an accent on good governance and feasible business plans, USAID-sponsored non-governmental organization CLUSA is successfully connecting rural economic cooperatives to formal banking institutions in Guinea. The bottom line? Healthy economic gains for rural clients and a loan repayment rate of 100 percent.

In a small village outside of Coyah in Guinea, the "Yassiriba" Rural Economic Cooperative (REA) of Madinagbe is singing and clapping at the end of their meeting -- thanks to a USAID-sponsored Credit Intermediary Service (CIS) designed and implemented by NGO CLUSA, the women's cooperative has applied for and successfully managed their second loan from a local bank. By leveraging $125 to take out a $500 loan to buy and commercialize palm oil, they were able to make $432 in net profits.

The co-op's short-term goal is to continue the palm oil marketing activity and use the profits to build a community storage area for agricultural goods. Building a second school in the community is a long-term goal. Says Maferin Touré, REA President, "We liked the help we were given in getting the loan, and the advice we were given helped us meet our objectives."

women clapping in praise of a USAID intervention

'We liked the help we were given in getting the loan, and the advice we were given helped us meet our economic objectives.' -- Maferin Touré, president of the 'Yassiriba' Rural Economic Cooperative

Credit intermediation in Maritime Guinea has connected 25 reliable, democratically-run rural economic cooperatives with formal banking institutions -- two parties that traditionally have not seen a common interest in working together -- encouraging transparency and trust on both sides, and allowing reliable rural clients to successfully manage a loan for the first time.

The CIS loan portfolio is worth $35,150, with an average loan amount of $600. Twelve loans totaling $13,376 including interest have been reimbursed to date, with a global reimbursement rate of 100 percent. The success of the program is building a bridge of trust between urban financial institutions and rural clients in Guinea.

To accomplish this end, the program puts an accent on good governance and transparency by using selection criteria that insist upon democratic practices in the management of rural co-ops. Good business plans are also essential--by reinforcing the capacity of the co-ops to analyze their financial options, run their businesses efficiently, and understand the importance of literacy for business management and organizational transparence, the CIS empowers its clients to make good decisions themselves, with economic benefits.

Story and photos by Laura Lartigue

USAID's Credit Intermediary Service -- Lessons Learned:

Rural clients are capable of analyzing the different loan options if the loan conditions and terms are clearly explained in their local language.

Clients value the non-financial factors associated with the choice of Financial Institution partner--considerations such as the location, or the conditions or services offered by the FI often weigh into their decision to enter into a loan agreement.

When the clients themselves determine and negotiate the loan duration and reimbursement schedule with the Financial Institutions, they invest in respecting these engagements by actively participating in the management of the economic activities.

The loan follow-up, consulting, and visits are effective means of reinforcing client's financial management skills while providing close monitoring, which also limits risk for the Financial Institutions.

Assistance in the loan application process must begin three to nine months before the projected start of the economic activity for first-time clients. This gives clients time to reallocate resources according to their economic objectives.

Challenges

The CIS is faced with managing growth while maintaining the quality of its services. As more Organizations assisted by the Program become eligible candidates for credit intermediation, the CIS field staff will need to become more efficient in order to meet their growing financial needs.

Cooperative Unions must be targeted to increase outreach and to help them take increasingly important roles in providing their members with access to lower cost production inputs and more profitable market opportunities.

The CIS must continue to be viewed as a business service; although it enjoys credibility as part of a USAID-sponsored program, it must takes steps toward autonomy and institutionalization.

The CIS must continue to develop and diversify the types of services it provides, not only to the rural clients but also to the Financial Institutions. Although risks associated with agricultural credit can be reduced through effective training and professional follow-up services, factors such as weather conditions can play havoc on even the best-designed rural finance schemes. The need for hedging instruments like insurance, options and futures contracts may be valuable financial products for both the FIs and the rural clients. Protecting both the farmers and the FIs will increase the likelihood of a sustainable partnership.

The definitive indicator of the CIS success will be reducing dependence on guarantee funds. Early positive results have helped the Financial Institutions see the potential of the ICS services--one FI partner has already agreed to a reduction in the 100% guarantee provision once certain benchmarks are met.

By Ben Lentz, CLUSA/Guinea

Introduction to the Guinean Context

With a history of shipwrecked microfinance projects in Guinea, where do progressive, democratically-run rural cooperatives look when they need a loan to advance their business plan? This was the question that CLUSA faced when the cooperatives they had been working with for years in Maritime Guinea needed external financing to scale up their economic activities.

photo of the main road running through Magdinagbe village, in Maritime Guinea

Madinagbe village, Coyah area, in Maritime Guinea.

Guinea has an agriculturally based economy. Common economic activities include the production, storage and marketing of agricultural products like rice, bananas, palm oil, salt, chili peppers, honey, and other natural food products. These activities, which require working capital and investment financing, are typically not targeted activities for credit projects. How could CLUSA link their trustworthy, long-time rural clients with formal financial institutions?

Many obstacles had to be to overcome. Urban-based formal banks in Guinea have long had a mistrust of rural clients in general, whom they view as unprofitable, unknowledgeable, unreliable or simply unable to manage their economic activities in a professional manner. Such beliefs make financial institutions all the more reticent to lend to the rural areas. Although a number of micro-finance institutions have done well in Guinea, including PRIDE/Finance, sponsored by USAID; many other micro-finance schemes have failed, and most tend to serve only clients in urban and peri-urban areas.

Reciprocally, rural dwellers in Guinea have watched one savings scheme after another go bankrupt, and many have even lost their life's savings through poor management or mishandling of funds on the part of financial institutions. Access to formal Financial Institutions and the cumbersome loan approval process are another roadblock for rural clients. Additionally, donors have grown leery of sponsoring of what they perceive to be the same old schemes whose goals are rural poverty alleviation but with little consideration given for either long- term sustainability or client empowerment.

The Solution -- a Credit Intermediary Service

Within this problematic context, CLUSA's clients asked for help in finding a solution. In 1997, CLUSA facilitated financing of a rice de-huller for one of its clients. Once thought to be impossible, the collective management of a motorized dehuller became a successful reality due to good business decisions made by the democratically run rural cooperative, with good counsel along the way from CLUSA. Through the process, CLUSA was convinced that they had stumbled upon something unique in Guinea. Although the loan facilitation process was not easy, CLUSA was able to learn from the experience, and the idea of doing credit intermediation to promote economic gains through good governance was given serious consideration.

CLUSA's overall goal is to help Rural Group Enterprises attain autonomy and self-sufficiency. The solution to their client's credit needs would have to built on a few good business principles: (1) credit interest is a business expense which needs to be reimbursed along with the capital; (2) interest rates will be the prevailing market rates; and (3) financing will come from viable commercial sources.

members of a rural cooperative who manage a rice dehuller as one of their economic activities

Helping a rural coop finance a rice dehuller was CLUSA's first experience with credit intermediation--and it worked.

CIS Accomplishments to Date

As of September 2003, the USAID sponsored ICS has facilitated 32 loan requests from 25 clients. All were approved by financial institutions -- 18 through The Islamic Bank of Guinea (BIG), and 14 through PRIDE/Finance. Seven of the initial clients have already received a second loan. The loan portfolio is worth $35,150, with an average loan amount of $600.00. Twelve loans worth a total of $13,376 have been reimbursed to date, with a global reimbursement rate of 100%.

Additionally, over $9,640 has been mobilized by 25 clients as contributions to the financing of their economic activities. Over 841 women have participated in the decision-making process relating to the external financing of the client's economic activities. Sixteen clients have opened 24 bank accounts.

Most importantly, clients are benefiting economically through the process -- increasing the net worth of their cooperatives by an average of 31% per loan cycle. Finally, many ICS clients have demanded and paid for technical services and invested in acquiring appropriate technologies in order to reduce the non-systematic risk related to their activities.

The Niger Model Adapted to the Guinean Context

The model originally used by CLUSA/Guinea for the Credit Intermediary Service (CIS), or "Sabui Fanyi" ("good intermediary" in Soussou) as it is now called by Guinean clients, is based on a similar CIS called KOKARI developed in 1993 by CLUSA in Niger that is now independently managed by a Nigerian cooperative as a professional CIS advocating a demand-driven approach to rural credit. Its agents offer credit analysis and management training as well as financial consulting services to their clients. Most importantly, the Nigerian CIS sells its expertise in the rural credit market and acts as a bridge between borrowers and lenders.

Using the Nigerian model as a springboard, the CIS model developed for the Guinean context advocates a relationship-building process between rural clients and the urban-based FIs, with transactions carried out directly between the two parties. Loan disbursements are made directly to the clients, and repayments are made directly to the bank. The only money handled by the CIS is the client's payment of the Loan and Consulting Service Fees.

The problem solving/consulting approach of follow-up visits during the loan cycle is key to making the process work. If executed efficiently, consulting through the loan cycle is a low-cost, effective mechanism to ensure loan reimbursements by the rural clients.

Getting Financial Institutions on Board

The service the CIS offers to the FIs include proximity, financial management training and appropriate consulting services for new rural clients, as well as loan monitoring and oversight. As clients face constraints in the implementation of their self-identified income generating, activities, the intermediary service acts as a consultant assisting the group to define, structure and resolve their difficulties. All business decisions, however, are made by the clients.

Trust had to be built between rural clients and the banks. Clients also said the loan procedure was difficult to master, especially at first...but the benefits in the end made it well worth it.

This was explained to six Guinean FIs, who were approached about their interest in working with the CIS to finance selected rural clients (See sidebar on Client Selection Criteria). Four FIs expressed interest, and in the end two agreed to the partnership -- the BIG, and PRIDE/Finance. These two organizations knew the success CLUSA's program but required CLUSA provide a guarantee fund to cover their potential losses. A guarantee fund was crucial -- without it, even these two financial institutions would not have entered the domain of rural finance.

Developing initial partnerships with Financial Institutions was difficult because of a recent failure of a major credit scheme targeting rural producer groups with an NGO acting as intermediary. Trust was low and would have to be built through the proven successes of the project's clients.

Eligibility for Credit Intermediation Tied to Good Governance

The CIS is unique in that it has its roots within a Good Governance and Democracy Program. Client eligibility is based on proven adoption of good governance and good business practices. The service provides clients with options or choices for their financing needs, and empowers them through training to make decisions that best meet their organizations' needs.

Selection Criteria for CIS clients:

Must be an active and mature client of CLUSA/Guinea

Must possess, as members, dynamic internal resource personnel capable of acquiring and transferring skills

Have a positive credit management history whether through internal or external sources

Proven capacity for internal resource mobilization

Have a well functioning and democratically managed organization

Possess legal documents like internal rules and regulations, internal statutes, and official recognition

Possess and maintain books for record keeping and other management tools

A critical mass of members are literate

Proven capacity to manage the economic activities profitably and according to cooperative principles

FIs differ in their terms of agreement. For example, PRIDE/Finance responds to the needs of the smaller loan requests (minimum of $250) whereas BIG set the minimum at $500. BIG on the other hand offers the clients the opportunity to open a Bank Account whereas PRIDE does not. PRIDE has branch offices in semi-urban areas within CLUSA's intervention zone, providing relative proximity for some clients.

Conversely, no two Rural Group Enterprises (RGEs) are alike, and each RGE needs to choose an financial institution that meets their specific financial and organizational needs. The ICS provides the rural clients with information on the loan terms and conditions of each FI, as well as the training necessary to analyze the different options, and then lets the client choose.

The "Yassiriba" cooperative of Madinagbé village in Forécariah is made up of 12 women and two men is a good example of a RGE that made it through the CLUSA client selection process. By mobilizing $125, they obtained a loan of $500 to buy and market palm oil in bulk. The cooperative implemented their economic activity and have successfully completed their loan cycle. The $432 earned in benefits from the activity will either be reinvested, or will contribute to community development priorities.

Says Maferin Touré, RGE President, “We liked the help we were given in getting the loan, and the advice we were given helped us meet our objectives.” The Yassiriba cooperative took out their first loan through PRIDE/Finance. They switched to BIG for their second loan because BIG offered the possibility of opening a savings account, and the members felt that the FI would be a secure place to keep their money.

It is interesting to note that 33% of the loan applicants in 2003 chose their FI partner for reasons other than direct financial costs (interest rate, loan fees, etc.). Reasons include the proximity of the applicant to the Financial Institution, access to other financial services such as bank accounts, and the Financial Institution's reputation (the clients demand quality service.)

The CIS continues to fine-tune its intermediation methodology; working with mature rural clients who have received training in democratic governance within their organizations, and who already have a positive history of resource mobilization. By clearly explaining the loan criteria to its clients, the CIS has seen many RGE develop and carry out action plans in order to achieve the necessary standards for loan facilitation. With the good governance criteria already met, and with a feasible business plan in hand, these RGE stack the cards in their favor to turn a profit through successful management of a loan.

Loan Durations in Sync with Agricultural Cycles

One aspect requiring negotiation with the Financial Institutions, and a lot of foresight by the rural clients, was the fixing of the timeline for loan reimbursement to fit within each targeted activity's business cycle, and the capacity of the RGE to generate needed cash flow to support the loan payments. The transaction period is determined through market studies and experience, while the loan period is determined through the development and analysis of a cash flow chart.

Lanciné Condé, Director of CLUSA's Credit Intermediation Service in Guinea, on adapting loans to agricultural cycles:

"What we were able to obtain from the banks was having them depart from the classic predefined loan duration. When you're dealing with agricultural cycles in different geographical and ecological zones, each case differs and has its own timeline. The loan duration is determined by the type of economic activity, and defined as starting when the client needs money and ending when the client's activity generates income.

"For example, we have a RGE in the Kindia area that obtained a loan for $2,450 to plant 1,600 banana plants on one hectare of land. They asked to receive the loan after they had done the physical labor of preparing the field and digging the holes. They didn't need the money to do the physical labor, and they would have paid interest for no good reason. They received their loan at planting. That's when they bought all of their inputs, including the banana trees. They negotiated their reimbursement date one month after their first anticipated banana harvest."

John Siodlarz, Cooperative Training and Credit Advisor for CLUSA:

"We had another case in which cooperative had a similar project with bananas, but the agricultural conditions were not the same -- the first was in a valley and the other was on a hillside. Since the altitude and soil conditions were different, the maturation period of the fruit was dissimilar. Even though the timing on the loan periods differed, both clients received loans from the same financial institution, no questions asked. To me that shows a certain level of trust has already been established.

"The idea behind this flexibility is to allow clients, through the integration of learned management tools, to determine the best loan duration for their particular RGE through benefit/risk analysis. This participative approach was adopted because rural clients expressed two major concerns: (1) the timeliness of the loan disbursements needed to correspond to their needs and not a predetermined default date, and (2) the reimbursement schedule should correspond to the timing of the actual cash-generating portion of the activity.

"If rice were being commercialized, for example, reimbursement would be timed to fall just after the period determined to be advantageous for the sale of rice following the harvest cycle.

"These two factors correlate with the basic principles of credit. The CIS suggested to the financial institutions that they allow the rural clients this built-in flexibility in order to learn, progressively and mutually, which loan products would best serve them. As a condition for their acceptance, the banks required the clients to respect the reimbursement schedule that they themselves had set, including the payment of interest even if a loan were reimbursed earlier than originally scheduled.

"In this way, CIS clients are learning the difficult task of predicting accurately future market conditions. What will the prices be like at harvest, or five months later? When will prices peak? To mitigate the risks of price fluctuations, and limit the possibility of nonexistent markets, the CIS collaborates with CLUSA/Guinea's Marketing Advisor to assist clients in developing forward contracts. This experience has met with both success and frustration. Through this process, however, the rural clients in Guinea are gaining valuable experience, and are improving upon their own business practices."

Technical Article by Laura Lartigue, with Ben Lentz and John Siodlarz, CLUSA/Guinea.