ruraldevelopment ica 2016

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Rural development and rural finance: the role of financial services cooperatives in the

Latin America region

Authors:

Jorge Coque ([email protected])University of Oviedo

Department of Business ManagementC/ Wifredo Ricart, s/n33203 GijónSpain

Inmaculada Buendía-Martínez ([email protected])University of Castilla La ManchaAvenida de Los Alfares, 44.16071 Cuenca.Spain

Theme: TOPIC 15 – STAGE 4 - MACRO

Key Words: rural development; financial systems; financial cooperatives; Latin America;public policies, rural finance.

Abstract:Over recent decades rural finance development has become a major topic in political agendasacross the globe. This is mainly due to the positive correlation between rural finance and ruraldevelopment; not only to fight against poverty but also for generating economic growth. Thenew rural finance paradigm emphasises finance as a way to expand outreach to rural areas andit requires specific government initiatives.In the case of Latin America, where the 22% of its population lives in rural areas, the ruraldevelopment approach based on the new rurality paradigm requires innovative ways ofthinking about development from a multi-sectoral and diversified perspective in order to meetthe populations’ needs, facilitate agricultural modernization, and provide viable businessalternatives. Reaching these objectives entails efficient rural financial markets. Despite thesubstantial financial deregulation in larger financial systems, the market failure remainspersistent in the region. This work proposes a study of rural finance policy initiatives inseveral Latin American countries in order to position cooperatives as an effective andalternative financial service provider.


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Rural development and rural finance: the role of financial services cooperatives in the

Latin America region

1. INTRODUCTION

WHAT?: Rural development: fighting against poverty + economic growth.

HOW?: New rurality paradigm = multi-sectorial perspective: government initiatives +efficient rural financial markets→ viable/modern business alternatives + populations’ needs.

WHERE?: Latin America: 22% of population in rural areas / financial deregulation → largersystems but persistent financial market failure: Another way, closer to people and betterhelped by public sector is required?

WHITH WHOM?: Financial cooperatives as one of the 2 main historical coops branches inthe region (from European inmigrants / Catholic Church / US).

THIS WORK: Rural finance policy initiatives in 3 Latin American countries ↔ Cancooperatives be effective/alternative financial providers?

2. RURAL DEVELOPMENT AND FINANCIAL COOPERATIVES

2.1. COOPERATIVISM IN RURAL DEVELOPMENT1

RURAL AREAS:• Low population densidity.•

Close social relationships.• Diverse economic sectors↔ Agricultural and livestock activities inform the rest.• Open spaces: flows with urban areas in both ways (beyond regional and national

scales).

PROBLEMS IN RURAL AREAS: DERURALIZATION:• Poor innovation skills and tools→ Labour productivity getting reduced.• Limited public services and infrastructures for business development.• Job opportunities decreasing.• Population decreasing and ageing.

RURAL DEVELOPMENT AS TERRITORIAL DEVELOPMENT (better than localdevelopment):• Micro (local resources and needs) / Macro (networking) levels.• Short term / long term results.• Endogenous (from below: identity) / Exogenous (from above: innovation)

stakeholders. Risks at the extremes: localism↔ identity loss + dependence.• Economic (core: people entrepreneurship) / Social (covering: people needs) / Public

(local/regional/national government = facilitator) initiatives.

COOPERATIVES AS RURAL DEVELOPMENT AGENTS:

•

Voluntary and Autonomy principles→ Collective initiatives from LOCAL NEEDS → Mobilization of LOCAL RESOURCES→ IDENTITY.

1 Coque (2005)


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• ECONOMIC and SOCIAL entities→ Participative entities (several principles)→ Organisational flexibility (facilitated by Education and Democracy principles)→ INNOVATION.

• Intercooperation and Concern for community principles→ NETWORKING→ Economic externalities & fixing resources to the territory.

ADVISABLE WAYS TO PROMOTE RURAL DEVELOPMENT BY MEANS

COOPERATIVES UNDER AN APPROACH OF TERRITORIAL DEVELOPMENT:• Combining stakeholders:

• From self-promotion, then external support.• Intercooperation from local context and other social economy agents.

• Avoiding paternalism / Encouraging entrepreneurship:• External support conditioned by viability.• Prominence of cooperative movement.

• Analysing and designing integrally:• Value-added chain approach→ New links to the territory.• Combining business and social issues.• Linking rural areas with urban areas.•

Combining different tools / Starting by awareness and training.• Long term perspective: self-sustainable development, life-cycle analysis• Acting on the environment: negotiations with beneficiary collectives,

institutions…

2.2. RURAL FINANCE

Rural finance refers to financial services offered and used in rural areas by people of allincome levels.

PROBLEMS IN RURAL FINANCIAL MARKETS:1. Combination of high levels of production and price risk and limited mitigationtechniques.

2. Imperfect or asymmetric information. Information is costly to acquire and transmit,yet it is vital in assessing and managing risk. Good information can serve as a partialsubstitute for lack of real collateral and a means to prevent moral hazard. However, inrural settings the absence of formal credit histories, the absence of a tradition of recordkeeping, and the heterogeneity of production conditions complicate creditworthinessevaluations and loan/insurance monitoring activities.

3. High transaction costs stemming from peculiarities in the physical and institutionalsetting. Rural areas are characterized by high levels of poverty, spatial dispersion,

marked seasonality of income, weak legal and contract enforcement frameworks, poorphysical infrastructures, and low levels of schooling. These features increasetransaction costs for both intermediaries and clients. Once transaction costs pass athreshold, they stifle intermediation.

CONSEQUENCES OF RURAL FINANCIAL PROBLEMS: exclusion of rural people in thefinancial markets with economics and social impacts:

• Reducing investment in the human capital of their children perpetuating the cycle ofpoverty.

• Increasing vulnerability due to external shocks, limiting the development ofeconomics activities with positive returns as families become more risk averse.

EVOLVING PARADIGMNS OF RURAL FINANCE:1. OLD RURAL FINANCE PARADIGM:


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• 1960s-1970s: focus on promoting agricultural development.• Confronted with the need to address the special cost and risk related to rural finance so

that formal institutions could enter the market, governments and donors decided totake action. Five types of intervention: lending requirements and quotas on banks andother financial institutions; refinancing schemes; loans at preferential interest rates;credit guarantee; and targeted lending by development finance institutions.

2. MICROFINANCE REVOLUTION:

•

Late 1970s.• Appearance of NGOs and credit unions.• Market targeted: the poor.• Based upon small, short-term loans with a gradually expanding credit line, depending

on the compliance of borrowers.3. NEW EMERGING PARADIGM:• 1980s-1990s• Finance as a way to expand outreach to rural areas instead of treating it as a policy

tool targeted to specific markets.• Focusing on market development focus on creating efficient financial markets.• Policies are oriented to establishing a suitable environment for the development of

rural finance.

For over a century citizens-consumers-entrepreneurs, unsatisfied by the available bankingservices, have been creating financial institutions to satisfy their own needs. Among thesealternative financial service providers we can find financial services cooperatives (FSC). Lackof accessibility to financial services was the main reason for their creation a century ago.FSCs dynamics, based on specific values and principles and their structural integration of thecommunity interest, has allowed them to meet the needs of social groups, communities, andregions improperly served by conventional banking institutions (Buendía Martínez et al.,2006). If we add to these characteristics the higher stability during financial crisis versuscommercial banking institutions (Crear, 2009; Groeneveld, 2011) we can understand theresurgence of the cooperative enterprises. FSC help to increase the diversity of the bankingsector, both in terms of business models as well as in terms of ownership structure, thuscontributing in a significant manner to improving the financial system (Ayadi et al., 2010).

More than a century has passed since the creation of the first FSC which largely contributedto the accessibility to savings and credit for consumers, farmers, craftsmen, and SME in thecountries where they prospered. The representation model of institutional forms for activityfinancing (see Figure 1) from Malo & Tremblay (2004) permit us to place FSC in the marketfinancial activities.

Historically, FSCs have been a form of social banking used by individuals and micro-enterprises, more or less marginalized, that must mobilize resources to reorganize theiractivities using only market organizations. In the majority of developed countries, FSC havethe same banking statuses as their competitors. The intensity of the competition in profitableniches limit their capacity to play their fundamental role of reintegrating in the market peopleand/or SMEs excluded by economic and societal transformations. Additionally, thetransformation of FSCs in universal banking institution implies a diversification frommembership which hinders initiatives that require a strong solidarity of their constituents.Despite this, FSC have succeeded in maintaining their distinctive characteristics: a strongorientation towards their domestic market, a large margin for strategic intervention affordedto local decision-makers and greater social and geographic accessibility for their members

which implies a certain equalization favoring their establishments in the more remote regions(Malo & Tremblay, 2004).


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Figure 1. Representation model of the institutional forms for activity financing

Source: Malo & Tremblay, 2004

Additionally, a review of state intervention mechanisms and the growing number of privatefoundations shows they have undergone a multiplication of associations. Some of them have asimilar composition, rules, and activities to those of cooperatives. In the majority of the cases,these associations emerge at the heart of solidarity movements, characterized by a strongcapacity of voluntary engagement and the financial support from third parties. FSC becomefinancial partners taking advantage of their social capital of proximity, highlight that this

option carry out that which they have difficulty to achieve in their banking dynamics.

Although the contribution of FSC in maintaining access to financial services is recognized(European Association of Co-operative Banks, 2005; HM Treasury, 1999; Jones, 2007;Lewis, 1982; Mayo & Mullineaux, 2001; Mckillop, 2011), FCS possesses a clear ability tostimulate local development in both urban and rural areas not only with their financialresources but also with their philosophy and organisational expertise (McCarthy, Briscoe &Ward, 1999:8). In this sense, the Secretary-General of the United Nations, in his report to the47th session of the General Assembly (United Nations, 1992), recognised that FSCs have astrong potential for mobilizing local savings and providing credit to members, and areparticularly important in apparently capital-scarce conditions, thereby encouraging thrift andentrepreneurial activity and hence stimulating local multipliers.

From a financial point of view, Douthwaite (1996) argues that conventional banks reduce thepurchasing power in a community since any money invested leaves the community of originand is employed elsewhere. Furthermore, once money leaves the community it will onlyreturn at interest rates determined by the world market. Credit unions, on the other hand,retain local money within the community by encouraging the pooling of local savings forlocal lending. Loans are made to members for personal or business development purposes.However, lending to business in general has been weak. McCarthy, Briscoe, Ward (1999)estimate that FCSs lend less than 10% of their total lending to local enterprises. FCSs have

emphasised personal lending due to a legislative requirement to lend to individual membersalthough they are permitted to lend to individuals for business purposes. There is enormousscope for FCSs to become more involved in business lending particularly as many are under-lent.


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Gormley (1993) asserts that by assisting in local development, FCSs can actually reduce localmigration and emigration, thereby sustaining populations and the demographic health of localcommunities. From an organisational perspective, one of the most valuable contributionsFCSs make to local development in their communities is demonstrating the principle of co-operation. Generally speaking, involvement in local development assists FCSs in extendingtheir vision of social justice both to the individual members and to the larger community in

which they work and reside, as directed by their operating principles. FCSs are a means bywhich a community’s financial resources in particular can be mobilised for the mutual benefitof the community as a whole (Buendía et al., 2001).

3. MULTI-CASE STUDY

ACCESS TO FINANCIAL SERVICES IN LATIN AMERICA (ROA, 2015):• Since the end of the 18th and the beginning of the 19th century financial institutions of

a social nature began to emerge with the ability to promote finance access for savingand credit to low income individuals and medium-size firms (SME).

•

80s-90s: More financial entities began to appear in the region: microfinanceinstitutions and NGOs. Cooperatives, microfinance institutions and NGOs are called“popular finances”

• In 2000s the priority in the public agendas of the national government andinternational bodies. Reasons (Roa, 2015: 4): a) the appearance of a series of studiesdemonstrating the high level of correlation between poverty and exclusion from theformal financial sector; b) some types of financial exclusion came because a source ofinstability; c) commercial banks have stated to see it as a niche for expanding theirbusiness.

WHY THESE THREE CONTRIES?•

Different levels of cooperative development (Coque, 2002):1. Colombia: consolidated cooperativism but low present expansion.2. Ecuador: latent cooperativism.3. Peru: regressed cooperativism.

• Clear Andean countries.• Mutually related economies.• Different levels of financial inclusion.• Different policies on rural finance promotion and FSC promotion.• Different roles of FSC.

GENERAL DATA:Number of

entities

Assets(millions

USD)

Participationin the market

%

Exclusiveoperations

with members Types of

FSC 1998 2014 1998 2014 1998 2014 Saving Credit

PR

% Multiacti-

vity

Creditunions 451 184 1,176 4,200 2.5 2.2 Yes Yes Yes

Financialcooperatives

44 5 934 946 2.0 0.5 No No NoColombia

Cooperativebanks

3 2 1,707 1,518 3.6 0.8 No No

10.7

No

Ecuador

Credit

unions 26 908 75 8,061 0.8 17.7 No No 66.4 PartiallyPerú

Creditunions

198 163 244 2,763 1.2 2.5 Yes Yes 8.5 No


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MEASURING FINANCIAL INCLUSION CRITERIA:• Access: number of access points per 10000 adults at a national level segmented by

type and relevant administrative unit.• Usage: percentage of adults with at least one type of regulated deposit account; and

percentage of adults with at least one type of regulated credit account• Quality: regulators/supervisors are responsible for mandates: consumer protection,

financial literacy, regulation of microfinance, savings promotion, SME finance

promotion; and rural finance promotion

MEASURING FINANCIAL INCLUSION: ACCESS AND USAGEOutreach: branches per

100.000 adultsDeposit: accountsper 1.000 adults

Loans: accountsper 1.000 adults

Total Urban RuralCommercial banks

Colombia 1267,44 469,75 14,30 65% 35%Ecuador 569,24 300,64 1,61 --- ---Peru 783 317,22 7,31 82,21% 17,79%

CooperativesColombia 27,34 24,24 0,78 60% 40%Ecuador 372,06 48,15 0,36 --- ---Peru --- 25,43 1,46 46,5% 53,5%

Specialized state financial institutionsColombia --- --- 0,01 100% 0%Ecuador 100,88 45,65 1,03 --- ---Peru 242,89 24,02 2,25 23,11% 76,89%

Microfinance institutionsColombia --- --- --- --- ---Ecuador --- --- --- --- ---

Peru 84,88 75,04 3,78 41,53% 58,47%Source: CGAP & The World Bank (2010: 56-63)

Nonbanks are more focused on rural areas.

MEASURING FINANCIAL INCLUSION: QUALITYAspects under the purviewof the financial regulator

Colombia Ecuador Peru

Consumer protection A+ A+ A+Financial capacity A+ A+ A+Regulation of microfinance A+ A A+Promoting savings --- --- A+Promoting SME access tofinance

--- --- A+

Promoting access in ruralareas

--- --- A+

A: agency is responsible; A+: agency is responsible and it has a dedicated team/unitSource: CGAP & The World Bank, 2010, pp. 67-69

Promoting financial access in rural areas is a topic for the regulatory authorities in Peru.


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4. CONCLUSIONS

Public sector statements and macroeconomic figures draw a nice scene on rural developmentpolicies by means FSC that would have been improving over the first decade and a half of thiscentury. And, apparentely, the ranking at the end of last century (Colombia #1, Ecuador # 2,Peru # 3) would have been changed.But, on one extreme, in Colombia and Peru the numbers of FSC drop while assets increase.

This proves a concentration process that could be putting at risk their participative featureand, consequentely, the identification with their members that fix the entities to their rualareas. Are FSC in these countries being left to their fate from a neoliberal approach that putthem al the same level that commercial entities, forgetting their social side to only payingattention to economic issues?

On the other extreme, the amazing rise of both entities (34 times) and assets (107 times) inEcuador reveals artificial processes of promotion from above that would be obviating the life-cycle analysis, wich demands respect to the natural development pace of collectiveentrepreneurship.

In spite of all that, small iniatitives either formal or informal, many of then with a cooperativelogic, are setting up in rural areas and reach to cover social financing needs where otherentities avoid to go.

To take advantage of natural FSC strenghs, the same as the rest of the social economymovement, recovering the approach of rural development understood as territorialdevelopment is necessary and urgent to balance micro and macro levels, long and short terms,endogenous and exogenous factors, social and economic issues.

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