Sustainable Banking with the Poor - Case Studies in Microfinance : Burkina Faso - Le Projet de Promotion du Petit Credit Rural : PPPCR

SEcr0 REsouRc~AL & IT ·'-.. CENTER . FEB 2 3 2000 SUSTAINABLE~ANKING with the POOR Case Studies in Microfinance BURKINA FASO Le projet de promotion du petit credit rural - PPPCR August 1997 The World Bank  Sustainable Banking with the Poor (SBP) is a collaborative effort of ASTHR Gender and Poverty Team and AGRPW Rural Finance at the World Bank, funded by the World Bank, the Royal Ministry of Foreign Affairs of Norway, the Swiss Agency for Development and Cooperation* (SOC), and the Ford Foundation. The study aims at improving the ability of donors, governments and practitioners to design and implement policies and programs to build sustainable financial institutions that effectively reach the poor. The SBP task managers are Lynn Bennett (ASTHR) and Jacob Yaron (AGRPW); the technical manager is Carlos Cuevas (AGRPW), and the associate Manager is Cecile Fruman (ASTHR). The World Bank ASTHR/AGRPW, 1818 H Street, N.W. Washington, D.C. 20433 Phone (202) 458-0277 Fax (202) 522-1662 Internet: CCuevas@WORLDBANK.ORG or LGomez@WORLDBANK.ORG WEB PAGE: http://www-esd.worldbank.org/html/esd/agr/sbp *Note: In the back cover box, Swiss Development Corporation, should read Swiss Agency for Development and Cooperation (SDC). This report was prepared by Julia Paxton (SBP Consultant). Valuable comments were contributed by Jacques Marzin (PPPCR, CIRAD), Cecile Fruman (SBP), Gilles Galludec, Jennifer lsem (CGAP) and Joanna Ledgerwood (SBP Consultant). The dissertation research was performed under the guidance of Douglas Graham at The Ohio State University. A background report is available upon request.  TABLE OF CONTENTS COUNTRY BACKGROUND 1 INSTITUTIONAL HISTORY 3 ADAPTING THE GRAMEEN MODEL TO THE SAHELIAN CONTEXT 6 THE APPROPRIATENESS OF THE GROUP LENDING APPROACH 13 CONCLUSIONS 20 FIGURE 1 - THE PPPCR HIERARCHY 5 BOX 1 - CURRENT STRUCTURE OF PPPCR, 1996 6 TABLE 1 - EVOLUTION OF LOAN PORTFOLIO 9 TABLE 2 - EFFICIENCY INDICATORS 1993-1995 20 SUSTAINABLE BANK.ING WITH THE POOR  LIST OF ACRONYMS CCCE: Caisse centrale de cooperation economique CFD: Caisse franr;:aise de developpement (previously CCCE) CIRAD: Centre de cooperation internationale en recherche agronomique pour le developpement CNCA: Caisse nationale de credit agricole MIS: Managment information systems NGO: Non Governmental Organization PPPCR: Projet de promotion du petit credit rural ROSCA: Rotating savings and,credit associations EXCHANGE RATES US dollar Burkina Faso Currency 1993 1 294.78 1994 1 534.6 1995 1 476.7 SUSTAINABLE BANKING WITH THE POOR ii  IBRD 28982 ,. o• MAL I BURKINA FASO NATIONAL CAPITAL CAP/TALE D'ETAT PROVINCE BOUNDARIES LIM/TES DES PROVINCES _ . _ INTERNATIONAL BOUNDARIES FRONTIERES INTERNATI0NAlES 50 100 150 200 KILOMETERS/ KILOMETRES 2· NIGER MAL I BENIN COTE D'IVOIRE AUGUST 1997 Country Profile Economic and Social Context Inflation GNP per capita (1995) $230 1993 33% Population (1995) 11 million 1994 30% Population density 40 inhab/km2 1995 5% (est) SUSTAINABLE BANKING WITH THE POOR 111  CASE STUDIES IN MICROFINANCE BURKINA FASO LE PROJET DE PROMOTION DU PETIT CREDIT RURAL Le Projet de promotion du petit credit rural (PPPCR) in rural Burkina Faso is attempting a difficult feat: to create a sustainable financial institution in a high risk, low income region. This relatively young institution, founded in 1988, has adopted a Grameen bank style model and each year continues to create context -specific innovations to overcome obstacles. While repayment rates have been noteworthy, self-sustainability is still not in sight as the PPPCR struggles with the high costs of providing credit to a widely dispersed, very poor clientele in a financially repressed country. Their obstacles and innovations provide insights to other institutions in similarly difficult milieu. One of the most interesting research questions in micro finance is whether or not the Grameen Bank can be replicated in regions that greatly differ from Bangladesh. Certainly, the implementation of a group lending methodology in Burkina Faso must vary in many important ways from the Grameen experience. This paper examines the appropriateness of a Grameen replication in Burkina Faso by describing its adaptation to the Sahelian context and analyzing three commonly touted advantages of group lending over other financial methodologies: that poor women prefer it, that repayment rates are better, and that costs are lower. The analysis raises new questions and sheds light on the innovations and obstacles of the PPPCR as it struggles to become a sustainable financial institution for the poor1• COUNTRY BACKGROUND Burkina Faso is a landlocked country in West Africa and is one of the poorest countries in the world. It has an average 1993 GNP per capita of only $300 annually c'ompared to $520 for the sub-Saharan region. 2 Due to the pegging of the CFAF to the French franc, inflation has averaged a mere 3.3 percent during the period 1980 to 1993. Inflation rates in 1994 rose significantly, approaching 30 percent annµally, due to the 1994 devaluation of the CFAF. However, in 1995 and 1996, inflation has come under control, averaging 5 percent at the end of 1995. From 1980 to 1993, the average annual GNP per capita growth rate of0.8 percent stands out in sub-Saharan Africa, averaging 1 For adetailed analysis, a background report is available upon request. 2 1993 data from World Development Report, The World Bank, 1995. SUSTAINABLE BANKING WITH THE POOR 1 minus 0.8 percent during the same period. Real GDP growth has risen in the mid 1990's, averaging 4 percent in 1995. While commercial interest rates were positive in real terms during 1980-1993, the sudden change in economic conditions coinciding with the currency devaluation led to an erosion of positive real interest rates. Banking regulations capped commercial lending rates since 1993 at rates that have fluctuated to a maximum of 29 percent annually. Meanwhile, inflation has exceeded these ceilings at times, causing the entire financial system to operate with negative real interest rates. Another difficulty presented by the legal framework in Burkina Faso is the inflexibility of the laws pertaining to financial institutions. Financial institutions may be governed by the banking law, the credit union law (the 1994 Loi portant reglementation des institutions mututalistes ou cooperatives d'epargne et de credit that applies to all countries of the West African Economic and Monetary Union) or by a convention with the Ministry of Finance. A micro finance NGO such as the PPP CR can sign a convention with the Ministry of Finance but this only gives the program official recognition without form.al regulation and insurance. As the PPPCR grows, its status becomes an increasingly important concern as it must determine the type of ownership structure, the financial products that it will offer, and its legal status. Indeed, the PPPCR is operating in one of the most difficult environments for microfinance. Not only is the financial system repressed through the occurrence of negative real interest rates, rigid policies, and a restrictive legal structure, but the project has chosen difficult economic environments for its operations. In particular, the program operates in villages where agriculture forms the heart of the economy with non-farm activities including petty trade, services, and small industries. The country has been plagued with droughts that have the capability of destroying the economic livelihood of villages. Given these obstacles to financial intermediation, it is no wonder that numerous attempts to provide these regions with credit in the past have failed due to low repayment3 • This failure is in part due to politically motivated credit pushes with no emphasis on repayment, misguided targeting of economic activities, and inappropriate terms and conditions4 . The combination oflow incomes, sparse population density, ethnic diversity, and susceptibility to shocks makes any type ofmicrofinance particularly challenging. 3 Prior credit programs have been implemented by CNCA and other governmental institutions. 4 Ellsasser, Kand Diop, M., "La Banque experimentale de Banh: une demarche de recherche-developpment sur le credit en milieu rural sahelien," CIRAD, 1990. SUSTAINABLE BANKING WITH THE POOR 2 · INSTITUTIONAL HISTORY Like the Grameen Bank, the foundation and direction of the PPPCR have stemmed from a dynamic leader, Dr. Konrad Ellsasser. However, while Professor Yu.nus of the Grameen Bank is indigenous to Bangladesh, Dr. Ellsasser's efforts have been sponsored primarily by an outside French research organization, CIR.AD (Centre de cooperation internationale en recherche agronomique pour le developpement). In 1988, he was asked by the Caisse centrale de cooperation economique of France (CCCE - the principal aid agency of the French government since renamed the Caisse franr;aise de developpement (CFD)) to prepare a development project for the drought stricken area of Yatenga. In 1988, after assessing that the drought prone northern Yatenga region was credit constrained, 30 trial loans were granted in the villages of Banh and Ziga in the Northern province ofYatenga. One hundred percent of the loans were repaid in full and thus the CCCE contributed 3 million CFAF to start a full scale lending operation with the PPPCR as the operations branch for loan distribution under the auspices of the administrative unit, SAHEL ACTION. This unit collaborates with the principal agricultural development bank in Burkina Faso, the Caisse nationale de credit agricole (CNCA) and the Burkina office of CIRAD. The now CFD provides interest free lines of credit to the CNCA who, in turn, onlends to the PPPCRat a 9 percent interest rate. The interrelationships of this system are illustrated in Figure 1. The PPPCR was created as an attempt to enhance financial security to some of the most disadvantaged people in drought prone areas of Burkina Faso. The stated objective of the PPP CR is to "study and implement financial products responding to the needs of a resource constrained clientele... and to create a system of financial intermediation at a low cost that is balanced and durabk" 5 Operations are managed by a largely local personnel with one French national as network director. CIRAD has played more of a support role rather than a management role, sponsoring several types of feasibility studies, offering training, and contributing to MIS. The pilot committee of Sahel Action, overseeing management and internal control, is comprised of Sahel Action, the CNCA, the CFD, and CIRAD. • Since 1988, the PPPCR has expanded to the provinces ofTapoa, Ganzourgou, and Soum. In 1991, it began an urban and peri-urban expansion to include the women of the city of Ouahigouya. Since its inception, the program has served an increasingly urban and "semi-rural" (rural areas with higher population densities) population. By 1995, 37 percent of the clients lived in urban areas, 29 percent lived in semi-rural areas, and 29 percent lived in isolated rural areas. 5 Faye, J.(CIRAD) and Bonkongou, P.(CNCA) "Organisation et Gestion du Projet de Promotion du Petit Credit Rural" Caisse Nationale de Credit Agricole, Rapport de mission, July 1993. SUSTAINABLE BANKING WITH THE POOR 3  Inthe early 1990's, several issues reached the forefront as the experimental program matured into a financial institution. Dr. Ellsasser's vision had been to set up the. program with foreign assistance, but to gradually lessen the external influence in favor of local control. As this transition evolved, the questions of staffing and the direction of the program surfaced. On the one hand, a field savvy local staff had learned the logistics of program operation and favored the decentralized system of regional branches that had developed. On the other hand, new management (both foreign and local) was hired to lead the rapidly expanding program into its next phase of development. Centralization was encouraged as a form of internal control and unification. During this phase of development, different visions of institutional development occasionally clashed, leading to management turnover and a struggle to define the program mission. Also during this phase, the legal status of the institution became an issue. As an NGO, the PPPCR struggled with the high cost of servicing an isolated, low income clientele. Given these costs and the availability of donor funds, certain advantages to remaining an NGO existed. Nevertheless, in order to become a true financial institution, the program needed to improve its profitability and to change its status from an NGO to a financial intermediary. In 1995 and 1996, inroads into cost coverage were made and several institutional issues were resolved, leading to a new phase of institutional development. In a 1995 seminar, leaders reached the conclusion that the PPPCR would remain an NGO for a transitory period. A jump to a legal status as a financial intermediary was deemed premature given the program evolution. In addition, a more harmonious working relationship was created as the staff agreed on the overall function and structure of the institution. Internal control was sharpened by the use of manuals describing a universal system of accounting, procedures, training, and standards for all four regional branches. Finally, specific objectives relating to financial self-sufficiency were introduced, giving the branches a common mission. The goals included raising the interest rate margin through use of obtaining subsidized loans, increasing productivity through the use of new products and program expansion, lowering costs, and matching financial services to client 6 demand . The structure and organization of the PPP CR is summarized in Box 1. 6 HORUS Banque et Finance "Projet de Promotion du Petit Credit Rural: Bilan Deuxieme Et Faisabilite Troisieme Phase: Volume I Rapport Principal" Paris, June 1996. SUSTAINABLE BANKING WITH THE POOR 4  Figure 1 - The PPPCR Hierarchy FOREIGN AID TECHNICAL SUPPORT CAISSE FRANCAISE I CIRAD French Research Center COUNTRY SUPERVISORY INSTITUTION: IBURKINAFASOAGRI~~CREDITBANK I I NGO: SAHEL ACTION/ PPPCR Management and Internal Control Admin./Fin. Services Network Services Training Services 4 PROVINCIAL OFFICES ATENGA GANZOURGOU SOUM I I I I PPPCR VILLAGE AGENT I !VILLAGE COMMITTEE! 'IQUARTIER/SECTOR LEADER! IGROUP LEADER I GROUPS SUSTAINABLE BANKING WITH THE POOR 5 Box 1 - Current Structure of PPPCR, 1996 * Number of credit agents: 52 * Central office: Ouagadougou * Number of branches: 4 * Number of credits (est.): 31,736 * Legal status: NGO * Source of funds: 69% CNCA, 21 % group funds and guarantee funds, 10% equity * Target group Female, rural, poor * Methodology Group lending (average group of 5) * Liability No future loans until all members of group and sector have repaid ADAPTING THE GRAMEEN MODEL TO THE SAHELIAN CONTEXT Given prior failed attempts at providing rural credit in Burkina Faso, a different methodology was sought to ensure a higher rate of repayment. In 1988, the Grameen Bank was becoming widely known and group credit offered such an alternative. Specifically, group credit was seen as an opportunity to lower bank transaction costs in . such an isolated area. Therefore, group credit was granted in the experimental phase and adopted formally by the PPPCR given the initial high recovery rates. SIMILARITIES WITH THE GRAMEEN BANK Objectives, strategy and methods The PPPCR parallels the Grameen Bank in several ways. Poverty alleviation through a group lending approach is a primary-mandate for both institutions. Both the Grameen Bank and the PPPCR target the poor excluded from the formal banking system by establishing credit facilities in the area of intervention. Average loan sizes are similar7 and both institutions have mandatory savings. 7 Average loans sizes ranged from $44 to $92 for the PPPCR from 1992 to 1995 while the General Loan of the Grameen Bank averages $75 to $100. In 1993, Burkina Faso had a GNP per capita of$300 in comparison to $220 for Bangladesh. SUSTAINABLE BANKING WITH THE POOR 6  Both the Grameen Bank and the PPPCR can be classified as "credit-first strategies 118 as opposed to "savings-first strategies." In the credit-first approach, outreach grows quickly due to the reliance on groups that can reach a wide number of clients and due to the fact that external funds are used rather than relying on the time-consuming process of mobilizing local savings. However, a greater incentive to default occurs in the credit-first programs since members know that they are defaulting on external funds rather than the savings of their neighbors, although more empirical research in this area is needed. In addition, the belief that group solidarity and peer pressure contribute to loan repayment and act as a collateral substitute exists in both programs. The PPPCR also has emulated the Grameen credit group of five members in most groups, although some groups range from 3 to 6 members. Groups of five were found to perform -best in Burkina Faso because: 1) tontines 9 are often based on five members; 2) a base-five counting method is common in some areas, and; 3) groups of five were large enough to reduce bank transaction costs while small enough to preserve unity and solidarity within the group leading to favorable repayment rates. Also, like the Grameen Bank, the PPPCR has a participatory managerial style which allows for a flow of information from village agents to bank managers. Once a week, all the village agents meet with the province manager to discuss weekly issues and ideas. Female clientele Finally, both the PPPCR and the Grameen Bank direct a large portion of the loan portfolio to strictly female groups. The PPPCR has continually increased its share of loans to women so that it currently lends almost exclusively to females. Ninety eight percent of the PPPCR's clients 10 are women. The initial objective of the project was to target the most disadvantaged people in Burkina Faso, which often include women. After the drought of 1984, the role of women as contributors t<:> household income became more pronounced as off-farm income became increasingly important. In addition, several village agents reported that women clients required less of the agents' time than men since they accepted the rules and regulations of the project more readily, without time- consuming questions and arguments with project personnel. Therefore, some bank employees believed that working with women would lead to lower bank transaction costs. Another logical reason for providing women with credit is that migration of Burkinabe men to neighboring Ghana and Ivory Coast is a pronounced phenomenon. In 8 Graham, D. and Von Pischke, J.D. "Factors and Strategies that Lead to a Sustainable Supply of Financial Services for the Rural Poor" IDB Workshop of Financial Services for the Rural Poor, Dec. 1994. 9 A tontine is the West African term for an informal group known as a ROSCA (rotating savings and credit association) 10 10,000 cumulative clients served were recorded in 1995. SUSTAINABLE BANKING WITH THE POOR 7 fact, in bad harvest years, male labor is Burkina Faso's primary export 11 • Burkinabe women, who traditionally perform most of the agricultural and household duties, as well as engaging in commercial activities, are assuming even more responsibilities as more men leave. 12 DIFFERENCES WITH THE GRAMEEN BANK Outreach The PPPCR is not a pure Grameen replication, and indeed has numerous departures from the Grameen model. One of the most striking differences between the two programs is the sheer size of the program. The Grameen Bank was started in 1983 (compared to 1988 for the PPPCR) and has quickly grown to be one of the largest microfinance programs in the world, serving over 2 million clients by 1995. This rapid expansion was facilitated by the high population density in Bangladesh. Like the Grameen Bank, the PPPCR has grown quickly, but cannot compare in terms of number of clients. By the end of 1994, the PPPCR had already served 10,000 clients and this figure grew dramatically in 1995 and 1996 to reach about 25,000 clients. Table 1 illustrates the rapid growth in the number and volume ofloans from 1992 to 1995. In October of 1995, it was projected that by year's end, the cumulative number of credits, including repeat borrowers, would reach 51,270 loans 13. The associated cumulative amount of credit totals $2.35 million. In 1995 alone, some 25,000 microloans were made with an average annual loan size of $59. • The small annual loan size is only one fifth of the GNP per capita, a clear signal that these loans are reaching a marginalized clientele. This ratio is well below the average loan size/ GNP per capita ratio of35 percent measured for microfinance institutions in West Africa as a whole. 14 It should be noted that while the loan sizes are steadily increasing in CFAF, their dollar value has been volatile due to the 1994 devaluation. 11 Economist Intelligence Unit J988-89 Country Profile: Niger. Burkina London, 1988. 12 Savane, Marie Angelique "The Effects of Social and Economic Changes on the Role and Status of Women in Sub- Saharan Africa" Understanding Africa's Rural Households and Fanning Systems Westview Press, Boulder 1986. 13 Projections made by "Responsable du Service Reseau", Jacques Marzin in letter to author dated October 17, 1995. Note that two six month loan cycles can be obtained in one year. Therefore, the number of credits is roughly double the number of clients. 14 World Bank, "A Worldwide Inventory ofMicrofinance Institutions" Sustainable Banking with the Poor, 1996. SUSTAINABLE BANKING WITH THE POOR 8  Table 1 - Evolution of Loan Portfolio 1992 1993 1994 1995 Exchange rate (per US$) 275.33 294.78 534.6 476.7 Number of loans granted 3,890 6,758 14,270 25,000 Loan volume granted 98 131 352 835 during year (m CFAF) Average loan size (CFAF) 24,430 19,478 24,680 29,613 Average loan size (US$) $92 $69 $44 $59 Outstanding loan balance 47.9 95.2 262.6 600 (m CFAF) end of year Volume of loan balance in 5.2 4.2 6.4 14.0 arrears (m CFAF) Arrears rate 10.2% 3.2% 1.8% 2.3% Source: Service Reseau PPPCR 1996 Management of a sparsely populated.area Some of the modifications of the Grameen model have resulted from the particular context of Burkina Faso. The smaller scale of operations is a function of the smaller population and sparse population density. In contrast to Bangladesh's population density of over 800 people per square kilometer, Burkina Faso has only 40 people per square kilometer. In an attempt to lessen the high transaction costs arising from a dispersed population _and the remoteness of certain villages, a hierarchical style of bank management was implemented. Villages are divided into quartiers (neighborhoods) and then subdivided into groups of five, with group leaders, quartier leaders, and village committee leaders. As in the Grameen bank, the formation of groups relies on the assumed effectiveness of peer pressure and group solidarity. This feature is particularly important in the African setting since each village agent collects weekly repayments from 200 to 800 clients, making evaluation and monitoring of each client difficult. In addition to using joint liability as a collateral substitute, the PPPCR also uses sectoral liability. In this case, no group in the entire village can receive new loans if another group has defaulted. tS Adaptation to clients [♦ Even though both the Grameen Bank and the PPPCR work with many illiterate clients, the problem of illiteracy is even more pronounced for the PPPCR in Burkina Faso. The 1990 adult female illiteracy rate in Bangladesh was 78 percent compared to 91 percentin Burkina Faso 15 , although rural rates are even higher. Traditional formal banks 15 The World Bank World Development Report, 1995. SUSTAINABLE BANKING WITH THE POOR 9 operating in Burkina Faso have required literacy so that the clients can complete applications and documents. However, in rural regions, nearly all women over the age of forty are illiterate. As a compensation for the lack of written communication, many rural African areas have an impressive oral tradition. The PPPCR incorporates this tradition by verbally explaining the terms and conditions of the loans in an open town meeting. The village leaders are intimately involved in the loan process as monitors, evaluators, and motivational leaders. While the absence of written guidelines for the clients is a logical step given the rural context, it presents certain risks. For example, the interpretation of the rules and regulations may vary across village agents. This problem has been lessened by a one year training period for all new village agents. A unique feature of the PPPCR clientele is that they belong to a multitude of ethnicities with the major ones including Mossi, Rimaibe, and Peulh. Numerous languages are spoken by the clients and few of the clients in isolated rural regions speak French. Therefore, bank officers must be multi-lingual in order to provide financial services to each ethnic group. This presents interesting and complex relationships between bank agents of one ethnicity serving clients of another ethnicity. However, bank agents report that this does not affect loan repayment significantly. Types of credit Perhaps the most outstanding characteristic of the PPPCR has been its ability to evolve and adapt to different settings through various financial innovations. The Grameen model was not merely artificially transplanted into the African setting, but each characteristic was tested for its feasibility in Burkina Faso. During the experimental phase, different group sizes, loan sizes, loan types, and terms and conditions were appraised. Group loans versus individual loans to both men and women were tested in different regions of the country. In addition, loans targeted for specific occupations were examined as well as loans with no explicit stipulations on how they would be used. As previously mentioned, the project determined that it was most advantageous to work with women in groups of five. While small credit groups are organized, the loans are recorded individually and no true joint liability exists. Although the women are told • that each is responsible for the entire tepayment of the group loan, in practice, if one member does not repay, the others in the group are blocked from future loans. No strict • guidelines exist regarding how the loans should be used. While loans are targeted for profitable economic activities according to the guidelines of the PPPCR, in practice, much of the credit evaluation is left to the discretion of the sector leader. This relaxed approach to project evaluation on the part of the project coincides with the concept of the SUSTAINABLE BANKING WITH THE POOR 10 fungibility ofmoney. 16 Since money received from a loan is identical to money obtained from other sources, it is difficult to determine the final destination of any given loan amount, regardless of what is promised at the credit screening session. Many innovations have emerged from the PPPCR in the form of loan types adapted to local activities. The most common type of credit given resembles Grameen style loans. These loans are made for small market activity, have a one year term and are granted to a group of five in which weekly repayments are made. Weekly repayment corresponds to the regular and modest revenue generated by market women. For ir loan of20,000 CFAF, 1000 CFAF is paid to a group fund as obligatory savings to be returned at the end of the loan or used as an emergency fund, 400_ CFAF to a guarantee fund, and 2,000 CFAF for interest payments (10 percent of the initial loan size). Repayment is collected weekly for 56 weeks, resulting in an annual effective interest rate of 26 percent including the effect of contributing to the funds. During the past five years, this effective rate has varied from positive to negative due to erratic inflation, but has been positive since 1995. The frequency of installments· allows women to repay their loans without holding the money at home where it is at risk of being used by family members. The villag~ or sector leader is in charge of collecting repayment from all members and the repayment is double checked and recorded by the loan officer and brought directly to the PPPCR for entry into the computer data base. These working capital loans have been granted for artisan activities, food production, soap production, and sales of food products and cigarettes. Typically, the ethnic caste of the borrower determines which types of economic activities are acceptable for the borrower to pursue. However, with the introduction of credit, these rigid cultural norms are changing slowly. 17 A second credit line has been introduced for the fattening of animals for resale. These group loans typically span a five to six month period and have only one repayment at the end of the period when the animal is sold. These loans are small, ranging from $10 to $150 in 1995, in order to purchase small livestock. This type ofloan frequently has been offered to men and women of different ethnic groups. Monitoring this type of loan has proven difficult since tracking the health and sale of an individual animal is laborious. Another type of loan has been designed for clients to buy grain during the harvest period when the price is low and then to consume it or to sell it during the off season. These loan sizes are larger, reaching up to US $300 for a group of five. This has proven profitable for the clients and has reduced the need for grain intermediaries who had previously engaged in similar types of speculation. 16 Von Pischke, J.:D. and Adams, D., "Fungibility and the Design and Evaluation of Agricultural Credit Projects" Rural Financial Markets in Developing Countries: Their Use and Abuse ed. Von Pischke, J.D., Adams, D., Gordon, D., The Johns Hopkins University Press; 1983. 17 Ellsasser, K. "La "Banque" de Banh: Une experience de Credit Informel au Burkina Faso" Document de travail, Paris, 1989. SUSTAINABLE BANK.ING WITH THE POOR 11  Not only has the PPPCR adapted its loan instruments to the local context, but it has also been innovative in its research. Each year, students from France and o_ ther parts of Africa have come to perform studies on various aspects of the project. Three Burkinabe students have written their theses on various aspects of the PPPCR. The . studies include economic and agronomic studies, as well as the feasibility of new economic activities that could be financed by the PPPCR. The PPPCR continues to experiment with loan instruments tailored to specific economic activities. Ongoing research by student interns ascertains the feasibility of credit for exports; weaving, the cultivation of onions, potatoes, rice, and vegetables, and the purchase of farm implements. Each type of new credit is designed with terms and repayment schedules that match the cash flow patterns of the activity. Absence of voluntary savings It has been demonstrated in many developing countries that one of the keys to financial development is providing deposit facilities for the poor. The ability and willingness of low income people to save is often underestimated and constitutes the "forgotten half of rural finance. " 18 Like the Grameen Bank, the PPPCR has a compulsory . non-interest bearing savings program generated through its group fund. At the granting of each loan, the clients contribute to a common fund which can take the form of a group or village fund, depending on the region. However, there has been much confusion on the part of the clients regarding this fund. Sometimes the entire village fund has been used to cover the arrears of a few groups and has not been returned at the end of the loan. Furthermore, there exists confusion between the role of a savings fund versus an insurance fund. A clearer understanding of the function and proper administration of compulsory savings is vital to the trust between the institution and the clients. While the amount of voluntary savings is growing in the Grameen Bank, there has been little emphasis on this service in the PPPCR. At one point, voluntary savings were collected, but returned to the clients when new personnel implemented program changes. This violation of trust and instability will make future savings mobilization more difficult. One of the main reasons that savings have not been stressed in the PPPCR relates to cost. There is little interest among bank workers to collect savings since it adds to the responsibilities of each village agent Even at the managerial level, savings are perceived as a highly labor intensive, low profit activity. In fact, the nature of small daily transactions, often on the order of pennies and nickels, can lead to the conclusion that savings mobilization is indeed an expensive financial service. While there is no question about the benefits of savings facilities among clients, the financial viability of small 18 Vogel, Robert C. "Savings Mobilization: The Forgotten Half of Rural Finance" Undermining Rural Development with Cheap Credit ed. Adams, D., Graham, D., and Von Pischke, J.D., Westview Press, Boulder, 1984. SUSTAINABLE BANKING WITH THE POOR 12  savings mobilization in the African setting is an area requiring more research. Certainly West African credit unions have had considerable success in mobilizing small deposit accounts in both rural and urban settings. Given the benefits of savings mobilization, the introduction of voluntary savings remains one of the PPPCR's future goals. In order to do so in a cost effective manner will require additional experimentation, research, and financial innovations. Social agenda I : Unlike the Grameen Bank, the PPPCR does not play a pro-active role in altering the ~, I ! social norms of its clients. In order to receive financial services, the Grameen Bank clients must adhere to a set of rules described in the 16 Decisions. These rules outline acceptable social behavior including the refusal of dowry payment, the promotion of education, and health practices. In addition, the use of social rituals at group meetings such as chanting and saluting fosters group identification and discipline. The PPPCR has not incorporated any such social agenda, instead focusing solely on the provision of : I financial services. THE APPROPRIATENESS OF THE GROUP LENDING-APPROACH . I ., In order to build a healthy and sustainable financial institution, it is important to ' ! consider the possible advantages and disadvantages associated with different ., I ; I , I methodologies. There are several justifications for group lending cited in the literature. I ,~ i Repayment rates might be higher through reliance on the group pressure, solidarity, screening, monitoring, and information advantages of the group. In addition, one might argue that outreach may be higher since some clients might feel more inclined to join a group of their colleagues rather than going to an unfamiliar financial institution if they have had no prior contact with one because they prefer working in groups. If the groups function well, then it may be possible to use the groups for non-financial activities related to education, health, and other social services. Finally, institutions may engage in group lending to reduce transaction costs by serving a large number of clients with only a few loan officers. !........ I Additional research in each of these areas is required before any conclusions :--~ about individual versus group lending can be drawn. In addition, cost, repayment, and ; I '., i _I I client attitudes about working in groups are interrelated. For instance, as an institution . spends more on evaluation, group training, group formation, and monitoring, its repayment rates will be affected. Likewise, clients that are resistant to group formation could increase formation costs or affect repayment rates. SUSTAINABLE BANKING WITH THE POOR 13  ARE REPAYMENT RATES LOWER DUE TO GROUP LENDING? Since the PPPCR utilizes group lending only, it is not possible to compare the repayment records of group versus individual lending within the PPPCR itself. Nevertheless, some interesting repayment patterns exist in the PPPCR_ . In particular, three major types of group dynamics were witnessed, including the domino effect, group solidarity, and peer pressure. These were some of the concepts included in a recent study on the determinants of repayment behavior of the PPPCR clients. The Domino Effect The PPPCR has adapted itself to the sparse population by creating a hierarchical structure in which one village agent works with several hundred clients, relying on group and sectoral organization to reduce transaction costs. The sector or village, comprised of approximately 30 groups, is denied access to future loans until each of the groups reimburse their full loan amount. However, this type of sectoral liability .has led to a domino effect in which it is in the best interest of any group to default as soon as another group defaults. Thus, sectors either repay in full or have widespread default. The domino effect can occur at either the group level (where individual group members intentionally default since other members of their group have defaulted) or the sector level if sectoral liability exists. This phenomenon has been expressed·both theoretically and empirically. 19 Besley demonstrates an inherent instability of group lending in his formulation of the "repayment game." In the game, the use of social sanctions can lead to increased repayment rates since they can encourage a delinquent borrower to repay when the individual may have chosen to default under individual lending. However, in other cases, if one individual is determined not to repay, then group members may either repay for him/her or decide to default themselves, leading to a domino effect of default. As long as the groups function smoothly, the group lending technology has the capability of recovering a higher percentage of loans. However, if problems arise in the groups, widespread default can occur. These findings have been witnessed empirically as well. Bratton found that in Zimbabwe, group lending operations had higher repayment rates in good years than individual lending programs. However, in bad years, the findings were reversed, due to the domino effect. The domino effect can be initiated by any type of repayment problem. In Burkina Faso, the village of Banh experienced a swift increase in arrears after the 1990 drought. 19 Bratton, M. "Financing Smallholder Production: A Comparison oflndividual and Group Credit Schemes in Zimbabwe" Public Administration and Development (6), 1986. Besley, T. and Coate, S. "Group Lending, Repayment Incentives and Social Collateral" Woodrow Wilson School of Public and International Affairs, Princeton University, 1993. SUSTAINABLE BANKING WITH THE POOR 14 The high degree of covariant income in a predominantly agrarian based society is another factor that threatens the financial institution viability in the Sahel. In more urban, highly populated areas, the variety of economic activities allows for healthier portfolio diversification and some protection from the economic impact of droughts. In a more urban sector that experienced widespread default, rumors of unethical behavior led the entire sector to collapse. In any sector, the first group may default for any number of reasons, but once this occurs, the whole sector tends to collapse. In the words of PPP CR founder Konrad Ellsasser, the success of group lending can be likened to an airplane. It relies on many different parts, all of which could have any number of technical difficulties. If even one part fails, the plane can not fly. Group Solidarity Group solidarity, defined as the willingness of the credit group to pay for one of its members on occasion, functioned well within most of the small groups studied in Burkfoa Faso where the bond of trust, loyalty, friendship and respect was well developed and truly functional. However, once a member was unable to repay four or five of her weekly repayments, the entire group went into default. Interestingly, the group was the main source of funds that the women relied on in the face of adversity. They rarely borrowed from their husbands, families or other friends in bad times. A comparable degree of solidarity was not present at the sector level. Part of this phenomenon can be explained by the fact that individuals do not interact and monitor other groups to the extent that they can within their own group. In addition, the dilemma of collective action is present as individuals can engage in "free-riding" by relying on the rest of the sector to enforce the repayment of other groups. Hence it is not surprising to see the domino effect in some groups of the PPPCR. Peer Pressure Group pressure is exhibited in two ways. Firstly, ex ante pressure is the threat of peer pressure that would manifest if one member of the group did not repay. This type of pressure exists in correct paying groups and acts as a deterrent, whether or not the threat is real or imagined. Ex post pressure is defined as the social sanctions incurred by a group member who defaults on the group loan. These sanctions can range from negative comments to exclusion from social events to more severe types of punishment such as the forced sale of household items. Results from the PPPCR client survey indicate that ex ante pressure contributed to correct repayment, but the presence of ex post pressure was not widespread. Usually, the reasons given for default were of an uncontrollable nature (such as an illness or unexpected family expense). Since the women did not default as a result of their own laziness or misbehavior, it can be deduced that a degree of ex ante pressure existed. SUSTAINABLE BANKING WITH THE POOR 15 Given the legitimate reasons for default, the other group members were uninterested in applying ex post pressure. Even in cases where the reason for default was perceived as controllable, little ex post pressure was applied in an attempt to maintain village hannony. As one neighborhood member explained, 'We may sometimes feel angry, but we will never pressure other members so as not to ruin the neighborhood peace.' One cultural dynamic which has impacted the viability of the PPP CR has been the hierarchical societal structure in Burkina Faso. An individual's position in society is largely determined at birth by his/her ethnic group and family. Furthermore, there is an overwhelming respect for the elderly. In a polygamous society, it is the first, and usually oldest, wife who has the most power among wives. This respect led to advantages and disadvantages for the functioning group dynamics. On the one hand, the hierarchical structure allowed the PPPCR to establish respected village leaders as project monitors in an expedient fashion. The village chief had detailed knowledge of the creditworthiness of each member of the village and this fac_ ilitated loan allocation. On the other hand, when individuals divided into groups, there was a sense of moral obligation to include the most elderly women to join if they so desired. Often these wonien no longer engaged in economic activities and were unable to repay their loans. However, because of their privileged societal position, it was difficult for other members to pressure them to pay. Results of Repayment Study The determinants of successful repayment were analyzed by J. Paxton, based on data collected from 1502°. Econometric results suggest that several variables are significant in predicting correct repayment in groups while other variables tended to destabilize the repayment process. Urban market women were much more proficient in managing credit group responsibilities. First, th~y were familiar with group activity since indigenous ROSCAs and other social organizations are divided into groups. Second, their previous participation in informal financial activities allowed them to understand the role and importance of financial services. Some market women were so sophisticated that they independently organized a ROSCA with their PPPCR credit group to act as a contingency fund for an occasional inability to pay their weekly repayment. Finally, the degree of monetization in the urban setting and the clients' daily cash flow operations made the urban market women relatively sophisticated clientele familiar with the requirements of borrowing. Another important variable in predicting repayment was the group's exposure to training and leadership. In the rural village ofMadougou where repayment was 100 percent, the bank agent worked closely with the village committee and carefully established lending rules as well as how groups should function. The village committee played a large role in educating the entire village on how the groups should react if one 20 Paxton, J. "Determinants of Successful Group Loan Repayment: An Application to Burkina Faso" unpublished dissertation, The Ohio State University, 1996. SUSTAINABLE BANKING WITH THE POOR 16 member was unable to repay on a given day. When interviewing groups in Madougou, each had contingency plans to repay in case of siclmess, travel, or other reasons. This type of planning was not evident in Banh, a village characterized by widespread default. The variable measuring the number of other informal credit contracts that an individual had was a significantly positive determinant of loan repayment. This supports the hypothesis that having other contracts is an indication of creditworthiness rather than having obligations spread too thin. Typically, the other contracts would be informal loans from family members. This is the same finding that Vigan6 reported in Burkina Faso in 1993 21 . Two primary destabilizing factors led to decreases in the repayment rates. One reason why group lending may not lead to the highest repayment rates can be referred to as the "matching problem." All five members of the group receive similar loan amounts for a term of 54 weeks (in most cases). At the first meeting, the bank loan officer invites all those interested in receiving such a loan to the meeting. Individuals divide into groups through self-selection. Once the first loan cycle is over, the group can qualify for a second, larger loan. The odds that each group member will want an additional loan at the same time .once again is much lower than at the original meeting. If four of the five want a new loan, the fifth member may go along with the group if he/she is indifferent. As more indifferent people are carried along with the process, the problem of arrears is exacerbated as individual needs are not matched to the loan sizes and terms. Higher arrears rates were found in groups that had gone through several loan cycles and the variable "loan cycle" was found to be negatively related to repayment. Finally, a latent variable measuring the domino effect (both at the group level, measuring the number of members with repayment problems, and at the sectoral level, measuring whether or not groups in the sector had defaulted on their loans) was found to be a negative determinant ofrepayment. Regardless of the group dynamics, leadership and training of the groups, income, and other factors, if too many people in a group or sector defaulted, the entire group/sector tended to default as the incentive structure for repaying was altered. This variable was statistically significant and points to one of the most destabilizing effects of joint liability. The traditional assumptions about group lending are that group pressure and solidarity lead to high repayment. However, in Burkina Faso, ex post group pressure is not a commonly used tool for societal reasons. While group solidarity was employed, its use may be outweighed by the domino effect and there have been no studies to indicate whether or not solidarity may also function in an indirect way for individual lending. The real danger for group lending in Burkina Faso is not that people will not try to help each other, but that covariant shocks affect more than one individual or group at a time, thus resulting in sectoral collapse. 21 Vigan6, L. "A Credit Scoring Model" Savings and Development, No. 4, XVII, 1993 . SUSTAINABLE BANKING WITH THE POOR 17  00 THE CLIENTS PREFER TO WORK IN GROUPS? An underlying justification for group lending often given is that poor people prefer to participate in groups for financial services. The central idea behind this belief is that poor people would feel more comfortable dealing with an institution if they were among friends and that weekly meetings would encourage hard work, camaraderie, and repayment. In addition, group formation facilitates the implementation of social services, although this is not relevant in the case of the PPP CR which is strictly a financial service institution. The empirical evidence from Burkina Faso suggests another story. The transaction costs of participating in a group are high. Each week the members of the group must coordinate schedules and bring their repayment to a group meeting. The group leader, in turn, must meet with the sectoral leader each week and be accountable for each member of her group. The sectoral leader is unpaid, yet is responsible for meeting with the group leaders and for the safe keeping of the funds for 10 to 30 groups. From a social perspective, the clients always live in the same small village or quartier and if they want to see each other socially, there is nothing preventing them from ad hoc social meetings. When asked if they prefer to work together as a credit group, nearly all of the women surveyed responded that individual loans are preferable to avoid any sectoral animosity when arrears occur. A perception of injustice arose when one group defaulted and the others were punished. In addition, given the social hierarchy where some women due to youth or ethnicity felt uncomfortable pressuring other women, the use of peer pressure was not effective. DOES THE PPPCR LOWER ITS COSTS BY GROUP LENDING? Regardless of the personal preferences of the clients, a legitimate justification for group lending from the institutional perspective is that group lending lowers institutional transaction costs. In a study of transaction costs, Adams and Romero 22 found borrower and lender transaction costs to be lower under group lending due to the decrease in paperwork, fees and number of visits. The hierarchical structure of the PPPCR lends itself to reaching a large number of clients per loan officer. Indeed, the employees of the PPPCR see the use of groups as the only way to reach a large number of clients. Given the use .of individual loans, it would be impossible for a single loan officer to serve 400 to 22 Adams, D.W. and Romero, A.A.P. "Group Lending to the Rural Poor in the Dominican Republic: A Stunted Innovation" Canadian Journal of Agricultural Economics, July, 1981 SUSTAINABLE BANKING WITH THE POOR 18 500 clients each week. Some of the critics question assumptions that transaction costs are indeed lower to borrowers and lenders under group lending. The time commitments of group members is enormous and group mobilization and training cause high program costs. 23 In the case of the PPPCR~ it is clear that clients dedicate a great deal of time each week to the repayment of the loan even though fees and bureaucracy are at a minimum. From the institutional side, training, personnel, and group mobilization are indeed high costs. Table 2 illustrates that interest income is well below operating costs. In fact, costs have consistently exceeded earlier projections. Several factors contribute to the high costs including: 1) significant start-up costs and technical assistance, 2) pressure from donors to expand rapidly, 3) the creation of a central office in the capital, 4) the demand for relatively high salaries, and 5) the relatively low population density and isolation of some clients24 . While high program costs have proven to be an obstacle for the PPPCR, some progress has been made towards improving overall institutional efficiency. Table 2 shows that costs are not growing as fast as the loan portfolio and a strong favorable trend exists for efficiency indicators. Program administrators believe that the group technology indeed lowers its costs and if the project were to convert to individual lending, costs would soar. In fact, the lowering of costs is the primary justification for the group lending methodology used by the creators and managers of the PPPCR. However, no study has been able to document the cost advantages of either group or individual lending in the Sahelian context, although such a study would be quite revealing. Upon further analysis, one recognizes that it is not the use of groups, per se, that contributes to lower institutional costs, but the use of a hierarchy so that each loan officer only has to visit a few key contacts in order to collect the repayment. Therefore, it is possible to envision a similar hierarchical structure as is present in the PPPCR with individual, rather than group, loans where group and sectoral leaders would be paid incentives to collect repayment from members, but no joint liability would exist. This system may have several advantages: it maintains the low transaction costs of group lending, it frees individuals from joint liability which can lead to the domino effect and neighborhood discord, and it solves the matching problem, allowing individuals to apply for loans as they are needed rather than when the group needs one. Experimentation would be necessary to determine if such a system would be viable. 23 Huppi, M. And Feder, G. "The Role of Groups and Credit Cooperatives in Rural Lending" World Bank Economic Review, 4, Sept. 1990. Khandker, S:, Khalily, B., and Khan, Z. "Is Grameen Bank Sustainable?" HRO Working Paper 23, World Bank, Washington D.C., 1994. 24 The northern region of Burkina Faso has a 1991 population density of 14 people per square kilometer compared to 810 / km2 in Bangladesh. SUSTAINABLE BANKING WITH THE POOR 19 Table 2 - Efficiency Indicators 1993-1995 1993 1994 1995 Interest income (m CFAF) 17.5 40.2 86.4 Operating costs (m CFAF) 117.7 188.2 200.3 Interest income/ Operating costs 14.8% 21.4% 43.1% Operating cost/ 100 CFAF lent 89.8 53.4 24.0 Rate of growth of number of 73.7% 111.1% 75.2% loans Rate of growth of outstanding 98.7% 175.8% 128.5% loan volume Rate of growth of project costs -- 59.8% 6.4% Outstanding loan balance per 5.3 9.7 18.0 loan officer (m CFAF) Number of loans per loan 375 529 860 officer Source: Service Reseau PPPCR 1996 and "ProJet de Promotion du Pent Credit.Rural: Bilan Deux1eme Phase et Faisabilite Troisieme Phase" Horus Banque et Finance, Paris, June 1996. CONCLUSIONS The PPPCR has been particularly innovative in adapting a Grameen style of group lending to the conditions in West Africa. Certainly the Sahelian region represents one of the most challenging environments for micro finance due to the combination of failed previous efforts, low population density, poverty and illiteracy. In order to overcome some of these obstacles, the PPPCR has departed from a pure Grameen replication and has adapted its financial services and organization. The experience of the PPPCR underscores the importance of a thorough understanding of the regional context before replication of any type of microfinance model is attempted. The primary justification for the group lending methodology given by the PPPCR is that it reduces costs through the use of a hierarchical structure. In addition, the mechanisms of peer pressure and group solidarity have led to favorable repayment rates. While group dynamics have been successful in most groups, in some villages, they have led to a domino effect of widespread default, highlighting a potential source of instability in the future. The clients have accepted the group structure of the project, but report that they would prefer individual liability due to the strain that joint liability imposes on the groups and the village. SUSTAINABLE BANKING WITH THE POOR 20  Despite all of the careful modifications of the Grameen model to the Burkina Faso • context, the provision of micro financial services has proven to be quite costly in the Sahel. The reasons for these high costs are more related to the environment (low population density, poor infrastructure, poverty, illiteracy) than to the methodology of group lending itself. The use of a hierarchical group lending structure has allowed one loan officer to serve a large nwnber of clients. A greater awareness of group dynamics will allow the program to fine tune its organization and training of groups. In addition, the future viability of the program is linked to the legal environment of Burkina Faso that dictates institutional forms, interest rate ceilings and deposit insurance. The PPPCR has experienced greater efficiency in the past couple of years as it continues to learn from its early experience and achieves economies of scale. The extent to which this improvement can continue will determine whether or not this approach will become viable and sustainable in the future. SUSTAINABLE BANK.ING WITH THE POOR 21 00 The World Bonk Sustainable Banking with thePoor (~B r) ~~ a collaborative effort of 1 ASTHR Gender and Poverty Team and AGRPW Rural finance at the World . , Bank, funded by the World:Bank;:the Roygl_ tv\lnistry of Foreign Affairs ·. of .Norway, the Swiss Developm~nt,Corporotion, •:,: • i, ~ ".,J ond·the Ford Foundation. · •• ''--~ •v•.. ~ , 1~: • • The study aims at improviqg)h~ ability of donok' governme.nts and and i~pl~m,ent policie{ ao~ _programs to - practitioners to design . build ..sustainable finoncial institutions t~at eff~ctively reac,h'the pOor;Th~ SBP task mgnagers are Lynn Bennett (A$_ Ta.~f,an.ffla~ob Varon (AG.~PW); · the technical manager_ is Ca~los Cq~~~(~AGR,PW}, ·an~·the administrative • - assistant IS lourosGomer{ASTHR}. ... . ' _ . ·~ .. • . ' ' - / , J ~ "-·:.\ _- Y· •.. The World Bank • ASTHR/AGRPW, J818 HStreet, N.W:Washington, D.C. 20433 Phone (202) 458-0277 • Fox (202) 522-1662 Internet: CCuevas@WORLDBANK.ORG or LGomez@WORLDBANkORG ' 1 Cover design by Beni [hibber·Roo