Niger - Credit Unions: caisses populaires d~^!!^epargne et de credit : Niger - Credit Unions: caisses populaires d'epargne et de credit

 TABLE OF CONTENTS INTRODUCTION............................................................................................................... 1 BUILDING A SUSTAINABLE CREDIT UNION IN A CHALLENGING ENVIRONMENT.................................................................................................... 1 LOAN AND SAVINGS PRODUCTS ................................................................................ 4 PERFORMANCE ............................................................................................................... 6 DISCUSSION: LESSONS FROM OVERCOMING OBSTACLES ............................... 14 CONCLUSIONS ............................................................................................................... 17 SUSTAINABLE BANKING WITH THE POOR i  LIST OF ACRONYMS BDRN Banque de Développment de la République du Niger BIAO Banque Internationale pour l'Afrique Occidentale CAMEL Financial rating system for banks (Capital adequacy, Asset quality, Management quality, Earnings record, and Liquidity position) CFAF Communauté financière africaine (African Financial Community) Franc CPEC Caisse populaire d'épargne et de crédit (people’s savings and loan association) Credit Union Credit Union GDP Gross Domestic Product GNP Gross National Product PARMEC Programme d’appui à la réglementation des cooperatives et mutuelles d’épargne et de crédit PEARLS Financial ratio used for Credit Union evaluation (Protection, Effective financial structure, Asset quality, Rate of return and costs, Liquidity, and Signs of growth) ROA Return on Assets ROE Return on Equity ROSCA Rotating Savings and Credit Association SDI Subsidy Dependence Index SHG Self Help Groups UEMOA Union economique et monétaire ouest-africaine (West African Economic and Monetary Union) USAID United States Agency for International Development WOCCU World Council of Credit Unions EXCHANGE RATE 1996 Exchange Rate: 1 US $ = 511.6 CFAF SUSTAINABLE BANKING WITH THE POOR ii  Country Profile Economic and Social Context Inflation GNP per capita (1995) $220 1993 -1.2 % Population (1995) 9 million 1994 36.0 % Population density 6.8 inhab/km2 1995 10.6 % 1996 5.3 % SUSTAINABLE BANKING WITH THE POOR iii  CASE STUDIES IN MICROFINANCE BUILDING AN AFRICAN CREDIT UNION FROM THE GROUND UP: LESSONS FROM THE CAISSES POPULAIRES D'EPARGNE ET DE CREDIT IN NIGER INTRODUCTION The network of credit unions in Niger known as the Caisses populaires d'épargne et de crédit (CPEC) represents a unique and insightful approach to microfinance in West Africa. Its development and experience since its foundation in 1990 are useful to practitioners of microfinance on several fronts. On the one hand, the CPEC movement is an example of building a credit union targeting lower-middle and low income groups in Niger from the ground up. In its short history, one of the principal developments has been a phenomenal interest in savings among members as is exemplified by the unanticipated growth in deposits. On the other hand, the CPEC case is interesting in that the CPEC are providing financial services in a very difficult environment characterized by political and economic instability, an underdeveloped regulatory environment, poverty, illiteracy, and uncertain external funding sources. The political instability culminated in a coup d'état in 1996, an event which hastened the departure of USAID, the CPEC's principal external funding source. As the credit union movement confronts each of these obstacles, it provides invaluable lessons and insights into the potential and limitations of microfinance institutions. The following examines the CPEC's experience in building a credit union from scratch, its performance, and the obstacles it is faced with as it strives to become a sustainable financial institution. BUILDING A SUSTAINABLE CREDIT UNION IN A CHALLENGING ENVIRONMENT CONTEXT Niger presents a most challenging environment for the provision of sustainable financial services. Perhaps foremost is the low income level of the population which results in a demand for financial services at a micro-level. As can be seen in the Country Profile table at the beginning of the paper, Niger's 1995 GNP per capita was only US $220. Marked income fluctuations prevail for rural inhabitants who are faced with frequent droughts and income shocks. In addition, the population density is very low, making it difficult to reach rural people with financial services. Social indicators also are unfavorable with a 1994 life expectancy of SUSTAINABLE BANKING WITH THE POOR 1 only 46 years and an astonishingly high adult illiteracy rate of 86 percent (the highest in the world in 1995)1. In the past decades, Niger has experienced economic and political strife that has led to financial uncertainty. The instability of the financial landscape in Niger led to the bankruptcy of numerous banks in the 1980's. The remaining few commercial banks had a high urban bias. A study of the financial system conducted by an Ohio State University research team in 1986-87 found that there were no formal financial institutions outside of the main urban areas of Niger such as Niamey2. Rural households had to rely almost exclusively on informal financial intermediaries for financial services. PROJECT OBJECTIVES AND THE CONCEPT OF INSTITUTION BUILDING In the face of poor socio-economic indicators and a weak financial system in Niger, a desire to create a sustainable financial system that would serve lower income level clients became strong in the late 1980's. USAID and WOCCU agreed to work together in order to build a sustainable credit union movement in Niger. This effort reflected a growing trend in the field of microfinance to create sustainable institutions. Around the world, the 1980's witnessed a surge of target group oriented financing by non- governmental organizations (NGOs) and self-help groups (SHGs). By in large, these programs were sponsored by donor funds and were not regulated by the central bank authorities. While many of these institutions had success in reaching the very poor, their scale remained small and they relied heavily on donor funds. Given these shortcomings, a "new view of microenterprise finance3" had gained prominence by 1990 which emphasized a financial sector and market- oriented approach. Part of this new view focused on institution building. Rather than merely providing financial services to a target group regardless of efficiency, institution building efforts tried to create and strengthen financial institutions that would be able to serve the relevant target group through sustainable banking practices4. Donor institutions became increasingly interested in supporting institution building efforts in microfinance by the early 1990's. The credit union model promoted by the World Council of Credit Unions (WOCCU) fit neatly into the new view of microfinance in that it emphasized financial sustainability, local participation, and a variety of financial services including both lending and savings. Securing funding from the United States Agency for International Development (USAID) for the development of a credit union network in Niger gave WOCCU a unique opportunity to build a financial institution from the ground up. Project leaders were excited by the prospect of avoiding traditional pitfalls associated with credit unions by 1 The World Bank, 1996 World Development Report, Washington, DC 1996. 2 Cuevas, C. "Potentiel de développement des CPEC dans la Région Zinder du Niger" Report to WOCCU, 1992. 3 Rhyne, E. and Otero, M. "Financial Services for Microenterprises: Principles and Institutions" The New World of Microenterprise Finance - Building Healthy Financial Institutions for the Poor, Kumarian Press, West Hartford, CT, 1994. 4 Schmidt, R. and Zeitinger, C.P. "Critical Issues in Small and Microbusiness Finance" paper presented at the International Donor Conference on Financial Sector Development, Vienna, September, 1994. SUSTAINABLE BANKING WITH THE POOR 2 creating a strong institution based on financial principles, clear guidelines, and appropriate incentives. The CPECs tried to avoid some of the "bad habits" found in well established credit union movements in Africa. For example, a rigid interest rate structure that doesn't reflect the market has immobilized some African credit union movements. In Cameroon, the low monthly interest rates favoring borrowers have become so engrained that it is difficult to change them. Another problem in many African credit unions is that the leadership becomes entrenched and those on the board of directors have special privileges, including preferential access to loans. The CPEC movement seeks to avoid these pitfalls by creating a board that determines market- oriented interest rates and by offering incentives (such as paying managers a salary and contributing to building construction and maintenance costs) to those credit unions that are successfully managed and performing well according to regular evaluations. Rather than creating market demand for financial services, the founders of the CPECs sought to meet market demand by tailoring sound financial services to fit client demand. Deposits are one of the most valued services in Niger as individuals seek security and liquidity in an uncertain environment. As such, the objective of the CPEC movement has been "to grant the Nigerian population in both urban and rural areas, access to financial services through the creation of a new network of sustainable financial institutions that is based on the mobilization of local savings.”5 INSTITUTIONAL HISTORY The CPEC movement in Niger was started as a pilot project through a cooperative agreement between WOCCU and USAID in 1990. The project started in the department of Zinder. The first three-and-a-half years of the pilot phase were used to develop and promote credit unions in the Zinder department where 11 CPECs were created during that period. During the second phase of the project (1992-1997), the objective of the project was to promote and extend CPEC development in other departments, to promote new CPECs and provide support services to them. From 1993 to 1995, project growth and targets were surpassed by 150 percent, resulting in concerns for growth management. Therefore, from 1995 to present, the institutional focus became directed at better control and safety. A coup d'état in January 1996 hastened the withdrawal of USAID, which had been considering leaving Niger anyway. The departure of USAID has left the CPEC movement without external funding for capacity building as it strives to remain viable in an unstable economic and political environment (see discussion on pages 14 to 17). Since the pullout of USAID, the movement has remained fragile and a few CPECs have been liquidated. Nevertheless, many of the CPECs have a solid foundation and it is the hope of project founders that this nascent movement can continue on a path towards sustainability. 5 WOCCU "Rapport d'Evaluation à Mi-Terme du Projet de Développement des CPEC au Niger" funded by USAID, Feb. 1996. SUSTAINABLE BANKING WITH THE POOR 3  INSTITUTIONAL STRUCTURE CPECs in Niger function according to the basic operating principles set out by WOCCU for all its affiliated credit union organizations. The credit union structure is based on a democratic structure where the members are the owners, and cooperation and social responsibility are key operating principles. CPECs are member-owned, member-operated, non- profit organizations that operate as cooperative financial organizations. Managers are responsible for the day to day decisions, while the ultimate control of the organization belongs to the general assembly of members-owners. The CPEC governance structure is characterized by a one-person, one-vote rule, implying that voting powers cannot be accumulated by any individual. Membership in the Niger CPECs is open to all community members. The majority of the CPECs in Niger are open-bond, i.e., community based credit unions, whereby members are from the same community, village, or residence area. A few occupational or closed-bond CPECs exist in urban areas, where members belong to the same profession, or are engaged in the same occupation or business. The membership fee includes a minimum deposit of CFAF 500 (US $1) which buys the member a share. An individual’s share capital cannot be traded or sold to others outside the CPEC. The member gets restitution of his/her shares upon resignation from the institution. Niger CPECs mobilize savings and provide loans to their members exclusively. Each CPEC is run by a management committee of 11 members on average and one salaried manager. The committee comprises a board of directors, a credit committee, a loan monitoring committee, and a training and marketing committee. The cashier or general manager is the only paid employee. The credit committee analyzes all loan requests and makes the final decision. Large size loan requests (greater or equal to CFAF 200,000) are submitted to the board of directors for final approval. On average, one-third of management committee members are women in CPECs with mixed (male and female) membership. A board of directors representing all of the CPECs has been created in recent years to monitor the overall growth and viability of the CPECs and to begin the slow process of turning the movement into a credit union federation. LOAN AND SAVINGS PRODUCTS LOAN PRODUCTS General credit policies are similar in all CPECs and more stringent during the first year in which the institution engages in credit activities: • A minimum deposit of CFAF 5,000 is required to apply for a loan; • At least three months of membership is required; • A member has a right to a loan equivalent to a multiple of his/her deposit (frequently 2:1); SUSTAINABLE BANKING WITH THE POOR 4  • A co-signor who is also a member is required for any loan and must have sufficient funds in his/her savings account to cover the entire amount of the loan. After a year of activity, CPECs can revise their loan policies. Thus, loan multiples can change from 2:1 to 3:1. Most CPECs also find the co-signor requirement too restrictive and have already revised their loan policies to include accepting tangible collateral. In rare cases, group loans are available at the request of the institutional members. Loan characteristics are fairly similar across CPECs. Box 1 presents the basic characteristics of CPEC loans. Box 1. CPEC Loan Terms and Conditions • Average Loan Size: US $220 • Nominal Interest Rate: 2 percent per month • Effective Annual Interest Rate: 48 to 54 percent per annum6 • Average Term: 5 months • Purpose of a loan: No requirements on loan use. Consumption purposes include naming ceremonies, weddings, health care, funerals, and school fees. Production purposes include buying seed and input, or cattle rearing. SAVINGS PRODUCTS Individual members as well as groups can open a savings account at the CPEC. The average savings account equaled approximately US $35 in 1996. By early 1995, there was only one savings product available, i.e., a current deposit account that earned no interest. However, members were rewarded at the end of the year when profits were redistributed and each member received a dividend proportional to the amount of savings. Members did not seem to mind the no interest earning deposit accounts as most view the CPEC primarily as a safe place to save. However, the management understands the importance of remunerating savings and was working on new term deposit accounts to attract potential net savers and especially women. Since 1995, 6 Given a nominal annual rate of interest is all CPEC of 24 percent, a 2:1 loan multiple, and a loan application fee of 0-3 percent of the loan, the effective rate of interest can be estimated using a formula developed by Poyo (1990) for the Dominican Republic Credit Union movement. The formula is: ( R N + T C - I Sφ ) RE = (1 - φ ) where: RE = The effective interest rate charged on loans RN = The stated nominal rate of interest on loans TC = The explicit transactions costs as a percentage of the loan amount IS = The expected interest rate on savings paid by the credit union φ= One over the loan multiple SUSTAINABLE BANKING WITH THE POOR 5 interest-bearing savings accounts have been introduced to offer a more attractive return on savings. CLIENT PROFILE The CPECs serve a predominantly male clientele. Women constitute 33 percent of the CPEC membership and receive one third of all loans granted. However, the average female loan size remains 1.5 times smaller than the average loan size for men. Women usually request smaller size loans because the activities they engage in require smaller size investment amounts. Approximately 85 percent of the members reside in rural areas, although the CPECs are expanding in urban areas. While member illiteracy remains a problem for the credit unions, the literacy rate for members (45 percent) is well above the national average (14 percent). While the objective of the CPEC is to reach low and lower-middle income clients in rural and urban areas, no specific guidelines exist regarding client characteristics. In order to provide data on the CPEC members in rural areas and in Niamey, a survey was completed in 19957. Survey results reveal that a typical rural CPEC member is a male farmer or microentrepreneur, head of household, in his forties, with an average annual income of CFAF 756,356 (US $1,512) in Zinder and CFAF 1.8 million (US $3,600) in Maradi which is a very active trading region. While the CPECs are the most important financial source for those interviewed, the informal sector also provides an important source of credit for many of the rural members. The results of the urban survey indicate that the majority of the entrepreneurs in the manufacturing sector are non-CPEC members. The reported sources of financing used by entrepreneurs include both informal and formal channels, although they are concentrated on informal agents. Most of the entrepreneurs (96 percent) reported that they use retained earnings as a source of financing their current operations. In addition, informal credit and supplier credit were common financing tools. Only 13 percent of the interviewed entrepreneurs have acquired formal finance from a commercial bank or a CPEC for the purpose of operating their businesses. Among the most common savings channels are the commercial banks, CPECs, tontines (ROSCAs), and money keepers. However, with the recent instability in the political and economic arenas, fewer people nowadays feel confident placing their savings in commercial banks. The large array of financial services used by micro and small scale entrepreneurs in Niamey indicates that there is room for the CPECs to attract a large number of manufacturing enterprises into their pool of clientele as they expand in urban areas. PERFORMANCE The performance of the Niger CPEC movement has been remarkable in general. The most notable result of the nascent credit union movement has been the strong interest and rapid growth in savings mobilization. While this clearly demonstrates the ability of a low income 7 The client survey was conducted by Korotoumou Ouattara and Mayada Baydas in the departments of Zinder and Maradi and included 720 individuals, half of whom were CPEC members. In Niamey, 159 urban enterprises were surveyed. SUSTAINABLE BANKING WITH THE POOR 6 clientele to save, it also has presented other problems associated with the rapid growth of the CPECs including liquidity management and high arrears. Overall program indicators demonstrate favorable trends related to sustainability and efficiency. However, the political and economic changes in 1996 have led to a backslide in several indicators, giving rise for concern. OUTREACH Scale of Outreach In a relatively short period of time from 1989 to present, the CPEC movement has grown significantly, surpassing all expectations and goals. The phase of rapid growth occurred from 1990 to 1995. By April of 1997, 65 credit unions had been created encompassing some 12,700 members, averaging 195 members per credit union. As a result of the fast expansion and the political and economic uncertainty in the country, network management has deliberately slowed growth in 1996, 1997, and 1998, focusing more on financial sustainability, sound banking practices, and managed growth. The National Forum of CPECs plans to reduce the network from 65 to 50 by liquidating some poorly managed credit unions and merging smaller ones with stronger, healthier credit unions. Depth of Outreach With most CPECs located in rural areas, the target population remains the economically active poor. CPEC clients in Zinder and Maradi departments are mostly farmers or microentrepreneurs. With an average loan size of US $220 and a ratio of average loan size over GDP per capita of 87.7 percent, the CPEC movement in Niger is undoubtedly reaching many poor clients. Figure 1 illustrates the characteristics of the clients of the CPEC movement in comparison to the country average by constructing a depth of outreach diamond. The outreach diamond illustrates four categories of banking clients that are often favored in any country: males, urban inhabitants, the wealthy, and the literate. The square represents the country averages for the general population of each of these categories for Niger. The diamond illustrates the average CPEC member. Comparing the two, it is evident that the CPEC clientele is made up of more men who are also more literate than the average country population (although only approximately half of CPECs members are literate). The income of the CPEC member is similar to the country average. The CPECs have had great success in reaching rural clients, a group that has long been overlooked by formal finance. SUSTAINABLE BANKING WITH THE POOR 7 Figure 1. CPEC DEPTH OF OUTREACH DIAMOND Income/GNP per EA population 1.5 1 0.5 Niger Adult literacy 1995 (%) 0 % male CPEC % urban LOAN PORTFOLIO Scale and Growth Table 1 is an illustration of the rapid expansion of the loan portfolio from 1993 (when the CPECs began granting loans) to 1996. Early growth of the loan portfolio exceeded projections given the unexpectedly fast growth of deposits. However, the political and economic uncertainty of 1996, coupled with a conscious effort on the part of management to control growth led to a slight decline in outstanding loan portfolio in real terms by December of 1996. Table 1. Real Growth in Niger CPECs Outstanding Loan Portfolio (1993-1996) 1 Date Number of Loans Real Outstanding Loan Real Growth in % outstanding Amount in CFAF 12-31-93 68 2,264,201 -- 12-31-94 430 36,270,774 1501.9% 12-31-95 1,185 102,993,704 184.0% 12-31-96 1,144 93,666,407 -9.1% 1 Real 1990 prices SUSTAINABLE BANKING WITH THE POOR 8  Portfolio Quality While the CPECs eventually collect repayment on nearly 100 percent of the outstanding loans, slow repayment is a key concern for program survival. By the end of 1996, the outstanding loan portfolio had reached CFAF 129 million (US $252,587) but arrears rates were increasing (Table 2)8. After only four years of loan activities, 34 percent of the outstanding loan portfolio was in arrears. In previous years, most of the arrears were marginally late (1 to 2 months) and eventually repaid. However, by the end of 1996, the composition of the arrears shifted from marginally late payments of 1 to 2 months to 2 to 12 months arrears. Part of the reason for the high arrears rate may be associated with the rapid growth of the institution whereby screening, evaluation, and monitoring of loans may have been weakened by the relatively abundant availability of funds. This alarming trend should be taken very seriously and monitored carefully by program managers as they strive for financial viability. Table 2. Portfolio Quality (1993-1996) Date Number of Outstanding Amount Amount Amount Amount Loans Loan Amount 1-2 Months 2-6 Months 6-12 Months more than Outstanding (CFAF) in Arrears in Arrears in Arrears 12 months in Arrears 12-93 68 1,969,855 19.5% 10.1% 4.9% 0.0% 12-94 430 42,944,596 22.6% 5.3% 0.0% 0.0% 12-95 1,185 134,818,758 17.2% 9.9% 0.8% 0.1% 12-96 1,144 129,072,309 5.3% 15.3% 10.1% 3.6% Deposit Mobilization The growth of assets, deposits, and shares has been remarkable throughout the brief history of the CPECs. Table 3 illustrates this impressive growth from 1990 to 1996. The years of highest growth were 1992, 1993, and 1994. Growth in the volume of deposits has been the most noteworthy, averaging 150 percent annually from 1990 to 1996. The interest in savings mobilization among members is perhaps one of the most important lessons of the CPEC movement. Many credit-first microfinance institutions justify their emphasis on credit rather than on savings by stating that low income people in developing countries are too poor to save. The experience of the CPECs in Niger has proven the opposite. Not only are the members interested, willing, and eager to save, but the savings instruments are more popular than loans. Many clients choose to save without ever applying for a loan. As a result, one of the problems that the credit union movement has run into in Niger is excess liquidity and the problem of the safekeeping of funds. 8 While no portfolio at risk (PAR) indicator is available, one can assume that the PAR figure is very high for the CPEC movement since the PAR measure takes into account the outstanding balance of all loans in arrears, not only the installments past due. SUSTAINABLE BANKING WITH THE POOR 9 Table 3. Real Growth in CPEC Assets, Deposits and Shares, 1990-1996 (CFAF) 1 Date Real Total Real Total Real Total % Growth % Growth % Growth Assets Deposits Shares Assets Deposits Shares 12-90 2,737,440 1,052,050 517,250 -- -- -- 12-91 4,467,012 2,589,501 600,678 63.2% 146.1% 16.1% 12-92 13,403,654 8,116,894 1,455,772 200.1% 213.5% 142.4% 12-93 31,942,623 20,062,669 3,029,638 138.3% 147.2% 108.1% 12-94 110,031,672 74,668,563 4,926,280 244.5% 272.2% 62.6% 12-95 213,817,500 157,923,492 9,179,053 94.3% 111.5% 86.3% 12-96 259,499,729 183,704,374 10,194,942 21.4% 16.3% 11.1% 1 Real 1990 prices SUSTAINABILITY Key Indicators The CPEC network has made continual progress towards sustainability despite some of the setbacks it has confronted (such as the 1994 devaluation of the CFAF, the 1996 coup d'état, and the pulling out of USAID). By 1996, the CPECs had achieved operational and financial self- sufficiency9, with the highest levels of return on assets and return on equity (Table 4). These sustainability measures are much more favorable than those recorded in the early 1990's when the operation was initiated. The increased levels of sustainability are attributed to the economies of scale reached as the program expanded, increased mobilization of internal funds, and attention to cost effectiveness. Nevertheless, the CPEC operations have been subsidized through 1996 (at a decreasing rate) and the financial sustainability of the program in coming years will depend largely on internal management, repayment rates, and CPEC solvency. Table 4. CPEC Sustainability Measures Indicators 1993 1994 1995 1996 Operational self-sufficiency 139.2% 105.5% 120.0% 134.1% Financial self-sufficiency 95.2% 69.8% 93.2% 132.8% Return on Assets (ROA) 7.0% 5.2% 8.6% 8.6% Return on Equity (ROE) 20.8% 18.8% 35.8% 37.0% Subsidy Dependence Index na 146.2% 52.8% 12.1% See definitions of above indicators in annex 1. 9 These sustainability measures were calculated from the CPEC financial statements and do not include all WOCCU costs associated with training and technical assistance. Were these costs to be included, the financial sustainability measures of the CPECs would be much lower. SUSTAINABLE BANKING WITH THE POOR 10  Subsidy Dependence The objective of the Subsidy Dependence Index (SDI) is to provide a comprehensive method of assessing and measuring the overall financial costs involved in operating a microfinance institution (MFI) and quantifying its subsidy dependence. The SDI is a ratio that measures the percentage increase in the average on-lending interest rate required to compensate an MFI for the elimination of subsidies in a given year while keeping its return on equity equal to the approximate non concessional borrowing cost. The index assumes, for simplicity, that an increase in the on-lending interest rate is the only change made to compensate for loss of subsidy. An SDI of zero assumes that an MFI has achieved full self-sustainability. Figures from Table 4 show that the SDI (which was at extremely high levels of over 1000 percent during the first couple of years of CPEC operation)10 has dropped to more manageable levels in the past few years. In fact, the SDI declined from 146 percent in 1994 to 12 percent in 1996. Thus, in 1996, interest rates would have to be increased by 12 percent in order to eliminate the effects of subsidies to the CPECs. The drop to 12 percent is very impressive. The dramatic decline in the SDI is to a large extent a function of the CPECs lessened reliance on external funding. PEARLS Analysis One of the ways CPEC financial performance is measured is through PEARLS11 ratios, which is the equivalent of CAMEL12 rating for banks. The principal purpose of a financial ratings system is to provide information for both comparative and regulatory purposes. A rating system permits early detection of emerging problems and can therefore indicate measures that are needed to improve the safety and soundness of the institution. CAMEL rating system does not allow evaluation of the financial structure and growth that are important indicators in evaluating a credit union. PEARLS was created for credit unions to be used as a management tool and subsequently became a supervisory tool as well. The PEARLS system uses 36 financial ratios to assess the viability of the credit union as a cooperative financial institution. Some key ratios obtained for the Niger CPEC movement are presented in Table 5. 10 In 1994, the SDI was also calculated to include all WOCCU technical assurance costs. It amounted to 3,675 percent. 11 PEARLS (Protection, Effective financial structure, Asset quality, Rate of return and costs, Liquidity, and Signs of growth). 12 CAMEL (Capital adequacy, Asset quality, Management quality, Earnings record, and Liquidity position) SUSTAINABLE BANKING WITH THE POOR 11 Table 5. Average PEARLS Ratios Obtained for Niger CPECs in 1993 and 1994 1993 1994 Goal Definition (CUs=20) (CUs=37) in % P1 Provision for loan losses/Total 11.53 0.73 35.00 Delinquency E1 Loans/Total Assets 4.94 28.46 >=50.00 E5 Deposits/Total Assets 48.78 56.69 70-80.00 E8 Institutional Capital/Total Assets 27.09 5.38 >=10.00 A1 Total Loan Delinquency/Total 11.04 10.51 <1.00 Loan portfolio R7 Total Gross Income 9.72 11.63 Avg. Inc. Yield margin/Total Average Assets R10 Net earnings/Average Total 11.45 12.62 Avg. Inc. Yield Assets L1 (Total Liquid Cash Invest.- 146.21 97.70 >= 20 Immediate Oblig.)/Savings Deposits S1 Growth in Total Assets 34.11 141.71 > inflation S2 Growth in Loans 12.05 478.05 > inflation S3 Growth in Deposits 57.47 182.18 > inflation (Source: WOCCU/Niger data base) The 1994 PEARLS ratios showed a relatively good performance of the Niger CPECs with decent net earnings (R10) and strong growth in assets (S1), loans (S2), and savings (S3) at more than a 100 percent per year. The ratios also revealed the presence of excess liquidity (L1), and absence of adequate loan loss provision (P2) despite a favorable repayment rate. The full PEARLS rating system can be seen in Annex 2. Impact The approach to assessing the impact of the CPECs in the Zinder region required an examination of the financial structure of individuals in general, and of CPEC members in particular, in 1991 (before the CPECs) and in 199513. Data from a 1991 study involved a household baseline survey in 11 villages in Zinder. The results of the survey suggested that WOCCU should focus its efforts on five villages that included Dungas, Maguirami, Kantché, Matameye and Wacha. The 1995 survey attempted to revisit a random sub-sample of the 1991 sample in three villages--Dungas, Matameye and Kantché. The Zinder 1995 survey, thus, included 241 individuals in the three villages of whom 116 individuals were included in the 1991 sample. The findings of the 1995 survey indicate that there are numerous sources of funding channels individuals draw upon. These fall into informal and formal networks. The informal 13 This study was carried out by Korotoumou Ouattara and Mayada Baydas. SUSTAINABLE BANKING WITH THE POOR 12 channels that prevail in Zinder include family, friends, suppliers credit, customer advances, tontines (ROSCAs), and money keepers. Although the financial market is expanding in Niger through the expansion of the CPEC movement, formal channels used in Zinder include only two commercial banks, the CPECs and a few NGOs. The sources of funding in the Zinder region before the establishment of the CPECs were informal loans, trade loans and informal holdings with tontines and money keepers. After the establishment of the CPECs individuals have added CPEC loans and deposits to their principal sources of financing. Sources of finance for individuals’ activities include both informal and formal channels, although they are concentrated on informal agents. Most of the individuals surveyed in 1995 (99 percent) operating in the various sectors of activity reported that they use retained earnings as a source of financing their current operations. About 47 percent of the individuals reported they draw upon informal sources of finance from family and friends in their current operations. This represents a larger share of the 1995 sample compared to about 33 percent of the 1991 sample who reported using informal loans. Twenty-two percent of the individuals reported using customer advances and supplier credit to finance their business operations. This represents a smaller share of the 1995 sample as compared to the 52 percent of the 1991 sample who reported using trade credit. Finally, about 23 percent of the interviewed individuals have acquired formal finance from the CPEC or, in a few cases, from another non-bank institution for the purpose of operating their businesses. Individuals in the sample were found to participate in different savings channels before and after the establishment of the CPECs. Formal channels that became a part of individuals’ portfolios in the 1995 sample consisted of accounts largely held with the CPECs. The informal channels continued to be represented by tontines and moneykeepers. Among the most common savings channels are the CPECs and, in a few cases, commercial banks. Roughly about half the 1995 sample held at least an account with a formal financial institution in Zinder. Tontines and moneykeepers are the second most widely used savings channel among the individuals in the Zinder region. This informal savings channel which was used by 27 percent of the 1991 sample was used by only 12 percent of the 1995 sample. The most noticeable decline has been tontine participation as compared to saving with moneykeepers. Tontines represent about 5 percent of informal savings channels in 1995 compared to 3 percent in 1991. The results of the analysis of the 1991 and 1995 Zinder samples provide several lessons and insights about the importance of the various financial services individuals in Zinder drew upon before and after the CPECs were established. First, cash or retained earnings are used less by farm and non-farm enterprises with a larger number of employees, by traders, and used more by the group of individuals who were interviewed in both the 1991 and 1995 surveys. Also, informal loans are larger for enterprises with a smaller number of entrepreneurs, for men more than women, and for non-members in CPECs. Third, increases in informal holdings are associated with a decreased value in physical capital, with individuals who were interviewed in both the 1991 and 1995 surveys, with men more than women and with non-members in CPECs. Fourth, increases in trade loans are associated with increases in profitability, with entrepreneurs and salaried employees more than farmers, and with older individuals. Fifth, increases in deposit holdings are associated with individuals engaged in sectors of activities other than farming, with SUSTAINABLE BANKING WITH THE POOR 13 older individuals, and with men more than women. And finally, the long-term effects of using formal debt financing indicate that formal loans increase with a decreased value of physical assets, for women more than men, and for CPEC members. The analysis of the current and changing financial structure provides evidence of the success of the CPECs in providing competitive financial contracts that represent relatively important services for economic units and meet a part of their demand for both savings and loan services. Moreover, the study of the agent/household's use of alternative financial instruments available in Zinder sheds light on the existing patterns of financing, their relative significance in the overall financial structure of the firm/household, changes in the financial structure, and the determinants of the existing financial contracts. It is clear that several informal and formal financial channels exist for individuals to draw upon to finance their activities and to diversify their portfolios in Zinder in 1995. However, since the establishment of the CPECs, members have been using less informal loans and savings from friends and family, participating less in tontines, and using more formal loans and savings from the CPECs. DISCUSSION: LESSONS FROM OVERCOMING OBSTACLES Without a doubt, the CPEC movement in Niger has attempted a difficult task: building a healthy network of credit unions from scratch in one of the most challenging environments in the world. Despite the many obstacles that the network has been confronted with, it has achieved much success and offers invaluable insights to other institution building efforts around the world. While some of the obstacles were know ex ante (such as poverty, illiteracy, the regulatory and macroeconomic environment), many of the CPEC challenges have occurred unexpectedly (such as the political instability, uncertain funding, and rapid growth). The following discusses these obstacles and sheds light on the lessons learned by the CPECs in their first decade of operation14. UNDERDEVELOPED REGULATORY ENVIRONMENT One of the biggest contributions of the CPEC movement in Niger has been to promote a more favorable legal and regulatory environment for credit unions. In the 1980's a void existed in the regulatory environment regarding precise legislation for credit unions. Under old laws, credit unions would be regulated under the same laws that pertain to banks and agricultural cooperatives. WOCCU has been one of the active participants in the Central Bank's efforts to promote a uniform credit union law (“PARMEC law”) for the seven francophone countries of the Union economique et monétaire ouest-africaine (UEMOA) 15. Rather than being guided by a regulatory commission, the CPECs have been in the position of teaching the Central Bank what types of regulation are appropriate for this methodology. As a result, the CPECs have used voluntary independent audits, encouraged financial transparency, and worked with the government to enact appropriate regulation. The PARMEC law was enacted in Niger on May 14 Insights into these obstacles were obtained through telephone conversations with the WOCCU advisor to the CPECs, Roland Thurlow (April, 1998). 15 The “PARMEC law” was developed by the Banque Centrale des États de l’Afrique de l’Ouest (BCEAO) in 1994 with assistance from Développement International Desjardins, the French Canadian credit union organization. SUSTAINABLE BANKING WITH THE POOR 14 30, 1996. It ensures a smooth transition of the CPECs from a provisional to a permanent legal status. Meetings with credit union managers and government officials from other UMOA countries have been essential to promote a lasting legislative effort that will be useful to the various West African countries. The cost of such lobbying and education has been significant, yet in the end, WOCCU is satisfied with the results of their efforts. INADEQUATE EDUCATION AND TRAINING LEVELS Another valuable contribution of the CPECs has been in the area of education and training. As previously noted, Niger had the highest recorded illiteracy rate in the world in 1995, reaching 86 percent. While a relatively higher proportion of CPEC members are literate (45 percent), the education level of members remains a large obstacle to the self-management of CPECs. In order to combat the low education level of members and field agents, the CPECs have provided a variety of educational and training programs for CPEC leaders including basic training on credit union operations, accounting, finance, business management, and literacy training in both Haussa and Zarma, the two national languages. It has been found that one-time training is not sufficient. More than 50 percent of credit union leaders have required retraining and updating. As the CPECs become more sophisticated by offering a variety of financial products and managing an increasing volume of assets, the level of education and training increases proportionately. In order to address this, the network has trained staff abroad by participating in various training exercises in the United States, Canada, Benin, Togo, Senegal, and Burkina Faso. Also, regional meetings have been organized to share information and lessons from around the area. While necessary and useful, the cost of this intensive and recurring training is high. As external funding dries up, the extent to which on-going training is possible remains undetermined. INSTABILITY IN THE POLITICAL AND ECONOMIC ARENA In January 1996, military General Ibrahim Mainassara Bare led a coup d'état, overthrowing the democratically elected, yet controversial civilian government. In a July 1996 election, the general was elected to a five year presidency in what many critics condemned as a rigged election. For the past couple of years, the political system has been in disarray creating a notable distrust of government by Nigerian citizens. The coup d'etat had a serious negative effect on the CPEC movement. First, it hastened the departure of USAID (a move it had been considering anyway) since the U.S. government was opposed to the coup. This led to a drying up of donor funds that had been used to support WOCCU representatives in Niger and to provide funds for training and program development. Second, the coup led to increased skepticism among CPEC members about the potential role that the government could play in the CPEC movement. Fear of government embezzlement, weak regulations, a termination of external support, and unstable government banks led to a contraction of savings mobilization and increased arrears. SUSTAINABLE BANKING WITH THE POOR 15  In addition to political unrest, Niger has been plagued by economic uncertainty in the past few years. One of the shocks to the economy was the 100 percent devaluation of the CFAF in 1994. Interestingly, this large monetary change did not have a negative effect on the CPECs. In fact, savings increased in the years following the devaluation as many profited from the more favorable terms of trade with neighbors. UNCERTAIN FUNDING As a result of the withdrawal of USAID, the CPECs have had to confront the fear of all fledgling microfinance operations: that external funding will be withdrawn before sustained financial viability is achieved. While much progress had been made in attaining sustainability, program managers believe that the cessation of external funds has been premature and may endanger the survival of the network. According to the managers, another five to six years of support and training would be required in order to assure program viability. WOCCU evaluators predict a 50/50 chance of survival given the sudden termination of donor support.16 In order to strengthen the network, some weak credit unions are being liquidated with increased attention given to the strongest CPECs. LIQUIDITY MANAGEMENT With the strong demand for savings instruments, many CPECs have had problems with excess liquidity. While network management recommends that only 10 percent of funds remain as cash in the credit unions, with 70 percent allocated to loans and 20 percent placed in commercial banks, in reality, approximately 20 percent of savings remains unproductive in CPEC safes.17 Safes have been placed within each credit union to ensure the safekeeping of funds and to generate confidence among members. Nevertheless, money placed there remains idle. Few opportunities exist in Niger for the safe placement of the excess liquidity in savings instruments that offer a positive return. The commercial banking sector is unstable and offers an average 2 percent annual interest rate on savings, resulting in a negative real return. In addition, the safety of West African commercial banks remains a concern, especially considering the lack of deposit insurance. In 1989, credit unions in Cameroon used commercial banks to deposit excess liquidity and four of the five major commercial banks collapsed. While the deposits eventually were salvaged, a fear of formal financial instability exists there. The frailty of the large banks in Niger such as the BDRN (Banque de Dévelopement de la République du Niger) results in a reluctance to deposit money in them. In order to address this problem, CPECs can deposit their excess savings into a Central Financing Facility set up by the network. Central liquidity funds and to earn a positive rate of return are used by the Central Financing Facility to redistribute funds to other CPECs that have a higher demand for loans. Following the coup, the 16 WOCCU "Niger Credit Union Development Project" Funded by USAID, Niamey, June, 1997. 17 WOCCU "Rapport d'Evaluation à Mi-Terme du Projet de Développement des CPEC au Niger" funded by USAID, Feb. 1996. SUSTAINABLE BANKING WITH THE POOR 16 only bank considered safe enough for CPEC deposits was the BIAO (Banque Internationale pour l'Afrique Occidentale). The problem of excess liquidity can be addressed through proper CPEC management. The correct pricing of financial services and management of funds is critical to the smooth operation of the credit unions so that problems of excess liquidity are resolved efficiently. In order to encourage responsible CPEC management, the network offers management incentives. All credit unions are monitored, evaluated, and rewarded in some cases for their financial viability and liquidity management through regular progress reports that are published to all CPECs. GROWTH MANAGEMENT AND NETWORK FORMATION As a result of the rapid growth of the credit unions, CPEC management has been confronted with network and linking issues sooner than expected. The overall CPEC board is faced with planning the future and linkage strategies among CPECs. Currently, issues relating to creating a CPEC federation remain in the forefront as the board discusses the institutional structure of the CPECs and works with authorities to create a safe and efficient regulatory environment. In order to track the progress of individual credit unions, computerization has been implemented and uniform accounting standards are in place. Annual audits are shared at the General Assembly. In 1996, a National Forum was held to critically review the movement performance, encourage slower growth, and create the Niger Credit Union National Association to monitor and strengthen credit union development. CONCLUSIONS The CPEC movement is an interesting case study for several reasons. First, it presents a unique insight into the challenges of building a credit union from the ground up. In a relatively short time, the movement has achieved a degree of sustainability and outreach. In addition, the formation of this financial institution has taken place in one of the harshest environments possible, characterized by extreme poverty, illiteracy, political and economic instability, and an underdeveloped regulatory environment. Finally, it underscores the issues and challenges that arise when funding sources disappear sooner than anticipated. Without a doubt, if the CPECs had not focused so heavily on sustainability from the outset, emphasizing financial transparency and internal mobilization of funds, it is certain that the withdrawal of USAID and WOCCU would have led to an immediate collapse of the network. Donor funds have not been used to support the basic provision of financial services, but rather to grant continued training, education, regulatory reforms, and network creation. Without external funds for these services, it is unclear how the network will progress in these areas. However, given that a strong foundation was being created, hope for continued viability remains strong. More lessons will be offered in coming years as the fledgling network attempts to offer highly valued financial services to some of Niger's low income inhabitants. SUSTAINABLE BANKING WITH THE POOR 17  Annex 1. Summary Table of Outreach and Performance Indicators Dec-31-1996 ( latest available figures) Outreach Number of branches/field offices 65/2 Clientele Number of members (percentage of women) 12,340 (30%) Number of current borrowers (percentage of women) 1,185 (40%) Deposits Deposits outstanding in US $ $367,409 Average outstanding deposit in US $ $34.26 Average outstanding deposit as percentage of GDP per capita 13.2% Loans Number of loans outstanding 1,144 Loan portfolio outstanding in US $ $252,587 Number of loans disbursed 1935 Total amount disbursed in the period in US $ $367,400 Average loan portfolio for the period in US $ $263,891 Growth of outstanding portfolio over last three years (in real terms) 559% Average outstanding loan size in US $ $220 Average outstanding loan size as percentage of GDP per capita 74% Average loan size disbursed in US $ $190 Average loan size disbursed as percentage of GDP per capita 85% Range of loan distribution (maximum - minimum) $2,000 - $10 Average loan term (in months) 5 Nominal interest rate on loans 24% Real effective interest rate on loans 48-54% Volume of deposits/ volume of loans outstanding 70% Performance and sustainability Repayment and loan losses Percentage of portfolio in arrears (> 30 days) 34.3% Reserves for loan losses / average loan portfolio (ALP) 4.4% Profitability Gross financial spread/average loan portfolio 23.7% Gross financial spread/average performing assets (APA) 11.1% Operating costs ratio (percentage of ALP) 19.7% Operating costs ratio (percentage of APA) 9.2% Loan loss provision ratio (percentage of ALP) 4.4% Operational self-sufficiency 134.1% Financial self-sufficiency 132.8% Subsidy Dependence Index 12.1% Return on assets, ROA 8.6% Return on equity, ROE 37.0% SUSTAINABLE BANKING WITH THE POOR 18 Gross financial spread: financial income (interest and fees on loans and on investments) - financing costs (interest and fees on debt and deposits). Operating costs: personnel expenses, other administrative expenses, including depreciation of fixed assets. Operating costs exclude financing costs and loan loss provisions. Operating income: interest and fee income from loans and from other finance-related services (same as financial income above). Operational self-sufficiency: operating income / sum of operating costs and loan loss provisions. Financial self-sufficiency: operating income / (operating costs + loan loss provisions + financing costs) SDI: See text. ROA = net income / average total assets for the period. ROE = net income / average equity for the period. SUSTAINABLE BANKING WITH THE POOR 19  ANNEX 2. List of PEARLS Ratios P = Protection P1 Provision for Loan Losses/Delinquency >12 months P2 Provision for Loan Losses / Total Delinquency E = Effective Financial Structure E1 Loans / Total Assets E2 Stocks and Bonds Investments / Total Assets E3 Other Investments / Total Assets E4 Liquid Cash Investments / Total Assets E5 Deposits / Total Assets E6 External Borrowing / Total Assets E7 Shares / Total Assets E8 Institutional Capital / Total Assets A = Asset Quality A1 Total Loan Delinquency / Total Loan Portfolio A2 Non-performing Assets in Liquidation / Total Assets A3 Annual Loan Charge-offs / Average Loan Portfolio A4 Accumulated Recoveries from Charged-off Loans/Accumulated Loans Charged-off A5 Non-earning Assets / Total Assets A6 Institutional Capital + Zero Cost Liabilities / Non-earning Assets A7 Financial Stabilization Counterpart (Stabilization Fund) R = Rates of Return and Cost R1 Total Loan Income / Average Loan Portfolio R2 Total Liquid Cash Investments Income / Average Liquid Cash Investments R3 Total Stock & Bond Investment Income / Average Stock & Bond Investment R4 Total Other Investment Income / Average Other Investment Income R5 Total Interest Cost on Savings Deposits / Average Savings Deposits R6 Total Interest (Dividend) Cost on Shares / Average Shares R7 Total Gross Income Margin / Total Average Assets R8 Total Operational (Overhead) Expenses / Total Average Assets R9 Total Loan Loss Provision Expense / Average Total Assets R10 Net Earnings / Average Total Assets L = Liquidity L1 [Total Liquid Cash Investments - Immediate Obligations] / Savings Deposits L2 Corporate (CFF) Liquidity Reserves / Savings Deposit L3 [Cash on Hand + Checking Accounts] / Total Assets S = Signs of Growth S1 Growth in Total Assets S2 Growth in Loans S3 Growth in Deposits S4 Growth in Shares S5 Growth in Institutional Capital S6 Growth in Membership Source: David C. Richardson (WOCCU Advisor). SUSTAINABLE BANKING WITH THE POOR 20