Three Features of Successful Rural Finance Programs

Financial policies

• Savings. Institutions that mobilize savings grow faster and have more secure financial bases. Increasing the value of savings relative to the loan portfolio is one measure of institutional success and sustainability.

• Interest rates. Successful credit institutions charge positive real interest rates ranging from 11% to 130%. These rates were significantly lower than those in informal money markets. The willingness of borrowers to pay high interest rates means that access to credit is more important than cost. Eliminating interest rate ceilings and liberalizing financial markets can only lead to greater access.

• Loan collection. The 4 cases studied by Yaron had annual loan collection rates between 80% and 98.6%. This can be achieved by making savings obligatory for borrowers, offering interest rate rebates for prompt repayment, and imposing annual penalty rates for late repayment.

• Collateral requirements. Strict collateral requirements usually put credit out of the reach of targeted groups. Successful programs offered credit without collateral. Character references and joint liability through groups allowed peer pressure to ensure high repayment rates.

Delivery mechanisms

• Effective loan administration. Yaron points to several elements:

• Incentive programs that tie employee bonuses to quantifiable performance criteria;
• Improved and on-going staff training.
• Incorporating existing social structures or peer groups into the lending process. Village leaders can provide information on loan applicants and so help in avoiding default. Using small groups allows peer group pressures to monitor borrowers.
• Innovative administrative techniques. Routine meetings, face-to-face contact, and mobile banking are ways to increase solidarity between institutions and borrowers and increase outreach and accountability.

• Loan collection

• Reward early repayment with increases in eligibility.
• Flexible repayment to meet clients' needs. In some circumstances, flexibility has shown positive results. In others a rigid repayment schedule has produced greater financial discipline.

Macroeconomic factors also essential for success. Stable economic conditions and low annual inflation rates of less than 10% are essential for success. This reduces uncertainty and encourages higher repayment rates. Unstable economies lead to erratic prices, losses in disposable income, and default on loans.

Implications

Other programs can learn from the successes of the programs and institutions analyzed by Yaron. The lessons from rural finance institutions can be applied to other circumstances and to extending credit to microenterprises in developing and industrialized nations.