In response to this criticism, new programs in rural credit have emerged. These new models incorporate mobilization of sayings and strengthening of local financial intermediaries.

The purpose of this article is to present implementation options that support an integrated approach to rural financing and promote sustainability strategies for poor rural communities. The characteristics of these strategies can be summarized as follows:

• Financial intermediation models that have achieved the most successful outputs are those structured around local initiatives. Full participation of community members in the creation and operation of credit programs is critical to the success of a system of rural credit.
• Specialized local financial intermediaries have a greater probability of understanding the rural market and thereby offer services and products reflecting the real needs of the target population.
• In order to, be effective, rural credit should be integrated and not limited solely to agricultural activities, - especially if these activities are subsistence in nature.
• At a minimum, interest rates should cover the rate of inflation, the increase in capital required for subsequent loans, and the operating costs of the program.
• Savings at the local level is a source of financing for future loans and provides the opportunity for program clients to liberate themselves from dependence on external resources.

The experience of various practitioners (ACCION, FUNDES and others) teaches a fundamental lesson: owners of small enterprises want credit, not donations. Subsidized loans, which rarely are based on serious commercial criteria, hamper clients from successfully expanding their businesses on a sustainable basis.

Clients of rural credit realize that subsidized loan programs will not continue for long. Therefore, when crisis occurs either personally or within the bank, the client decides to not repay the loan. Subsidized credit programs give the wrong economic signals to the rural client in several ways:

• The credit program is not a serious business venture requiring repayment.
• It provides a poor example of business practice for the microentrepreneur.
• It discourages savings. Clients only make minimal savings to qualify for loans because they are concerned about the viability of the program and the security of their funds.

The role of financial intermediation is to efficiently coordinate the requirements for savings and credit. The role of credit in this process is to promote rapid capitalization through increases in productivity or improvements in technology.

Different operating 'environments determine the most appropriate credit methodology. Informal credit is most often used in the rural sector, and although the borrowed amounts tend to be small, loans are opportune in solving problems of family liquidity at minimal cost per transaction.

Successful rural credit programs usually depend on the following characteristics:

Commitment and Training

• Group formation, training, and commitment are essential for its success.
• Member participation fortifies understanding and commitment to the organization.
• Effective preliminary training and the requirement to save assists in self-selection of members of the group.
• Practical business education in managing capital is very effective; it is wise to begin with small, short-term loans and slowly increase them according to experience and need.

Administration

• Credit should not be used as an, incentive to introduce new technologies Or for agricultural extension.
• Precise accounting control is indispensable for a credit program.
• The use of solidarity groups as a cost effective mechanism for service delivery and repayment of loans.
• Mobilization of savings among the poor builds solidarity and can be used as a basis for a self-financing credit program.

Cost of Services

• The service provider's efficiency and minimization of cost per transaction is more important than the interest rate.
• The externalization or transfer of expenses using associate or solidarity group control mechanisms and promotion is effective in lowering program costs.
• The existence of continuous credit services and the opportunity for new loans are the best incentives for a high level of loan repayment.

Mobilization of savings

Credit fulfills its function best when it transfers and mobilizes resources within society itself. A myth exists that the majority of the rural population does not have savings. If this were true, the rural poor would have become extinct a long time ago. The rural poor, more than any sector of the society, must have liquid reserves in order to confront emergencies. The most important service that a financial intermediary can provide to the rural saver is the opportunity to hold liquid deposits that pay positive interest rates in real terms.

The mobilization of savings has several advantages for the organization which provides financial service and for its clients:

• Convenient sayings mechanisms give low-income producers the capacity to meet liquidity requirements, control their financial future, and adapt to unforeseen circumstances in their productive activity or at the family level.
• A history of regular savings on the part of low income clients, and the cash they succeed in accumulating can serve as a valid substitute for the requirements of traditional guarantees required to access loans,
• For the lending organization, mobilization of client savings can create a significant source of new funds for subsequent loans.
• Mobilization of savings converts intermediaries into responsible lenders with fiduciary commitment to the borrowers and creates a solid base for self-determined and sustainable institutions. It enables clients of the organization to develop capacity in admin- istration.
• Mobilization of savings improves the assignment of resources.
• It assists the producer in increasing capital for financial independence.
• It increases the economic stability of the family and allows the saver to cover emergency expenses, especially illness.

Mobilization of savings has significant, demonstrated impact. It increases the possibility of access to formal financial institutions, arid it is the first step towards the formation of permanent savings and credit organizations in the deprived rural sector.

Source:

"Innovation and Transfer" November 1997 - Vol. 6, No.3