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Akademie Deutscher Genossenschaften

(ADG)

Pros and Cons of State Involvement


in Cooperative Movements

Prof. Dr. Hans Dieter Seibel


(seibel@uni-koeln.de)

1 Nov 2014

1
Overview

1. The challenge of economic growth and poverty reduction:


Banking & microfinance in Europe – Lessons of history 3

2. The challenge of self-reliance:


The rise and fall of credit cooperatives in India
2.1 The rise: self-financed 11
2.2 The fall: government-financed –
From state sponsorship to state control 13
2.3 The challenge of restructuring credit cooperatives 14
2.4 The challenge of inclusive finance: SHG banking
for the rural poor in India 15

3. The challenge of coop autonomy vs state control in Vietnam 24

4. General conclusions and recommendations:


economic growth & sustainable poverty alleviation 39
2
1. The challenge of economic growth & poverty reduction:
Banking and microfinance in Europe – Lessons of history

500+ years of banking and financial intermediation


200+ years of microfinance
160+ years of coop. finance & rural development
Objective of banking: Economic growth
Objective of microfinance: Poverty alleviation

15th century:
Beginning of economic development and banking:
• Small and big business growth, international trade
• Banking: from deposit-taking to financial intermediation and
business finance (demand-led)

3
Poverty and the rise of microfinance (MF)

16th-18th century:
Tremendous increases in poverty
18th-19th century: Origin of microfinance (MF)
Objective: Poverty alleviation
Two (competing) MF movements:
• Municipality-based savings funds → banks
• Member-based cooperatives/credit cooperatives → banks
• Both movements: Savings-led, local, informal beginnings
• First priority of the poor: Depositing savings

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1st MF movement (origin in Germany & England):
Savings funds/banks for the poor

~ 1800, Germany: Initiated and governed by municipalities,


under municipal trusteeship (not ownership!)
• Sources of funds: savings of the poor ,
supplemented by charity, government funds
• Saving for emergencies, old age, MSEs → SMEs, consumption,
public municipal investments
• Savings → loanable funds → credit
Germany: 1778 first registered thrift society
1801 first community savings “bank“ (Sparkasse)
~ 1800, England: from informal „friendly societies“ to a state-owned
national savings bank (no private credit, collecting savings for the
budget, model for the colonies)

5
Second MF movement (origin in Germany)
SHGs/credit associations/cooperatives

1846/47 hunger year, many lost their farms or life


1847 1st rural charity (by Raiffeisen), unsustainable
1850 1st urban SHG/credit association (Schulze-Delitzsch)
1864 1st rural SHG/credit association (Raiffeisen)
Private initiative, member-owned, member-governed
Coop. strategy of poverty reduction and ec. growth:
Promoting member enterprises with savings & credit, input
supply and marketing services to individuals and SMEs
Evolution: from multipurpose to single purpose coops
1877 Federations for services, bank linkages, advocacy
~1900 spreading around the world

6
The role of the state (Germany):
Providing a regulatory framework

1838 (Prussian) Savings banks decree


Trusteeship by municipalities, not ownership
1867/1889 (Prussian/German) Cooperative Acts
Ownership by members
Start-up: joint liability (= collateral substitute for bank credit)
1889: Limited liability (access to central fund, refinanced by banks)
Auditing: by chartered accountants or coop. auditing federations
State kept at bay, state intrusion (by Bismarck) resisted
1934 Banking Act, covering 18,000 local finiancial institutions:
15,000 credit coops/banks + 2822 savings funds/banks
Supervision by the central bank, auxiliary supervision
delegated to auditing federations of the networks
(Coops: DGRV – German Cooperative and Raiffeisen Association)
7
Savings and cooperative banks (ex-MFIs):
two of three pillars of the German banking system (2010)

Mission:
Universal inclusive banking for all:
poor and non-poor, individual and SME finance
Outreach:
429 savings banks, 15,600 branches, 50 mn clients
1138 coop banks, 13,500 branches, 30 mn clients
Total assets (incl.central institutions): EUR 3.58 trillion
In % of total banking sector:
Cooperative banks: 10.3%
Savings banks: 27.5%
Total: 37.8%

8
Basic elements and steps
of savings and cooperative banks

 Self-help of communities and members, respectively


 Based on voluntary withdrawable savings
 Initially focusing on the poor, later including non-poor & SMEs
 Local autonomy in management and governance
 Local outreach, financing the local economy
 Federations, network-wide institutional safety net & deposit
guarantee scheme (Haftungsverbund)
 Access to refinancing by commercial banks
 Evolution of a legal and regulatory framework
 Auxiliary supervision delegated by financial authorities
to auditing federations of the networks (eg, DGRV)
 Transformation to full-service banks
9
Lessons of history
Commercial banks: Big business, big growth, big risks
Historical objective of MF: poverty alleviation
Results of microfinance / local banking:
• Inclusive access to finance for all and for SMEs
• Crisis-resilience of savings and coop banks, low risks
Impact: Sustainable poverty reduction a result of economic
growth & access to finance
Complex interaction between:
economic growth, poverty reduction, financial sector dev. &
microbanking

10
2. The challenge of self-reliance:
The rise and fall of credit coops in India

2.1 The rise: self-financed


Centuries of farmer indebtedness and dispossession
by moneylenders – since taxes had to be paid in cash
1904 Co-operative Credit Societies Act (Raiffeisen model)
= model for the former British Empire
1912 Amendment: Co-operative Societies Act (state sponsorship,
authorizing federations)
• Conducive framework of regulation and supervision
• Self-governance. Mandatory auditing
• Self-help & self-reliance – fund composition (1920/21):
50% shares and surplus, 10% deposits,
40% commercial credit (Strickland 1922:51)
• Loan interest rates 9% - 12% p.a.
• Rapid expansion: 50,000 credit coops by mid-1920s
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An early balance between an operational framework
provided by the State and self-managed operations
(Quotes, 1922-24)

“Registrars refuse to register societies unless the applicants have been


properly instructed in co-operative principles and unless there is
sufficient and efficient supervision…. Nonfunctioning societies are
dissolved by the Registrar.” (Strickland 1922: 45)
“The societies are not managed by Government or by officials, they
are in the hands of their members, subject to an audit prescribed
by law and carried out by non-officials under a decreasing official
supervision.” (Strickland 1922: 51)
“People’s Banks are the greatest benefit that India has yet received,”
stated a cooperative registrar. (Huss 1924: 82-83)
“Co-operative credit is tending to create a revolution… in rural India.
The people have developed an extraordinary capacity for united
action” (Prof. J. Sarkar, in Huss 1924: 83)

12
2.2 The fall: government-financed
From state sponsorship to state control
1935-… Reserve Bank of India (newly established) provides refinance
• Rapid increase of overdues
Post-war policy framework:
• Central planning, the State takes control
• „State partnership“ in equity, governance and management
• Bureaucracy, state intervention and loan channeling
→ interest rate subsidies, loan waivers (at election time)
• Multiple supervisors without power to enforce regulation
NABARD (Annual Report 2007, p. 87) on Credit Coop System (CCS):
• Low resource base, dependence on external financing, lack of
professionalism, weak MIS, poor internal controls
• 10% of agricultural loans of PACS financed from deposits
• 51% of 106,000 primary societies (PACS) loss-making
• 26% out of 1112 cooperative banks loss-making
$4.3 billion of deposits of 120 mn members at risk
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2.3 The challenge of restructuring & reforming
the credit cooperative sector (CCS)

Strategies: Mergers, closures, restructuring, capacity building


2006: Reform package for primary coops estimated at $3 billion:
• 92% for cleaning up balance sheets
• 8% for auditing, HR development, technology
Planned cost sharing:
• 68% central government
• 28% state governments
• 4% own funds of CCS
3/2012: Recapitalization to date: $2.28 billion (still ongoing)
• 86.6% provided by government, 13.% by credit coops
Risks: State assistance = a perverse incentive, rewarding defaulters
• Deepening dependence on the state
• Undermining self-reliance and the credit culture
Continuing challenge: Turning coops from government to members

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2.4 The challenge of inclusive finance: SHG banking
for the rural poor in India

Challenge:
A vast network of commercial, regional rural and coop.
banks has not reached some 300 million rural poor
Background:
*1986 APRACA-GIZ Program „Linking Banks and SHGs“
1988-91 1st pilot project in Indonesia (establishing
business relations between banks and existing SHGs
with savings and credit activities, market rates of
interest, no government intrusion, no capital injections)
Coop status of SHGs not feasible (due to state control)

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NABARD‘s SHG Linkage Banking Program
• 1987 National SHG study (carried out by NGOs)
• NGOs, GOs and banks establish autonomous SHGs
(= informal cooperatives, up to 20 members;
cooperative status not feasible due to state control of coops)
• Savings and internal lending first, bank credit next, refinanced by
NABARD
1991 Permission by RBI to open SHG bank accounts
1992 Pilot project, 1996 mainstreaming of SHG Banking
(Microcredit Innovations Dept., capacity building fund)
31/3/2011: 7.5 mn SHGs with bank savings accounts
100 mn members, population coverage 500 mn
4.8 mn SHGs with bank loans outstanding of $6.8 bn
+ approx. $5.2 bn loans from internal funds

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Self-help group in Karnataka State, India

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Challenges:

• Informal SHGs, depending on NGO and GO services


• NABARD monitors bank linkages, not internal funds or profits,
lack of reliable data, risk of fraud
• State interference with grants, interest rate subsidies
• Banks provide only term loans, lack of growth of internal funds,
resulting in shortage of access to small short-term loans
Recent pilot innovations:
Cash Credit Limited (CCL), an overdraft facility
Tablet-based accounting & MIS pilot (50,000 SHGs)
Mobile-based accounting & MIS pilot (10,000 SHGs)

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Pilot project Sector Own Control, AP:
Empowering SHGs and their coop federations

AP leading state in SHG Banking and federation development


21% of SHGs in India, 42% of SHG loans outstanding (2010)
1995 Mutually Aided Cooperative Societies (MACS) Act
AP: 22 coop district SHG federations: 100% MACS
1,099 coop subdistrict SHG federations: 100% MACS
38,300 coop village SHG federations: 92% MACS
Pilot project (supported by DGRV):
Sector Own Control: Development of Self-regulation and
Self-supervision of the SHG Federation System in AP

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Outcomes in Kamareddy Cluster, AP (2011)

Implementation (number of SHGs):


 SHG annual planning 1106
 SHG level general body meetings 1215
 SHG level election process 1215
 Interest paid on member savings 1250
 Financial literacy training sessions 2969
Systems established
 4317 SHGs audited: 31% in loss
 172 VOs: 171 VOs regularly audited, AGM meetings as per
bylaws
 6 MSs: Regularly audited, AGMs as per bylaws
 Elections conducted regularly in all VOs and MSs as per
byelaws
 VO and MS annual reports printed and submitted to GBMs
 Cooperation of external auditors and supervisors initiated
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Results

The SOC pilot has been successful in:


 building the capacity of women to manage their own affairs
 promoting the ability of women to manage their institutions
 improving transparency & accountability at all levels
 improving financial literacy among SHG members
 promoting growth of funds and profitability at all levels
 ensuring legal compliance as per MACS Act
 developing the required training materials
 making SOC material available in five Indian languages
 having ENABLE network members adopt the SOC system
 providing exposure visits and training programs to stakeholders as
potential adopters
 documenting systems and processes adopted in the pilot for
dissemination

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Phase II: Mainstreaming Sector Own Control

(1) Upscaling SOC throughout AP and in other states


(2) Establishing a state-level SHG financial institution
(3) Establishing a system of supervision for the SHG
federation system in AP (both rural and urban)

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Proposed system of regulation and supervision
for SHG federations in AP
Regulator
(RBI / NABARD)

Delegated Supervision

State Level Supervisory Body

Supervising

District Supervisory Federations at ZS


(22)

Controling Controling

Mandal Samakhyas Town Level Federations (81)


(1100)

Overseeing Overseeing

Village Organisations Slum Level Federations (7,200)


(38,000)
Overseeing

SHG SHG SHG SHG SHG SHG

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3. The challenge of cooperative autonomy
vs state sponsorship and control in Vietnam

• Late 1980s: Introduction of market economy


Collapse of the 1954-system of credit coops
• New system of People‘s Credit Funds (PCFs):
• the state examines the options,
• provides a legal framework
• active oversight by the central bank (SBV)
• capitalizes an apex fund (CCF) through SBV as majority
shareholder
• PCFs self-financed and self-managed
• PCF network part of the formal financial sector:

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Designing a system of rural credit coops
1990 Law on Banks, Credit Coops and Finance Companies
1991-92 examining the options:
• a Government team visits Bangladesh, Germany, Canada
• Technical assistance offered by DID, funded by CIDA
Deciding on a strategy:
• Steering committee, comprising SBV as lead agency, ministries,
Vietnam Cooperative Alliance
Implementation:
• Steering committees at central, provincial, district and commune levels
• New name: People‘s Credit Funds (PCF)
Mandatory training and supervision: by SBV branches

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Evolution of the PCF system
• 1993 – 2000 pilot project
• 1993 first PCFs established
• 1995 Central People‘s Credit Fund (CCF) established, apex fund for
liquidity exchange, refinancing, representation, advocacy)
• Assessment 1999: 82 non-performing PCFs closed (out of 977)
• 2000 CCF adds financial intermediation with the general public (SMEs)
• 2006 Vietnam Association of People’s Credit Fund (VAPCF) formed
• 2013 CCF transformed into Co-opBank (in operation from 1st July 2013)
• 2014 Safety Fund established, managed by Co-opBank, supervised by
SBV, Co-opBank & PCFs contribute 0.08% of annual average total loans
• Capacity building of PCFs initially by SBV branches, gradually transferred
to CCF/CBV: accounting, loan appraisal, general, credit, risk and liquidity
management, business law, payment, money transfer, IT…

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Number of PCFs, 1994-2013

1200

1000

800

600

400

200

0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

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2,000,000

1,800,000 PCF membership, 1994-2013


1,600,000
2,000,000

1,800,000
1,400,000

1,600,000
1,200,000
1,400,000
1,000,000
1,200,000

800,000
1,000,000

800,000
600,000

600,000
400,000

400,000
200,000
200,000

0
0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

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The PCF model

• Membership: individuals, cooperatives, local enterprises,


social organizations
• Governance: Elected board of 3-9, appoints MD
(approved by general assembly, confirmed by SBV)
• Deposit mobilization from members and non-members
• Lending outreach restricted to members in one commune
(~ 4 villages); up to 10% of portfolio to poor non-members
• Approx. 30% of borrowers are women
• PCFs pay income tax up to 25% after the first 2 years

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Oversight

• Daily internal control


• Random on-site inspections by SBV branches
• Off-site supervision by SBV
Reporting:
• Monthly reports to SBV and CCF branches (now online)
• SBV branches forward reports to PCF Division of Banking
Supervision Department of SBV

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PCF prudential standards and the role of SBV
(as of 2007 – Oct 2014)

• Minimum capital D100 million (= $17,000 in 1993, $4,640 in 2014)


• Risk-weighted capital adequacy ratio of 8% increased to 9%
• Fixed asset ratio not exceeding 50% of equity
• Reserve requirements of 1% of Dong and 8% of US$ deposits
(placed interest-free at SBV)
• Single borrower limit 15% of equity
• Adequate maturity matching (maximum of 10% of short-term
deposits used for term loans)
• Observance of SBV‘s provisioning rules
• Regulatory framework by SBV (loan appraisal, collateral,
provisioning, record-keeping, reporting)
• Supervision and enforcement by SBV, including closure

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Minimum capital requirements for local banks:
a commparison of four Asian countries (2014)

• Vietnam (PCFs): 1993: Dong 100 million


= $17,000 in 1993, $4,640 in 2014
• Indonesia (BPR): 1988: $ 29,000
$50,000 to $500,000, depending on location
• Philippines (Rural Banks): 1953: ?
$115,000 to $ 2.3 million, depending on location
• India:
$26.6 million (new draft law, 2014)

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Crisis resilience of PCFs and CCF

Asian financial crisis, 1997/98:


• Both PCFs and CCF unaffected
Global financial crisis:
• Global microfinance industry strongly affected
• PCFs unaffected
• CCF:
 deposits from the general public (SMEs) declined in 2008, then
resumed growing
 loans to the general public flattened in 2008, then resumed growing
 intermediation with PCFs remained stable

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PCFs: Total assets, loans outstanding, deposits and equity,
1994-2013 (in million US$)

3000

2500

2000
Million US-$

1500

1000

500

0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Total assets Loans Deposits Equity

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CCF/CoopBank: Total assets, loans outstanding, deposits
and equity, 1995-2013 (in million US$)

900

800

700

600
Million US-$

500

400

300

200

100

0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Total assets Loans Deposits Equity

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Outreach and performance of PCFs and CCF/CBV, June 2014
(amounts in billion US$)

PCFs CCF/CBV Total


No of PCFs 1,145
Total assets 3.2 0.95 4.15
Loans outstanding 2.4 0.64 3.04
Deposits 2.6 0.65 3.25
Owners‘ equity 0.17 0.11 0.28
NPL ratio (percent) 0.97 2.09
Av. return on assets in % 1.03 0.99
Av. return on equity in % 16.02 6.51

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Average size of PCFs, 1995-2013
(amounts in US$)

1995 2013 Increase in %


No of PCFs 567 1,132 100
No of members 271 1,539 467
Total assets 71,728 2,314,930 3,127
Loans outstanding 61,552 1,853,959 2,912
Deposits 43,545 1,778,347 3,984
Equity 7,619 151,172 1,884
Own funds in % of
total assets 71 83

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Lessons from PCFs: success factors

• Political will to create a sustainable system


• Participatory process of examining the options
• PCFs/CCF-CBV under prudential regulation and central bank
supervision
• State sponsorship/control through central bank/SBV without
undue intrusion
• Enforcement of standards by closing non-performing PCFs
• Mutual support network + self-financed Safety Fund
• Controlled outreach to the very poor
Result: A most successful reform of financial cooperatives
Continual policy issue: Interest rate interference by SBV –
an (ineffective) attempt to control inflation 38
4. General conclusions and recommendations:
Economic growth & sustainable poverty alleviation

Highlights
 Under Central Bank leadership enter into a participatory process of
stakeholder consultation, with the objective of initiating fin. sector
development for economic growth & sustainable poverty reduction
 Create a legal framework for microfinance local banks in private,
cooperative or community ownership under CB regulation and
supervision, possibly delegated to auditing apexes of their networks
 Focus on deposit-taking microfinance local (coop) banks offering
withdrawable savings to prevent overindebtedness and positive real
returns on savings to make poor savers richer, not poorer
 Abolish caps on interest rates
 Leave the definition of loan ceilings to each institution

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Thank you!

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