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A Systemic Approach to Rural Finance
A systemic approach of promoting Small Farmer Cooperative Ltd (SFCLs)

Since 2001 the GTZ Rural Finance Nepal (RUFIN) Project has been supporting the development of a cooperative system that provides financial and non financial services to the rural areas through its organisations. The project implementing organisations Agricultural Development Bank of Nepal (ADBN), Sana Kishan Bikas Bank (SKBB) and GTZ have the vision to make the SFCL model a leading microfinance and development example of Nepal.

The central problem of rural finance in Nepal is the inefficient and ineffective supply of microfinance services to the rural population. In order to achieve maximum impact, RUFINs outputs are following the principals of systemic promotion of the financial sector. This entails, that the project generates coordinated outputs on the micro, meso and macro levels.

The figure below depicts the financial systems approach to SFCL.

The SFCL Systems Approach

On the micro level SFCLs are enabled to provide financial and non-financial services. On the meso level, the Sana Kisan Bikas Bank (SKBB) and SFCL Federations provide refinance and non financial services for SFCLs. At the macro level interventions are geared towards improving the regulatory and supervisory framework for rural finance.

Establishment of grassroots institutions: Financial and non financial services for the rural poor

The Small Farmer Development Programme (SFDP) was Nepal's first group based poverty alleviation programme. The programme began as a pilot test in the districts of Dhanusha and Nuwakot in the mid 1970s. The success of the pilot test in the Terai and hills with support of FAO\UNDP encouraged the government and Agricultural Development Bank of Nepal (ADBN) to gradually expand the program. The Sub Project Offices (SPOs) of SFDP reached 459 in 1993, benefiting two hundred thousand small farmer households (i.e. more than 1.2 million below poverty line) in over 649 Village Development Committee (VDCs ) of 75 districts. However, due to rapid expansion, the programme faced several problems: high overhead costs, low repayment rate and lack of competent staff. In 1987, the ADBN introduced an action research Institutional Development Programme (IDP) with support of the German Technical Cooperation (GTZ). The objective of the IDP was to transfer the ADBN run SPOs into fully self administered and managed cooperatives of small farmers i.e. SFCLs.

A Small Farmer Cooperative Ltd is a multi-service cooperative designed to deliver primarily financial, but also non financial services to its members in rural areas. SFCLs are civil society organizations that pool their joint resources to meet basic needs and to defend their members’ interests. They are member owned and managed and have an open membership policy towards “poor” farmers.

Small Farmer Cooperatives Ltd organizations and products, have been comprehensively researched. An interesting feature that distinguishes SFCLs from other Micro Finance Institutions (MFIs) is their unique three tiered structure with small farmer groups, at village level inter-groups at ward level and the main committee at VDC level.

Small farmer groups are formed as joint liability groups in the village, usually consisting of 5 to 12 members. They allow members to access financial and non financial services required by the group and/or group members. From each small farmer group within a defined area, one representative member joins the so called inter group. The inter group further validates specific group requests and gives approval and recommendations to the main committee. It also functions as an intermediary between the groups and the main committee. One representative of each inter group joins the main committee at the VDC level. The members of the main committee approve the programme of the SFCL and decide on program implementation. To handle daily operations of the organisation, a manager, an assistant manager and a helper are employed by the SFCL. Either the manager or the assistant manager should be female.

The Organizational set up of a Small Farmer Cooperative Ltd.

SFCLs deliver various financial and non financial services. Financial services include various forms of voluntary and compulsory savings products, a variety of loan products as well as a livestock insurance scheme. Non financial services include construction of irrigation channels, establishment of milk collection centres, nursery programmes, women empowerment programmes, and other social mobilization activities. New products and services are continuously added as per requirements.

Service Delivery System of SFCL

Through this unique organizational set up, SFLCs deliver their services to members. Important messages from the main committee can be effectively delivered through the inter group representatives without calling an assembly. Particularly for hill and remote areas, the three tiered structure appears to be appropriate, since the small farmers will be able to do the majority of their activities within their groups at the local level.

Creation and Strengthening of Sana Kisan Bikas Bank: A bank for and by the poor

The Sana Kisan Bikas Bank (SKBB) was registered in July 2001 with the Company Registrars Office. The bank received its operating license from the Nepal Rastra Bank (Central Bank) in March 2002 and started lending operations from three area offices in November 2002.

The objectives of the SKBB are:

	To act as a specialized, professional and lean rural finance institution to refinance SFCLs and similar institutions in rural and remote areas
	To encourage SFCLs to become majority shareholders within 5-10 years

Thus, the vision of the SKBB is to establish a refinance institution which is driven and guided by its members, i e SFCLs and similar organizations. As of Jan 2007, the SKBB has established eight area offices. The Head Office and Area Offices of SKBB have been well equipped with the financial assistance of GTZ/RUFIN. The remaining Area Office will be instituted shortly. To bring SKBB into operation, ADBN has handed over 133 SFCLs to the SKBB. Other remaining SFCLs will be gradually handed over in the near future.

SFCL Federations: The pillar of non financial support services

Besides refinance facilities provided through the SKBB, SFCLs need technical assistance and guidance. In order to achieve full autonomy from external support, SFCL federations will provide non financial services to their members such as training, consultancy, supervision, stationary management and auditing.

From the start, a guiding principle was to separate financial and non financial services at the apex level. While the SKBB was established to meet the financial requirements of the SFCLs, the federation system has been set up for non financial services. Eight federations and one central federation have been formed.

Replication: Creating new MF institutions at a discount rate

The process of institution building in micro finance is generally considered as very costly. The lack of capacity building measures for MFIs is probably the single most important factor that is why many MFIs are still struggling for survival. Against this background, SFCLs have initiated a farmer to farmer replication with support from ADBN and SKBB. The core idea of replication is to minimize the institution building costs of a community based organization through the exclusive involvement of mature and highly experienced SFCLs. Being the real practitioners, the small farmers appear to be more knowledgeable and capable to work with rural poor. This approach leads to a significant reduction in the institution building costs of up to 50% in comparison to the earlier SFCLs set up cost.

The process of replication takes about three to four years. In this process the replicators provide micro finance services and training (social mobilization, capacity building, financial and accounting management) to the rural poor women in order to establish a sustainable MFI to be registered in the form of a SFCL. The SFCL Chhatredeurali, for example, started a replication initiative in 1998. It took 3.5 years to form SFCL Kewalpur with about 350 women members, and 93% financial self-sufficiency ratio.

The prime promoters of replication, are SFCLs with technical and financial support from ADBL, SKBB, GTZ and Consultative Group to Assist the Poor (CGAP). It is hoped that replication becomes the prime tool to support the establishment of new SFCLs all over the country.

Technical Assistance to other Projects and Programmes

The German Technical Cooperation (GTZ) is implementing the 'Rural Programme Nepal' (RPN) in line with the 10th Five Year Plan (2002-2007) of Nepal Government poverty reduction strategy in 15 districts under a bilateral agreement between the governments of Nepal and the Federal Republic of Germany. The programme is for three years, from January 2005 to December 2007. RPN's aim is to improve access to food for food deficit households and to provide short term-employment and long-term income opportunities. The components of RPN are: social mobilization, rural infrastructure development, economic promotion and strengthening of local service delivery in partnership with NGOs and government offices. RPN is also the lead Technical Assistance Provider for the Rural Community Infrastructure Works Programme implemented in 25 districts with support from Ministry of Local Development, World Food Programme and Department for International Development.

During social mobilization, self-help groups (SHG) and cooperatives are formed including members from the target population to help promote economy of member households.

RPN and RUFIN have completed an assessment of key institutional and financial aspects of cooperatives and SHGs, in order to recommend measures for developing existing and new cooperatives as viable institutions. The assessment reveals that most cooperatives and SHGs are not functioning and are far from attaining institutional and financial viability for a number of reasons: small membership size, limited accumulated funds and inadequate managerial capacity. Based on the recommendations of the assessment, RPN and RUFIN have formulated a strategy for strengthening cooperatives. As part of these recommendations, RUFIN is providing training and technical assistance to RPN's partner NGOs staff to strengthen existing and emerging cooperatives. The identified areas of training and technical assistance are: Cooperative Education, Amalgamation of SHGs and Formation of Cooperatives, Account Keeping, Savings and Credit Management, Business Planning, Financial Management and Product Development. It is projected that by the end of 2007 about seventy cooperatives will be strengthened thereby providing micro finance and other services on a sustainable basis to 30,000 poor households in the remote hills. By Jan 2007 hundred cooperative have been formed.

RUFIN is also providing technical assistance to Private Sector Promotion Project to set up and strengthen the agricultural production and marketing cooperatives in orange, tea, bamboo and hand made papers sectors. It is estimated that by the end of 2007 about twenty such cooperatives will be promoted and strengthened. In addition to this RUFIN has been requested by Churia Forest Development Project of GTZ and Decentralised Local Governance Support Prorgamme of UNDP to provide Technical Assistance for promoting and strengthening of community-based cooperatives.

RUFIN's Achievements in Rural Finance So Far

RUFIN is providing technical and financial support to its partners to establish a Systemic Approach in Rural Finance. It is assisting in strengthening financial management of the SFCLs through the introduction of international practices and standards. Furthermore, RUFIN is also providing financial and technical support to SKBB to set up area offices and SFCL federations. In particular, RUFIN is helping its partners by:

	Providing financial support to convert SPOs into SFCLs
	Providing stationery support to SFCLs free of cost during the initial first year
	Granting financial support to set up SFCL federations and the SKBB area offices with partners
	Providing stationery support to SFCL federations.
	Conducting capacity building measures to SFCLs and federations in partnership with ADBN and SKBB
	Conducting joint monitoring and supervision of SFCLs

Up until January 2007, 214 SFCLs have been established, of which 203 sub project offices of ADB/N have been transformed into SFCLs and 11 SFCLs grew by replication. These SFCLs serve estimated 130,000 member households reaching 700,000 poor. SFCLs have captured a significant share of the formal/semi-formal rural financial market. The SFCLs have followed a strong path towards profitability with impressive growth rates in terms of deposit mobilization and increases in revenue. An ADBN/GTZ study in 2001 (Wehnert & Shakya) showed that from a sample of 33 SFCLs, the average financial self sufficiency ratio had increased from a poor 39% by mid July 1997 to 118% by mid July 2000, putting SFCLs in the category of successful microfinance institutions. Over the last couple of years however, business climate and security environment have deteriorated due to the Maoist conflict, adversely affecting the performance of SFCLs.