The power of the community

Milford Bateman argues that it is community-driven financial institutions rather than microfinance that can help poor people in Least Developed Countries move out of poverty

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Local communities in LDCs across the globe have been hit hard by the global financial crisis, with the already meagre economic and social gains made in recent years being abruptly put into reverse. Increasingly urgent calls are now being made for the international community to ‘do something’ to assist with job creation and income-generating initiatives to attempt to repair the situation, especially in the very poorest of communities. As in previous years, one of the most commonly- heard solutions being put forward is microfinance which, so the argument runs, is perfectly situated to help kick-start a ‘bottom-up’ recovery and a development trajectory animated by the poor themselves through self-employment and microenterprises.

The Ikidia Saving the Change group holds a weekly meeting in Domba, Mali | Photo: Rebecca Blackwell/Oxfam America

In spite of much heady rhetoric and uplifting PR surrounding the microfinance model this past thirty years, even long-time microfinance supporters now accept that its track record is actually very weak indeed. For others, the evidence reveals that microfinance is more likely a part of the development problem, and not part of the solution: LDCs wanted sustainable development, but are largely ending up with microdebt peonage.

With the dominant, commercialized microfinance model increasingly seen as problematic, many international development agencies, and LDC governments too, are starting to examine what might be better forms of local financial institutions to assist the poor. And what they are finding is that there are many local financial models and community-based financial institutions that actually have a very impressive record of promoting sustainable development and poverty reduction.

The CLP example

Perhaps the most important requirement of a local financial system in the LDCs is that it should not simply ameliorate poverty and under-development, but should move to permanently eradicate these problems over time. Well-designed and managed community development banks can do this. The Caja Laboral Popular (CLP) in the Basque region of northern Spain is one such locally-owned and controlled institution that has succeeded in supporting enterprise development in a historically backward and conflict-affected region. The CLP is a development bank that supported cooperative enterprises as the lynchpin around which the community could begin to develop and rapidly reduce poverty in a socially optimal manner. For example, cooperatives were founded near to where the members lived so they could easily travel to and from work, a decision that gave members more free time to enjoy their family lives. Thanks to its deep roots in the community, and because of various democratic checks and balances, the CLP has managed to successfully steer clear of both corruption and mismanagement. All told, in a little over 30 years, a once poor region was turned into one of Europe’s richest, most socially inclusive, and culturally vibrant regions.

Is the CLP experience a one-off? Not at all. Broadly similar results were achieved in northern Italy after 1945, when a network of cooperative banks and special credit institutions (SCIs) were decisive in reconstructing the physical and social infrastructure destroyed during the Second World War. By quickly mobilizing savings and then recycling these savings into long-term investment funds geared up to support potentially sustainable and/or fast-growth businesses, especially cooperative enterprises, these community-based financial institutions helped a conflict-ravaged region become perhaps Europe’s most economically and socially advanced. Importantly, they were able to develop methodologies to identify the best business prospects and then to carefully support them down the years. In some cases, government financial support was needed (as in the case of the SCIs), but this expenditure could not be seen as anything other than a fantastic investment, given the economic development and poverty reduction outcome achieved.

Governance issues

Spurred on by such uplifting examples, a growing number of LDCs have begun to (re)explore the idea of local cooperative banks and other community-based financial institutions. Many accept that the cooperative banking concept is a sound one, but the paramount issue is how to get the governance issues right. Privately owned, profit-driven financial institutions in many LDCs very often undermine trust in the community and create economic chaos, as seen most recently in Nigeria, where the licenses of 224 small privately owned microfinance banks were terminally revoked by the Central Bank because of excessive risk-taking and bad corporate governance. Of course, the cooperative model has not escaped similar forms of abuse and corruption, as seen, for example, with the collapse of many financial cooperatives in Haiti in 2002. But experience shows that community-ownership and control can help to increase the chances of there being proper accountability to both its savers and to the wider community, as well as enhance efficiency as a financial institution.

Some LDCs have been inspired by successes with the development bank concept at the national level in emerging economies, as in the case of Brazil. But, at the community level too, there are many creative examples of what can be done. For example, Akwandze Agricultural Finance (AAF), in South Africa’s Mpumalanga province, is a 50-50 joint venture between a farmer-owned cooperative (Liguguletfu Co-operative Ltd) and a sugar processor (Tsb Sugar). AAF has been able to help its poor farmer-members permanently escape poverty by turning subsistence farming operations into family farms, operating well above the minimum efficient scale. Involving more than 900 of the local sugar farmers who are members of Liguguletfu, in just a few years AAF has been able to help its farmer-members with access to affordable loans (16% interest rates), not just to underpin their normal operations, but also – crucially, in view of the need to scale-up in order to be successful into the longer term – to support their expansion plans. The farmers know that they need to grow beyond the minimum efficient scale if they are to really become secure and enjoy a decent return on their labour. Importantly, any profit in AAF is not channelled away to external shareholders, but recycled back into AAF to develop more services, as per the farmer-members’ wishes.

But it is not just development-driven, local financial institutions that can help LDCs to develop. Many analysts argue that promoting savings within poor communities is often an equally beneficial way of dealing with poverty. For example, helping the poor to save up for important purchases, rather than pay high interest rates on simple consumer loans obtained from microfinance providers, would be a major help to them. And here, dedicated community-based, saver-owned and controlled institutions have very often proved to be just the ticket. The idea is an old one, of course, stretching back to the building society movement founded in the United Kingdom (UK) in the late 18th century. For more than 150 years, the UK’s building societies worked extremely well for the local community, providing affordable loans for house purchases and small business development. They only floundered when they were demutualized and commercialized in the early 1990s. The positive experience of such community-based savings institutions can be replicated in many LDCs – given technical support and, perhaps, some initial capitalization too.

Real empowerment

Indeed, there are now many experiments underway using credit union-type community-owned organizations. For example, Oxfam America’s ‘Saving for Change’ programme in Mali involves upwards of 300,000 women managing over US$4m in their group funds. The women are helped to avoid contact with the local loan sharks and commercial microfinance institutions, and instead begin saving with their own institution. They save for regular ‘big-ticket’ items of expenditure and also for unforeseen emergencies, but they can also quickly access sufficient, affordable funds to start or expand a real business, as opposed to just a simple trading operation. This is real empowerment, achieved via a community-owned financial institution, not gradual entrapment in microdebt.

The conclusion to be drawn from the experiences of developed countries, and elsewhere, is that local financial institutions are overwhelmingly best configured as community-owned and controlled bodies, especially to maximize the chances that they remain focused on local development. Financial cooperatives, community development banks, and credit unions, have been very successful local financial-sector innovations in many developed countries, and their experience is urgently needed as the LDCs design their own financial institutions in the wake of the global crash. Above all, the lesson seems to be that we need to take local financial systems out of the hands of would-be Wall Street-types and aggressive, commercialized microfinance institutions, and return them to their rightful owners: local communities and local people.

• Milford Bateman is a research fellow at the Overseas Development Institute in London, United Kingdom, specializing in access to finance and enterprise development issues.