Tough Crowd; Pitfalls and Progress in Agriculture Loans
By Marcus Berkowitz, KF16, Ecuador
Farmers are tough cookies. As it turns out, they’re even tougher to finance effectively. Those who work in agriculture are faced with a unique set of conditions that make most traditional microfinance methods unfeasible for them. This post examines some of the reasons why farmers stand apart from other borrowers, and explores the clever efforts of an Ecuadorian Kiva partner to craft a loan product that is appropriate to their needs.
The partner is the Cooperativa de Ahorro y Credito San Jose de Chimbo, (Cooperativa San Jose or CSJ for short), a credit union based at nearly 8000 feet above sea level in Ecuador’s poorest province of Bolivar. Under the shadow of Mt. Chimborazo, Ecuador’s tallest (pictured above, from my roof), CSJ offers a well-designed product called Ventanillas Rurales (Window to the Countryside) which specifically caters to the particular agricultural circumstances of the mostly corn, bean and potato growers that inhabit this shockingly beautiful slice of the northwestern Andes.
Unique agricultural circumstance #1; Cash Flow Blues
At very most a few harvests per year mean that the small, frequent loan repayments that are so common in microfinance make little sense for farmers, since unlike many other micro-businesses they have nothing that even remotely resembles a consistent cash-flow.
Unique agricultural circumstance #2; Precipitation, Production and Pricing
Farmers are highly dependent on the elements, and thus sometimes subject to wild swings in production that they have little to no control over. They are also price takers (as opposed to price setters) in the local marketplace. There are mountains of factors that determine the prices for their goods on the local market, virtually none of which they can influence in any meaningful way.
How does one manage such varied risk? CSJ’s solution is still evolving, but has been remarkably successful. The strategy has several elements; the first two are fairly standard, the rest less so.
1) Nationally recorded individual credit scores combined with group loan dynamics
Loans are given to each individual but guaranteed by the group leaders, who are obligated to repay in case of individual default. This gives the group a strong incentive to self-select carefully (see sections 3.1 and 3.2 in link), and puts a lot of pressure on the leadership to make sure best practices are followed and come up with schemes that mitigate both individual and group risk. In practice this often means encouragement of crop diversification, both at the individual and group levels.
Though repayment is guaranteed by the leadership, credit scores are kept at both the individual and group level and stored in a database accessible to financial institutions nationwide. This both mitigates the risk of over-indebtedness and encourages responsible behavior at the individual level so that group leaders are not stuck with a bill for which their members bear no responsibility. Individuals are encouraged to repay because if they do not their score will be docked and they will not likely be invited to join any groups for the following year’s loan, which brings us to…
2) Progressive lending structures
Group loans start at a certain amount per person, which slowly rises with each year’s loan. This gives both a group and an individual incentive to repay on time (see section 3.3 in link), because any delay can result in the amount being frozen or the loan request simply refused in the following year. The per-person amount is capped at a set amount after a few years, at which point the group members must use their hard-earned credit histories to apply for individual loans.
3) Single repayment just after the time of harvest with a flat interest rate
This allows individuals to repay the loan at an easily understandable rate at the time when they have the most cash on hand, thus attempting to accommodate farmers’ cash-flow issue. This differs from many other micro-loan terms, for which repayment often takes place much more often but in smaller amounts (see section 3.4 in link).
4) System of obligatory savings
Every month groups are required to meet with their Loan Officer. At this time, each individual must make a small contribution to the group savings account. These payments may only be removed before the term ends if they are needed to cover defaulted members. This in some ways is a partial substitute for gradual repayment, although the funds, which are tiny compared to the principal, do not usually go towards paying down the debt.
5) Training, capacity building, and convenience.
CSJ provides borrowers with training sessions on how to increase their sales. They also send loan officers out to each group once per month to conduct business, eliminating costly travel for borrowers.
There are certainly issues to be worked out. As just one example, the obligatory savings are a drop in the bucket compared to the amount of debt in a state and country (indeed, a hemisphere) that seems highly allergic to savings. But CSJ is constantly tweaking their model, and it remains a great plan to loan to them – no Ventanillas Rurales borrower on Kiva has ever defaulted!
Marcus Berkowitz is a first-time fellow with Cooperativa San José (CSJ) in the western Andes of Ecuador’s Bolívar province. Show support for CSJ´s hardworking rural borrowers by making a loan. Or get even more involved by joining CSJ’s lending team!