Member-Owned MFIs in Agricultural and Rural Finance

Member-owned financial institutions (MOIs) are important in rural areas of developing countries. Rural people develop and operate a variety of cooperatives, credit unions, self-help groups, rotating saving and credit associations (ROSCAs), village-level savings groups or accumulating savings and credit associations (ASCAs), burial societies, and community funds serving a clientele usually poorer than bank clients. CGAP concluded that commercial banks provide the bulk of rural coverage, but on average only 26 percent of all bank branches are in rural areas compared with 45 percent for cooperatives, 38 percent for specialized state financial institutions, and 42 percent for microfinance institutions (CGAP, 2010).[1] However cooperatives and credit unions tend to be relatively small so their share of total savings and loan accounts also tends to be small (Christen et al., 2004).

Some MOIs achieve impressive outreach, serve rural markets, and reach more distant locations than other types of financial institution. They typically recover their costs and, although often limited in scope, their services respond better to client demand and are less costly for clients than alternatives. Their emphasis on mobilizing savings and lending at lower interest rates sets cooperatives and credit unions apart from other MFIs. They also build institutions that empower communities and create social capital, and have lower-cost, in-depth information about low-income local people that is difficult and costly for outside institutions to acquire. However, they are often highly localized, small scale, and susceptible to local co-variant risks. Frequent fraud and mismanagement limit their scale and continued existence (Hirschland et al., 2008; Zeller, 2006).

Financial cooperatives played important roles in developing agriculture in Western Europe, Canada, and the United States but have a bad reputation in many developing countries because of poor performance and heavy government interference. When properly managed, however, they can achieve success and compete with other financial institutions. This section summarizes examples where their performance in rural areas and in serving agriculture has been more positive.

  • [1] CGAP notes these results likely underestimate the size of the nonbank branch network due to incomplete data.
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