Rural Credit Cooperatives Research Articles

Reaching Rural Areas with Financial Services: Lessons from Financial Cooperatives in Brazil, Burkina Faso, Kenya, and Sri Lanka

This paper presents four cases of financial cooperative networks in developing countries with significant rural outreach. The four cases are SICREDI (Sistema de Cooperativa de Credito) in Brazil, SANASA in Sri Lanka, RCPB (Reseau des Caisses Populaires du Burkina) in Burkina Faso, and KERUSSU (Kenya Rural Savings and Credit Cooperative Society Union) in Kenya. These cases represent examples of FC networks with significant outreach in rural areas, but operating in widely varying economic contexts. Access to financial services contributes to rural development and poverty reduction by promoting income-enhancing and vulnerability-reducing investments, enabling better management of cash flows and risk, and facilitating remittances. However, financial access is limited in most rural areas in developing countries because of high transaction costs and risks attributed to low levels of economic activity, poor infrastructure, high levels of production and price risks in agriculture, and poor public policies, such as interest-rate caps and debt write-offs. Through a case study approach, this paper attempts to answer such questions as: Can FCs provide financial services in rural areas in developing countries and still be profitable? Do FCs provide services to low-income clients? How does the regulatory environment affect FC performance? How does the business model of FC networks affect FC performance?

Informal lending amongst friends and relatives: Can microcredit compete in rural China?

Abstract This paper explores the relationship between informal and formal lending in China with consideration of how the strength of informal lending might affect microcredit. Lending relationships involving trust are investigated using original survey data from over 1500 farm households. Econometric results confirm a relationship between trust and informal lending, and mistrust and formal lending. With over 67% of farm households borrowing from friends and relatives the economic significance between this form of informal lending and borrowing from Rural Credit Cooperatives and Micro Finance Institutions cannot be overlooked.

Informal Lenders and Rural Finance in China: A Report from the Field

Chinese farmers need loans. It’s hard for them to borrow from formal lenders like banks or even the rural credit cooperatives. Thus, to satisfy their financial needs, farmers borrow from informal lenders. While farmers have benefited from the post-Mao reform in many respects, financial reforms of the past three decades have failed to create an effective system in which farmers can borrow from formal lenders. To create an effective and efficient financial system that can meet farmers’ needs, it is necessary for informal lenders to play an active role in rural finance. China’s rural finances face four key problems: asymmetric information, a lack of collateral, the unique structure of costs and risks, and the nonproductive use of loans. Informal lenders have an advantage in solving these problems. This article proposes the creation of a financial system in which informal lenders play an active role in lending to farmers and formal and informal lenders cooperate with each other. It develops the argument based on the first author’s field research in the provinces of Guangdong, Henan, Jilin, Shaanxi, Shandong, and Shanxi.

Rural Credit Cooperatives in India

Recently, the Indian Congress asked a distinguished committee of experts to analyze and make policy recommendations about India's Cooperative Financial Institutions (CFIs), which included organizations such as credit unions and cooperative banks. One committee member, Mohan R. Narayan, a leading economist at a prestigious Indian university, was enthusiastic about the job; it was an opportunity to help millions of rural poor and to have a positive effect on the country. Some poor farmers, deeply in debts to money-lenders, had been reported to resort to committing suicide when they faced with draught or other catastrophes and saw little reason to continue living. Well-functioning CFIs would certainly help restore hope and boost income for the rural poor. But he knew the system had a long history of overregulation, financial laxity, and corruption. Creating an actionable and clear strategy would be no easy task. The case, written at the invitation of the World Bank to study the challenges of building inclusive financial system in emerging countries, invites students to discuss 1) The roles and responsibilities of financial institutions in poverty-reduction and economic development, 2) the benefits and risks of using public versus private institutions to aid development, and more specifically, 3) the economics of credit cooperatives—in particular how they function in an emerging market setting.

Rural Credit Cooperatives in India

Recently, the Indian Congress asked a distinguished committee of experts to analyze and make policy recommendations about India’s Cooperative Financial Institutions (CFIs), which included organizations such as credit unions and cooperative banks. One committee member, Mohan R. Narayan, a leading economist at a prestigious Indian university, was enthusiastic about the job; it was an opportunity to help millions of rural poor and to have a positive effect on the country. Some poor farmers, deeply in debts to money-lenders, had been reported to resort to committing suicide when they faced with draught or other catastrophes and saw little reason to continue living. Well-functioning CFIs would certainly help restore hope and boost income for the rural poor. But he knew the system had a long history of overregulation, financial laxity, and corruption. Creating an actionable and clear strategy would be no easy task. The case, written at the invitation of the World Bank to study the challenges of building inclusive financial system in emerging countries, invites students to discuss 1) The roles and responsibilities of financial institutions in poverty-reduction and economic development, 2) the benefits and risks of using public versus private institutions to aid development, and more specifically, 3) the economics of credit cooperatives -- in particular how they function in an emerging market setting.

The Communist Party and Financial Institutions: Institutional Design of China's Post-Reform Rural Credit Cooperatives

Financial-sector reform is a cornerstone of economic restructuring in China. Described by Nicholas Lardy as the Unfinished Economic Revolution,1 the path of reform followed by China's financial sector, which holds the country's enormous savings, has been a rocky one. It is widely recognized that the impediments to financial reforms stem in large part from the complex political-economic realities facing transitional China. Scholarship on the political economy of financial-sector reform has tended to examine it either from the angle of institutional politics at the central level (for example, Heilmann)2 or from the perspective of elite politics (for example, Shih and Liew).3 What is largely missing from the literature is the configuration of the Communist Party's power in the financial organizations. Beset by lack of access to valuable data, a majority of researchers studying China's financial sector have tended to treat Communist Party institutions as non-existent or something exogenous to the system. Notable exceptions are Heilmann, who looks at policy making and institutional politics in Shanghai's financial

Development of Local Financial Systems in Mainland China

Two Beijing-based economic geographers present a comprehensive study of local financial systems in China. The paper analyzes the most recently available (2006) regional data on exogenous (state-owned, foreign-owned, and joint shareholder-owned) and endogenous (city commercial banks and rural credit cooperatives) banks, highlighting the differences between the country's coastal and the lagging rural provinces located in China's central and western macroregions. A key component of the analysis is the geographic distribution of bank branches and assets. Special attention is devoted to Shanghai, the country's traditional financial center, which has attracted the bulk of foreign-owned banks and financial service providers seeking entry into the vast Chinese market. Journal of Economic Literature, Classification Numbers: G21, G28, O18, P34. 9 figures, 3 tables, 54 references.

Reform of Rural Credit Cooperative（RCC）and Borrowing Behaviors of Rural Household in China: A Case Study of Jiangsu Province

Reform of Rural Credit Cooperative（RCC）and Borrowing Behaviors of Rural Household in China: A Case Study of Jiangsu Province

Aplicação da análise envoltória de dados em cooperativas de crédito rural

A forma cooperativa de organização tem-se mostrado uma alternativa importante para o desenvolvimento das pequenas e médias organizações. Entretanto, assim como ocorre em outras organizações, as cooperativas necessitam ser avaliadas do ponto de vista da eficiência que apresentam ao desempenharem suas atividades. A avaliação de eficiência é de grande importância para as organizações deste tipo, pois as cooperativas possuem uma gestão que deve atender às necessidades dos seus diversos cooperados. Neste trabalho foi realizada a aplicação do método Análise Envoltória de Dados (DEA) para avaliar o desempenho das cooperativas de crédito rural do estado de São Paulo. O estudo realizado demonstrou que as cooperativas que dispunham de maiores volumes de recursos conseguiram obter desempenho superior, no tocante ao seu objetivo de operação (concessão de crédito). Um dos resultados mais relevantes, evidenciados no estudo, foi que as cooperativas que dispunham de maiores volumes de recursos conseguiram obter maiores taxas de eficiência, quando considerada a relação ativo total e despesas administrativas relativamente ao volume de crédito concedido. Os resultados obtidos demonstraram que a análise envoltória de dados pode ser uma interessante alternativa para a avaliação de desempenho.

Multiple Principals and Collective Action: China's Rural Credit Cooperatives and Poor Households' Access to Credit

Ample empirical evidence suggests that Rural Credit Cooperatives (RCCs), which are the core credit institutions in rural China, are not accountable to their member households. This article argues that this conundrum can be explained by an institutional analysis of the credit cooperatives using the multiple principals-agent framework: the credit cooperatives as agents are accountable to multiple heterogeneous principals—with multiple conflicting objectives. The multiple principals are (1) the County RCC Unions, which exercise control using the evaluation criteria on which the remuneration of grassroots RCC officers is assessed; (2) local party secretaries, who exert influence through top personnel appointment and dismissal in the credit cooperatives; and (3) member households, which are a “collective” principal. In a multiple-principals scenario, the “collective” principal has weaker control over the agents due to the “collective action” problem.

Why Did the Rural Agricultural Cooperation Funds Fail?: A Look at Changde, Hunan Province

A modern economy needs financial institutions that facilitate the transfer of funds from people who save to those who have productive investment opportunities. (1) In China, this function is performed overwhelmingly by the banking system. In 1985, a new type of financial institution came into being--the rural cooperative funds (RCFs). They were simple depository institutions that basically took savings deposits from peasant savers and lent them to other peasants and town and village enterprises (TVEs) in the same local area. These institutions filled a gap that was not filled adequately by the existing financial institutions, and they showed great promise. However, many of the RCFs ran into serious problems, primarily with their loan portfolios, and in 1997 they were ordered closed by the central government. Many peasant depositors have never gotten their money back. (2) The RCFs were not able to survive in the Chinese environment, with its heavy-handed government interference, its abuse of power by the privileged and powerful at the expense of the depositors, and its seeming disregard of some basic principles of business and economics. As China strives to develop an efficient, diversified and durable financial system, the short, ill-fated history of the RCFs provides some object lessons. Setting up the RCFs Structure and Need (3) The typical depository financial intermediary borrows at one rate and lends at a higher rate. After allowing for expenses, the difference between the two rates is the profit. Of course, loan losses are an expense, so these must be minimised. In China, some peasants have idle money, while others need money. A financial intermediary was required to absorb the idle money and then lend it to the peasants who needed it. The RCF was just such a financial intermediary. (4) Local governments at each level of government set up the RCFs. That is, there were county funds, town funds and village funds. The RCFs at each of the three levels operated independently of each other, so that village funds were not controlled by the town funds, and the town funds were not controlled by the county funds. The RCFs were under the supervision of the Ministry of Agriculture, not the central bank. (5) The RCFs had important advantages and seemingly could have done a good job, especially in the case of loans to peasants. Fund employees were local people who were familiar with all the peasant families. They knew which peasants were diligent and had the ability to repay loans and which peasants might not pay them back. A need existed in China for a financial institution such as the RCFs. (6) By providing financing to agriculture, the RCFs helped fill an important gap in the financial system. This was a healthy development. In a modern economy, there is need for a variety of financial institutions and financial instruments, not just banks and bank loans. Given the vast size of China as measured by both area and population, a diverse and decentralised financial system would be especially valuable. There exist two types of financing in the Chinese economy--financing done by official (or formal or governmental) institutions and financing that is done outside official institutions. As discussed below, the RCFs were nonofficial (or informal) institutions. (7) Official Financial Institutions The rural sector in China is served primarily by official institutions: a state bank (Agricultural Bank of China), a policy bank (Agricultural Development Bank of China) and thousands of rural credit cooperatives (RCCs). RCCs are small savings and lending organisations that are the main source of small-scale financial services at the local level in the countryside. Their main borrowing clients are farmers and TVEs. Almost every township has at least one RCC. Although created at the township level, their presence in villages through branches and Offices makes them the financial institution with the widest outreach among rural populations. …

Technical and Scale Efficiencies for Chinese Rural Credit Cooperatives: A Bootstrapping Approach in Data Envelopment Analysis

Chinese rural credit cooperatives (RCCs) are a major supplier of credit to the rural sector in China. However, Chinese RCCs are currently encountering operating problems, and experimental reform is occurring to restructure the RCCs. In order to have some idea about the efficacy of reform, it is important to have an understanding of the institutional economics underlying the delivery of rural credit in China. This paper evaluates pure technical efficiency, overall technical efficiency, and scale efficiencies for RCCs in China using non-parametric techniques. The use of a bootstrap algorithm allows for inference on efficiency measures.

Information systems in Spanish financial firms: an empirical analysis

In the period 2002–2003 we carried out a broad study of Information Systems (IS) in financial firms in Spain. Specifically, we surveyed one in five (44) banks, savings banks, rural credit cooperatives and credit cooperative banks. In general we can affirm that the IS of financial firms are in a more developed stage of their evolution than those of other firms, since they are more automated in terms of equipment and information. There is still, however, room for improvement, above all with regard to data transmission and computing tools among the highest levels of management.

Indian Cooperative Credit and the Sustainability Issue

Resource allocation in non-farm sector of less developed economies is generally not done according to any accepted theoretical behaviour pattern. Rural Credit cooperatives or credit unions as they are being called in many African countries provide one such illustration. Lack of efficiency in allocating credit is intimately associated with the sustainability issue of such cooperatives. The paper discusses the factors that need to be taken into account in formalizing cooperative behaviour. Two alternative criteria of efficiency namely optimizing returns and minimizing transaction cost have been highlighted in the paper. It does not however, develop a full fledged model depending on either of these behaviour assumptions.

Reforms of China's rural credit cooperatives and policy options

This paper provides an overview of the major reforms to rural credit cooperatives (RCCs) since the middle 1990s and discusses future challenges for RCCs, including unfinished RCC reforms. The focus is on ownership structure, corporate governance, and the historical burdens of RCCs. The paper also presents the official line for future RCC reforms.

中国農村信用合作社における協同組合的経営改革の展開

中国農村信用合作社における協同組合的経営改革の展開

Economic Reforms and State Sector Bankruptcy in China

The deterioration in government finances, the bad loan problem in the state banking system and the losses of state-owned enterprises (SOEs) are well-known characteristics of China's reform period. The decrease in the share of government revenues in GDP is frequently cited as sign of a deterioration in government finances. A corollary is the gradual rise in the budget deficit. While the 1978 budget was still in surplus, new domestic government debt incurred in 1997 was equal to 28.63 per cent of total government revenues, or 3.31 per cent of GDP.On the decline in the share of government revenues in GDP see, for example, Christine P.W. Wong, Christopher Heady and Woo Wing-Thye, Fiscal Management and Economic Reform in the People's Republic of China (Hong Kong: Oxford University Press, 1995). For the debt data see Zhongguo tongji nianjian 1998 (China Statistical Yearbook 1998) (Beijing: Zhongguo tongji chubanshe, 1999), pp. 55, 269 and 291. At the same time, bad loans in the banking system have come to account for perhaps as much as 25–50 per cent of all loans extended by the exclusively state-owned banking system.On the bad loan problem see, for example, John Bonin and Huang Yiping, “Dealing with the bad loans of the Chinese banks,” manuscript, Wesleyan University and Australian National University (March 2000), or Carsten Holz, “China's bad loan problem,” manuscript, Hong Kong University of Science & Technology (April 1999). All financial institutions in China are controlled by the state. All financial institutions except Minsheng Bank and the rural credit co-operatives are also state-owned. China Minsheng Bank is 85% owned by member enterprises of the All-China Federation of Industry and Commerce, a state-controlled federation of privately owned enterprises; the independence of China Minsheng Bank, not least due to the personnel appointments at its top tier, is highly doubtful. Its assets at end-1997 amounted to 0.20% of the total assets of all financial institutions (Zhongguo jinrong nianjian 1998 (Almanac of China's Finance and Banking 1998) (Beijing: Zhongguo jinrong chubanshe, 1999), pp. 508 and 563). The rural credit co-operatives are directly administered by the central bank. While they are formally owned by farmers, their aggregate net worth is negative; i.e. formal ownership comes neither with control rights nor with financial returns. SOE losses have grown continuously over the economic reform period; in the case of industrial SOEs, for which detailed data are available, losses in loss-making enterprises relative to profits in profitable enterprises rose from 7.64 per cent in 1978 to 45.92 per cent in 1997.On the data see Zhongguo tongji nianjian 1998, p. 461. Due to data limitations, industrial SOEs cover only those “with independent accounting system.” A comparison with all industrial state-owned units is possible based on Gross Output Value of Industry (GOVI). In 1978, industrial SOEs with independent accounting system produced 96.44% of GOVI of all industrial state-owned units, in 1997, 95.97%; this share was constant at 96% to 97% in the two decades in between. (Calculated from Gaige kaifang shiqi nian de zhongguo diqu jingji (China's Regional Economy in 17 Years of Reform and Opening) (Beijing: Zhongguo tongji chubanshe, 1996), p. 146; Zhongguo tongji nianjian 1998, pp. 435 and 454; Zhongguo tongji nianjian 1997, p. 413.)

Conflicts of Interest: Reform of the Rural Credit Cooperatives in China

Conflicts of Interest: Reform of the Rural Credit Cooperatives in China