The Beauty and the Beast As One

Author: Michaël de Groot, Rabo Foundation.

In the sixth in our blog series to celebrate the International Year of Cooperatives, Michaël de Groot from Rabo Rural Fund contrasts the beauty of cooperatives as a concept, but a beauty that is all too commonly neglected in practice. How can we maintain the enormous potential of their influence while ensuring they remain fit for purpose, staying competitive and efficiently serving their members?

This blog is on the beauty of cooperatives, the power of their collective influence, and the ugliness of how they have been misused. This is not an academic plea, but rather reflects insights working for 30 years with farmer organizations, savings and credit cooperatives and stakeholders in 36 countries.Cooperatives are not some policy instruments to fix every problem in the world i.e. poverty, income, gender, youth, climate, biodiversity. Nor are they aggregators to bring subsidies for cheaper Agri-credit or to solve other social dilemmas. What are they? Cooperatives are enterprises with clear economic and social goals and a shared ownership, long-term value creation, responsible entrepreneurship. Their business needs to be solid, and the basis is a well-functioning stakeholder model.

The world is undergoing rapid changes – among them climate change, deforestation, lack of water, soil quality, migration, conflicts which leads to structural transformation of the places where we live. While Friedrich Raiffeisen had a keen eye for poverty reduction and created the first credit union in 1864 – the Heddesdorfer Darlehenskassenverein – it was functional within the confines of its time and place. 160 years later we maybe should renew our thinking on cooperatives and ask ourselves do we give them due recognition.

In the 1990s there was a lot of attention for microfinance as a way out of poverty reduction, starting with NGOs deploying microcredit programs changing into funds growing into non-bank financial institutions and finally into banks. The ‘peak’ was an IPO of Equity Bank in 2006 and Banco Compartamos in 2007. Microfinance was now seen as a separate asset class to invest in and a purely commercial venture. Was the cooperative sector forgotten i.e. not beautiful anymore?

On the contrary; there are more than 43,000 savings and credit cooperatives alive today with 900 million members that reach clients and areas (particularly rural areas) that are unattractive to banks.

1. They provide savings services to their members, unlike most microcredit funds;

2. Savings and credit cooperatives are often started locally, without major external support;

3. Their solid base of small savings accounts constitutes a stable, relatively low-cost funding source; and

4. Well-run savings and credit cooperatives have low administrative costs and offer loans at interest rates lower than those charged by other microcredit providers.

Our focus and technical support began in 1994 in Indonesia and Vietnam primarily supporting savings and credit cooperatives related to a second tier organisation Bank Umum Koperasi Indonesia (which later on transformed into Bank Bukopin) and in Vietnam the VPB bank for the Poor transformed into VBA, the Vietnam Bank of Agriculture. In Tanzania coffee cooperatives in the north Arusha region formed their own Kilimanjaro Cooperative Bank to provide thousands of farmers access to finance. The KCBL and the Tandahimba Community Bank merged in 2024 into Coop Bank Tanzania. The Cooperative Bank of Oromia in Ethiopia was founded 20 years ago by farmers and today serves almost 15 million clients. Digital services will enable the bank to serve the unserved and is a major step towards transforming Ethiopia’s agricultural sector. And in Sri Lanka the Sanasa Development Bank or SDB serving the co-operative sector was founded in 1997 by the Sanasa movement of 4 million people to finance the unbanked.

Learning from these experiences the Dutch NGO ICCO sought us as a partner for the Terrafina Program, reaching out to rural areas and strengthening 20 savings and credit cooperatives around the great Lakes area in six countries in East Africa. Harbu Microfinance Institution in Ethiopia went on to win the European Microfinance Award in 2010.

In Brazil the Cresol system was established in 1996 in the state of Paraná, southern Brazil, as an attempt to provide credit and other financial and non-financial services to smallholder farmers in the region. With over EUR 1.5 billion in assets, Cresol is the third largest cooperative group in Brazil. Cresol has a very strong social impact, serving over 25,000 producers with finance adapted to agricultural cycles. It has 70% of its portfolio dedicated to agricultural activities, reaching EUR 1 billion. Savings and credit cooperative Norandino in northern Peru, founded by three agricultural cooperatives in 2005, serves 27,500 members in with a vast range of products including digital/mobile banking.

What can we learn from these examples? What transformation do savings and credit cooperatives have to undertake to stay competitive and serve their members efficient?

• Governance. Based on 30+ years of experience, savings and credit cooperatives are usually traditionally governed by a volunteer board of directors, elected by members. Changes in economy, international regulation, laws and markets require adoption of a broader stakeholder model. Especially when you grow as financial institution, supervision of more sophisticated and risky operations require professional managers and a well-trained board. Often there is an imbalance between voluntary board members and professional staff. Renew your stakeholder model and avoid one-size-fits-all solutions. The business cases explained above all have different stakeholder models and different legal structures adapted to their situation.

• Collaborate, mergers, fusion.  Savings and credit cooperatives have many names around the world, including credit unions, SACCOs, or COOPACs – and typically share a common bond based on a limited geographic area, employer, community, or other connection. But nowadays to be competitive and provide and excellent service to your members investments are needed in IT, HR, digital money, payment services, and insurance. Scale is necessary to fulfil the essential role and stay competitive. One needs to collaborate whether it is to join together to form a second-tier association or to merge with another cooperative or to create a separate bank as a cooperative system.

• Improve regulation and supervision.  Countries such as Ecuador, Mexico, and Bolivia changed their laws and brought the ‘microfinance sector’ under supervision of the Central Banks. This resulted in a better protection of public savings and setting quality standards for governance and management. Yet, in many countries in the South, savings and credit cooperatives are often supervised by the same government agency that is responsible for all kinds of other (multi- purpose) cooperatives. Those ministries of cooperatives do not have the financial skills and political independence needed to oversee financial intermediaries. Supervising savings and credit cooperatives requires understanding their risk profile and proper supervision.

• Transform your financial products. In traditional savings and credit cooperatives, very limited loan products are offered and based on collateral – typically clients’ savings balance. It’s better to provide other loan products based on cash flow of the business and with variation according to risk levels. It’s better to be more flexible and understand the diversity of credit needs, such as working capital agricultural input loans, leasing, warehousing, housing loans etc. Try to use data to develop better instruments to assess and manage loan risk, apply credit scoring tools for risk analysis and offer flexible lines of credit to fund working capital needs.

Partnerships play an important role in the design and growth of cooperative systems. e-MFP members can play an important role in working on rationalising and increasing the impact of cooperative financial institutions in emerging economies who reach hundreds of millions of people. Especially when providing a focus on inclusive financial services for smaller food and agri producers.

Combining the cooperative principles with a sound banking structure that allows them to serve large numbers of customers and attract capital from third parties is what we should aim for together. It is not about capital investments.

As e-MFP members we have to put well-functioning cooperatives with huge potential at the heart of a multi-actor partnerships, with organisations such as International Fund for Agricultural Development, Gates Foundation, and the World Bank and employ blended finance to support the transition from a traditional savings and credit cooperative to a modern financial institution with a solid business model contributing to the social and economic challenges of today. There must be equality and equilibrium in the partnerships. e-MFP members can offer access to knowledge, network, financial solutions and innovation, and through our own partners, we have access to ‘critical’ food and agri markets, we learn from their travels in fast-growing markets and from innovations such as distribution via mobile phones.

The cooperative model can and will survive and thrive – but needs reform to keep it relevant for today. It does not have to be perfect; we just have to be truthful to our mission and be good at it.

Michaël de Groot is Senior investment manager at Rabo Rural Fund. He joined Rabo Foundation in December 1994 after his return from Sudan where he had been doing volunteer work in community banking projects and informal microfinance schemes. Before going to Africa he worked four years with NMB Bank (now ING) where he was engaged in risk management of international loans. At present he is senior investment manager with Rabo Rural Fund for Latin America. This fund (founded by Rabo Foundation) invests in sustainable Agri & Food supply chains for smallholder producers. Beside these activities he is a member of teams engaged in the development of another social ethical investment fund, a green fund, and micro-finance loans.

Michaël has 30 years international experience in co-operative savings and credit systems, village banking and a variety of other types of microfinance institutions with a wide knowledge of issues such as: strategy formulation and (re)positioning, organisational issues, savings and loan policies, membership development, new product design and institution building.