Paul Lobo

RESPONDING TO THE CHALLENGES IN FINANCIAL SERVICES DELIVERY IN POLPITHIGAMA, KURUNEGALA 1. Introduction National figures on microfinance in Sri Lanka generally provide an encouraging picture of the situation. There are many players: banks, cooperatives, microfinance NGOs and various government lending programs. Compared with other developing Asian countries, Sri Lanka has a relatively higher density of bank offices in relation to population. Surveys indicate the supply of services is considerably high: one in every two families has a micro loan, while every household has 2 savings accounts (AusAID and GTZ). Another study estimates micro credit market saturation at 80% (ADB). Statistics, however, can be misleading. The supply of financial services to the poor and very poor members of the population remains largely insufficient. Earlier inquiry conducted by Plan found that the requirements of low income people regarding access to financial services are largely unmet. Current services hardly take into account the needs of clients and are mainly used by non-poor people or those close to the poverty line. Several programs have been set up for the purpose of providing financial services to the poor. But many of the people indicated they did not use these systems. In collaboration with a local microfinance institution, Sarvodaya Economic Enterprise Development Services (SEEDS), Plan Sri Lanka seeks to broaden participation by the low income and very poor households in financial services. Both institutions have agreed that prevailing services do not reach the more marginalized and very poor households, and that many rural communities in Kurunegala remain unserved. Specifically, the microfinance program aims to: Provide financial services to low income and very poor households in more remote and isolated areas; Develop a methodology and offer products appropriate for the target group; and, Monitor and evaluate program performance for sustainability, outreach and desired impact. 2. The Program Area and Microfinance Players Polpithigama Division in Kurunegala District has been chosen as Project area. The Division is located 43 kilometers north of Kurunegala town, the commercial and business center of the District. It has a total population of 82,604 (22,004 households) in 2004, 99% of which are Buddhists. It is a predominantly farming area with paddy, copra, vegetables, as major crops. Livelihood opportunities are quite limited to agri-based enterprises, are highly seasonal and largely influenced by weather. The road network is underdeveloped and transportation services especially in the more remote villages are quite limited. Roads to outlying villages are unpaved and could be difficult to traverse during the rainy season. Five (5) institutions provide banking services in the Division. All are located in the town center, with limited clientele outreach in the distant communities. Three of the banks are under the government: Wayamba Development Bank – a Regional Development Bank established under management of the Central Bank and financed entirely by government. People’s Bank – a state-owned commercial bank whose microfinance operations are directed by government. 1 Samurdhi Bank – a government program on poverty alleviation that directly provides credit and savings services. The Bank is based at the divisional secretariat level under the supervision of Samurdhi Authority with the Divisional Secretary playing a key oversight role. The private banking institutions were set up by the cooperative movement. These are Sanasa Development Bank - a specialized bank with primary societies and district unions as share holders. The Bank provides loans to qualified primary thrift and credit co-operative societies. Co-operative Rural Bank - a banking division of the Multi-Purpose Cooperative Society, set up as an independent profit centre and given semi-autonomy from the MPCS. It does not have separate legal status. Banks extend credit for various purposes: agriculture/ cultivation, self-employment, business, housing, consumption, emergency, asset acquisition. Interest rate is generally 18% p.a., with the Co-operative Rural Bank offering a slightly lower rate (16% p.a.). Pawning services are widely offered as well. (Annex A.) Even with a considerable number of banking offices operating in the area, financial transactions seem to be mostly informal. Moneylenders provide credit for both farm and non-farm purposes. Interest rates are generally in the range of 10 - 20% per month. For large amounts (about. Rs 20,000 and above) the lender may require collateral (such as, bicycle, farm equipment and machines) and advance notice. Otherwise, loans can be released without security and within a day. Moneylenders may also provide loans for considerably lower interest (e.g. 5 - 7% per month) if documentation they require is provided (e.g. land titles, GN Officer certification of ownership of assets being offered as collateral, such as, bicycles, machines, appliances). Informal groups, like rotating savings and credit associations (ROSCA) make loans to members with interest of 10% per month, using savings collected (e.g. Rs 100 per member per month). Relatives, friends and neighbors are an important source of cash for emergency requirements and especially if the amount needed is relatively small (up to Rs 1,000 to 2,000). Loans are interest free. While there are no specific conditions, the borrower is expected to repay “as soon as possible”. The death donation society is another important source of financial support in the village. As the name of their group implies, they provide cash assistance to a bereaved family. It maintains a pool of funds put up from periodic contributions from their members (e.g. Rs 50 per month). Cash support can be as much as Rs 8,000 with additional assistance in the form of household goods (rice, sugar, biscuits). Some groups also extend loans for members’ emergency requirements (e.g. Rs 5,000) and charge interest (e.g. 5% interest per month). Shopkeepers-traders support crop production requirements of communities by providing material inputs (seeds, fertilizers, pesticides) on credit. Such supplies often are offered by traders at no additional cost to the farmers but on the condition that harvests are sold to them. Farmers availing of such service may get a lower than market price for their produce. A private company (Hayleys) extends loans without interest to farmers for the cultivation of gherkin and chili. Technical assistance is combined with the service. Borrowers have to sell their produce to the company at a particular price agreed at the beginning of the cropping season. 2 In a few villages, NGOs operate livelihood and credit programs through groups of women. Interest rate is low (1.2% per month) and loans up to Rs30,000 may be availed for cultivation and business purposes. Their coverage is limited though. 3. Objectives The microfinance program of Plan seeks to develop an approach that caters to the financial requirements and capabilities of low income groups who remain unserved by the banking system. Through this study, it specifically endeavors to: a. Describe the savings and credit behavior of the poor; b. Understand client views regarding prevailing financial services; c. Gain insights into the design of financial products and program appropriate for the target communities. 4. Methodology The study used participatory rural appraisal tools compiled by MicroSave Africa to gain better understanding of the financial situation of the communities, their specific needs and preferences concerning financial services, the constraints they face in accessing financial services, and the challenges involved in introducing effective financial services to them. The PRA tools used include: a. Seasonality Analysis of household income, expenditure, savings and credit. This tool was used to obtain information on seasonal flows of income and expenditure, and the demand for credit and savings services. The analysis provided important insights into some of the risks and pressures faced by clients, how they use financial services to respond to these, some understanding of the financial intermediation needs of the communities and what services financial institutions can design in response. b. Life Cycle Profile. This technique was used to identify events that require lump sums of cash; to examine the implications of these for household income/ expenditure; to determine current coping mechanisms; and, to find out how access to financial services can help the household respond to these. c. Product Attribute Ranking. This method determined what people view as the key attributes in financial services and how relatively important each is. It was used to understand clients’ satisfaction or dissatisfaction with different elements of the services of MFIs. d. Relative Preference Ranking. This technique gathered information on how participants view a variety of financial service providers and the various components of the financial services they provide. e. Focus Group Discussions. This tool obtained responses from participants, using direct, open-ended questions. The inquiry dealt with issues relating to prevailing financial services (formal and informal), savings, income, access to financial services and need for credit. Information gathered were used to validate data collected through other techniques. The research team consisted of staff from Plan Sri Lanka, Plan Bangladesh and SEEDS. (Annex B). SEEDS gave the initial training. Given their extensive experience on the use of the tools, Plan Bangladesh staff led the field training, assisted the team in the selection of tools, initial consolidation and analyses of data. 3 The team conducted a total of 14 FGD sessions using the four PRA tools (seasonality, life cycle, product attribute and relative preference ranking). To supplement information collected through these tools, and to provide more clarity to the insights obtained from the participants, discussion guide- driven FGDs were conducted immediately after many of the PRA sessions. These allowed more ‘directed’ discussion on issues and questions of the researchers. Ten FGDs of this type were undertaken. (Annex C.) The program aims to reach rural, agricultural communities and the more remote villages. So farmers (mainly), women and casual wage earners were involved in the discussions. For every session, some 10 to 12 participants were invited by the Plan field staff through the community volunteers. Whenever possible and if the schedule would allow (considering ongoing classes), youth were invited to participate. In two of the early FGD sessions, separate discussions with women were undertaken. This was discontinued after the researchers found that there was no difference in views with men on issues discussed. Even in mixed group sessions, women actively participated in the dialogues and did not appear restrained to express their opinions. 5. Key Findings a. Seasonality of Income Flows Like many agricultural regions, the communities face the continuing challenge of coping with limited earnings. They generally depend on two cropping seasons in a year and in between, they do casual work in other farms, small enterprises, construction and public works. But the flow of income is highly seasonal and the timing is such that they hardly coincide with farm and household expenditures. This concerns both farmers cultivating paddy and those producing cash crops. Type of Farming Community Paddy (rice) Vegetable/ cash crops Months of High Income Months of High Expenditure March July-August December-January June April-May October April September Household expenditures are driven mainly by farm requirements (land preparation and agricultural inputs). People invest substantial amounts for their main crop. For rice farmers, spending is highest in October due to farm activities in preparation for the primary season, Maha which ends in March. For vegetable producers, farm expenses peak in September in anticipation of good yield of pumpkin in December-January. April is a high expenditure month for all communities not only because of cultivation; it is the celebration of the country’s main festival -- New Year. January is also a high expense month for children’s school fees. It is the ideal time for house construction on account of favorable weather.1 (Annex D, Seasonality of Income, Expenditure, Savings and Credit). People save mostly with neighborhood ROSCAs and at home. Like household income and expenditure, the flow of savings is determined by periods of high crop earnings as well. Be that as it may, people have indicated their readiness to save small amounts regularly (e.g. Rs 5 or 10 daily). Apparently, there is demand for casual labor almost all year round – providing the opportunity for regular savings. 1 Home construction is usually done gradually, in phases considering the costs involved. It usually takes an extended period to complete, e.g. five (5) years. 4 In response to the seeming mismatch between household income and expenditures, people take out loans from friends, relatives, neighbors and moneylenders to meet their relatively large cash requirements, especially for the farm. Many also indicated their desire to borrow for social events too that run from April to June, children’s education and for building their homes. While there is strong potential for savings mobilization, the availability of reliable savings services in the community remains a constraint to most families. While banks offer a variety of depository services (even for children’s education), the target communities are relatively isolated and clients think depositing monies in the banks are inconvenient and costly to undertake. As they say, “there are opportunities to borrow, but less to save”. b. Challenges in Community Savings Discussions with the community on the subject of savings suggest that they are mainly concerned about and in the order of declining importance: reliability of the depository institution, proximity, ease of withdrawals and interest rate. In two villages at least, participants narrated their unpleasant experience of losing their money to “mismanagement” of savings at both community and institutional levels. In addition, the people also reported how they were deceived into opening savings accounts with persons who presented themselves as staff of banks in the area. For some time, these swindlers visited them regularly (e.g. weekly) to collect savings. But when the depositors went to the banks to withdraw their money, they were told that their accounts were non-existent.2 . Distance matters. Many depository institutions are located in nearby towns but it is still some 15 to 20 kilometers from the villages. Relatively small amounts are involved (Rs 25) for regular savings and villagers need to spend more (Rs 30) to reach the banks. Savers also want to be assured that they can withdraw their money, especially during emergencies. At best, it would be encouraging if they can deposit and withdraw “any time”. There is strong readiness to save small amounts on a daily basis. But the opportunities are very few. Saving at home did not figure prominently as an option among many. Pressures to spend whatever money they intend to set aside for household consumption is strong. They would also feel compelled to help friends, relatives and neighbors in urgent need. Generally, the choice of depository institution of the communities is limited to four: the neighborhood ROSCA and 3 banks (People’s Bank, Samurdhi, Co-operative Rural Bank). The ROSCA is constrained by people’s concern of its legal status. Weighed down perhaps by negative experience in other schemes, they do worry about the possibility they will lose their money in the scheme. The banks do not appear to be an attractive opportunity either, mainly for reason of distance, transaction costs and the savings amounts involved. (Annex E, Relative Preference Ranking - Savings Services). c. Coping with Financial Pressures Savings, albeit in limited amounts, helps households cope with financial pressure. It has been the practice of people to use money set aside earlier (mainly at home and in ROSCAs) for emergencies, children’s education, family medical needs and starting a family or building a house. Savings alone, however, is not sufficient. They use savings in combination with other measures like borrowing and pawning assets. (Annex F, Life Cycle Analysis.) 2 The Central Bank of Sri Lanka periodically posts announcements in leading dailies, advising people to save only in formal banks. 5 Borrowings are largely informal. People rely on their ‘peer’ network of friends, relatives and neighbors for somewhat smaller amounts. Otherwise, they go to the money lender in the village or town center. Especially if the need for cash is urgent (emergencies, education, medical expenses, cultivation requirements) informal credit sources are the main recourse. Apparently, there is very limited access to formal credit services for life cycle needs, such as, family emergencies, higher education for children, serious illness and building a house. Quite alarmingly, people also resort to measures that could seriously undermine their future income flows. They sell productive assets, such as land and livestock to meet hospitalization and emergency needs. d. Credit Preferences and Concerns Even if the informal sources (money lender and death donation society) charge much higher interest compared to banks, they seem to be the preferred sources of credit. The people’s perception is that they are very reasonable in terms of loan requirements. Some form of collateral is required only when the amount needed is substantial. Because of the lack of paperwork and procedures, they can also provide much quicker services compared with banks. Informal sources also provide much easier loan repayment terms and are very accessible. Furthermore, they can also be flexible when it comes to possible delay in the payment of loans. (Annex G, Relative Preference Ranking – Credit Services). For the communities, the cost of credit isn’t much of a concern. To them, the main obstacle to accessing formal credit is loan requirements. These include security or collateral, guarantees from local officials, co-makers and even savings. Government institutions and programs accept guarantees of local authorities but officials are reluctant to take on the responsibility. People generally find these requirements difficult to satisfy. Procedures are complicated and paper work required is too burdensome. Second, processing of loan applications can be awfully slow. If it takes the banker up to 3 months to approve a loan (as the people have indicated), crop farmers would miss the prospects of a good harvest. Getting the loan ‘now’ is far more beneficial than getting it with low interest. Besides, doing the application and complying with the bank’s requirements could be very costly too. People are also concerned with how bank staff treat them. They see bankers as unapproachable and uncaring. And because of past experience where people have been deceived into participating in bogus savings systems, reliability of service and trustworthiness of the institution are important. (Annex H, Product Attribute Ranking.) 6. Program Implications The area has huge potential for savings mobilization. While savings may be highest during particular periods of the year (e.g. harvest time), the area offers good opportunity for regular deposits, as income from casual labor is fairly distributed all year round. People also expressed their inclination to save in small, regular amounts even on a daily basis for education of their children, home emergencies, house construction and special events. And the differing farming systems and income flows across areas, also suggests a huge potential for financial intermediation in the wider region. In addition to the huge demand for farm loans, credit for non-productive needs seems largely unmet. During particular periods of the year, short-term loans for education (January), home 6 improvement (January) and construction, special occasions and festivals (April, May) are needed. Excessive loan requirements and conditions of most service providers keep clients away. A new entrant to the financial market in Polpithigama, therefore, must desist from imposing “unreasonable” loan requirements and should be quick to respond to client needs (emergencies, cultivation). Even more important than the cost of the service, potential clients are concerned about timeliness of service delivery. Many are crop farmers and for them, getting the loan at the right time is essential. How bank staff conduct themselves matters to them too and unfriendly demeanor discourages many from even approaching financial institutions. Perception of the bank’s reliability is also of importance, given past financial misadventures. So the financial institution should also know how to relate with the communities, given that for the potential clients, credibility matters a lot. There is strong demand for instant loans among the people for family emergencies and sickness. Households are willing to pay relatively higher interest for this service, (about 5% per month). This suggests an opportunity for even higher priced formal loan services, as long as they are accessible, convenient and provided in a timely manner. Clients have shown a fairly good understanding of prevailing rates, so new savings and credit products will likely be compared with the existing services. Should products be priced higher than what are being offered, the value added should be appreciated by the customers themselves (e.g. fast release loans for emergencies, ease of transactions). 7. Proposed Approach to Financial Services There is a strong tradition of saving in the country. Whenever they can, people in the villages save at home and participate in ROSCAs (“seettu”) despite the limitations of these venues. They save in banks but their participation is constrained by accessibility. And in a number of communities in Kurunegala town, a local NGO has quite successfully introduced savings and credit operations in women societies that were originally organized for its social empowerment program. “We can save money, but there is no convenient system in the village. That is why we are still poor”. “Banks should bring their services to the village and should not expect us to go to them.” These statements from potential clients sum up the outlook of the communities toward savings and their perception of how prevailing banking services can be improved. In response, Plan Sri Lanka and SEEDS propose to adopt a group approach to financial services in Polpithigama.3 SEEDS will form neighborhood-based, small groups of about 20 women (primarily) to start savings. The groups will be encouraged to meet every week for regular savings and to support proper recording of transactions (and thereby enhance members’ trust in the system). They will be trained on basic accounting and management of savings and credit activities. The program will also promote internal lending by the group using savings they have accumulated. 3 Initially, a “door step” approach to individualized savings and credit transactions was considered. This involved a collector visiting the village almost every day, to collect savings. Loans will be provided by the implementing partner and repayments will be collected by the same staff. Financial regulations in the country, however, do not allow non-bank institutions to collect savings from the public, even if they are formally recognized members of a microfinance institution. 7 The groups are expected to start with small amounts per member (about Rs 20 to 50 per week). It will thus take a considerable period for them to build up their own capital and reach a level where they can adequately respond to the household and farm credit requirements of their members. So in the short and medium term at least, they would need external loans to supplement their internal capital. After some experience in savings and extending loans to members (at least 6 months), SEEDS will consider extending credit to the group on the basis of their financial performance and organizational strengths. The first loan to the group will be limited to the value of its internally generated capital. In succeeding loans, higher savings-credit leverage may be introduced (about 2 or 3 times the group fund). Collateral, including group savings, will not be required of the groups. (Annex J.) The savings and credit groups will decide on who among their members gets a loan and what the terms are (interest rate, installments, period of payment).4 Decisions on members’ loan are entirely for the groups to make – relying on their knowledge of the memberborrower’s background, capacity to pay and need (especially at the initial stages when onlending funds are quite limited). They are not expected to require collateral and guarantees, and ‘productive’ use of credit; so loan release should be quick and relatively easy. SEEDS will not concern itself with finding out how group members use their loans (even if these are financed indirectly by the microfinance institution). But the microfinance institution will relate to the group as a client – focusing on quality of member participation in group activities (e.g. savings, weekly meetings, lending, decision making), timely collection of members’ loans and integrity of the group’s recordkeeping and accounting system. The groups will be advised to maintain an emergency fund in the village. As the name implies, this is intended for members’ need for urgent financial assistance, such as, sickness in the family, accidents and emergencies. This should also compensate for the nonwithdrawability of members’ savings with the neighborhood group. At some point in the future, the groups will be encouraged to form federations for certain institutional advantages: e.g. more sustainable system of technical support to the neighborhood groups; more flexible savings arrangements; and stronger financial linkage with SEEDS. The neighborhood-based, group approach to financial services represents a new strategy to the implementing institutions. Learning on effective practice involving similar methodologies will be considered. These include the Self-Help Groups in India, and Village Savings and Loan Associations (Mata Masu Dubara) in Africa, which has been proven to be effective in working with the very poor and extreme environments. Specific areas of study would cover: group formation and promotion techniques, savings mobilization, community-managed accounting systems, MIS, group financial management, and financial linkage. A workshop will be organized to design the financial services methodology. Detailed features of the savings and loan products will then be presented to representative groups in the target communities for feedback before starting the pilot project. Specific responses from potential clients to project concerns, such as, willingness to form a group for community-based financial intermediation, weekly savings amount with the group, interest rate to charge on member loans, and interest rate on MFI loan to the group, will be obtained. 4 These should consider the cost of funds (interest rate) and group cash flow-- taking into account term of payment of the SEEDS loan. 8 Annex A Summary of Formal Financial Services, Polpithigama Division Savings Products Bank Loan Products Interest Rate p.a. Type Interest Rate p.a. Wayamba Development Bank Normal Rankathi Punchi Sipsarana Dayada Diriya Mawa Retirement Development savings 5.0% 6.5% 6.5% 6.5% 7.0% 7.5% 8.0% 6.5% Pawning (Rs 10,000 per “pound”) Cultivation Isuru National Trust Fund Housing Land acquisition Business 18% 18% 18% 17% 15% 22% 15% 5.0% 5.5% 5.75% 6.0% Pawning (Rs 8,000 per “pound”) 18% People’s Bank Normal Isuru Udana / Sisu Udana Jana Jaya Normal - Children Fixed deposits 6 months 12 months 24 months YES Vanitha Wasana Dana Yojana Dana Yojana (minors) Parinitha < Rs 5,000 >Rs. 5,000 Type Samurdhi Bank For other loan types, clients have to go to Mahawa Branch. 7.25% 8.0% 9.0% 5+ 1.5% 5.75% 5.75% 6.0% 5.5% 6.0% Diriya Matha Children Sisu Reka/ Kekulu Non-members 5.5% 6.5% 6.5% 8.5% Agriculture Self employment Consumption Fishery Family development Housing Emergency 18% 18% 18% 18% 14% 16% 14% Danayojana Current Sisu Pubudu/ Duputhu Wasana (Children) 8.5% 6.0% Pawning (Rs7,500 per pound) Members Non-members Self employment Industrial/ business Housing Agriculture Emergency Agricultural equipment Fishery Self-employment 15% 16% 16% 16% 16% 14% 20% 16% 16% 16% 7.0% Co-operative Rural Bank 9 Savings Products Bank Type Sanasa Bank Regular Children’s savings Dowry Fixed deposit 3 months 6 months 12 months Loan Products Interest Rate p.a. 8.5% 10.5% 6.5% 11.5% 12.0% 12.5% Source of data: client 10 Type All types of loan (housing, cultivation) Interest Rate p.a. 18% Annex B Research Team Name Designation Organization 01. Indrajith Dayaratna Field Manager SEEDS 02. Anura Dissanayake Program Unit Adviser, Household Economic Security (HES) Program Plan Sri Lanka 03. Mohammad Tarequl Hoque Program Coordinator, Family Economic Security (FES) Program Plan Bangladesh 04. Mobarok Hossain Coordinator Capacity Building, FES Program Plan Bangladesh 05. Paul Lobo Microfinance Manager Plan Sri Lanka 06. Sunimalee Madurawala Microfinance Researcher Plan Sri Lanka 07. Kanchana Senanayake Program Assistant, Microfinance Plan Sri Lanka 08. B.H.C. Shiromali Senior Management Training Officer SEEDS 09. D.M.Priyantha Wijesinghe Senior Management Training Officer SEEDS 10. Upali Wijetunga National Advisor, HES Program Plan Sri Lanka 11 Annex C Market Research Tools and Villages Covered Tool Village Koruwawa 1 Seasonality of income, expenditure, savings and credit Nikawehara, Kattamberiya Tharanogollagama, Thalandapitiya Hatpokuna (a) Hatpokuna (b) 2 Life cycle profile analysis Koruwawa (a) Koruwawa (b) Kiribamune 3 Product attribute ranking Siyambalangamuwa Thaladupidiya Siyabalangamuwa 4 Relative preference ranking Kattamberiya Hattangana Keralbokkagama 5 Discussion guide- driven focus group discussions All 10 villages (above) 12 Annex D Seasonality of Income, Expenditure, Savings and Credit Table D.1. Paddy-Based Farming Villages Session 1. Farmers and Casual Wage Earner (Koruwawa) Month Jan Feb Mar Apr Income Expenditure Savings Credit May Jun Jul Aug Sep Credit Dec Jul Aug Sep Oct Nov Dec Nov Session 2. Farmers and Casual Wage Earners (Nikawahera, Kattamberiya) Month Jan Feb Mar Apr May Jun Income Expenditure Savings Oct Table D.2. Vegetable-Based Farming Village Session 3. Farmers, Casual Wage Earners, Vegetable Traders (Tharanagollagama, Thalandapitiya) Month Jan Feb Mar Apr May Jun Jul Aug Income Sep Oct Nov Dec Expenditure Savings Credit Livelihood in the area is predominantly agriculture. Yet, there are significant variations in income flows across villages. Major expenditures are mainly determined by farm requirements (land preparation, agricultural inputs) and the crop raised by the households. Savings generally follow the trend of the people’s earnings, and peak during high income months. Demand for credit is driven mainly by farm requirements and social events (New Year). For many villages, the major crop is rice, with main harvest in March (Maha season) and a second cycle ending in July-August (Yala). Household earnings peak during these months. In addition to the sale of agricultural produce, rural folk take on work opportunities during the harvest period. In between, they do casual work in farms, small enterprises (e.g. coconut coir processing) and go to other places for work (e.g. construction, public works). Field crops and perennial crops (coconut) also provide some income in between. Expenditures peak in April because of New Year celebrations and spending on farm inputs and land preparation. Major cash outflow for paddy happens again in October-November. Although expenditures are not as significant as farm preparation and festivals, they are relatively high in January as it marks the beginning of the school year. It is also the preferred time for home construction on account of favorable weather conditions. Not surprisingly, the demand for credit goes up during high expenditure months, and crests in November. Income from Yala (July-August) is not as high as previous harvest and major farm 13 spending is undertaken for the main season (period of October – November). On the other hand, savings generally follow the trend of income (March, July-August). (Table D.1) Villages engaged in the production of cash crops have a different cash flow pattern. Income peaks in December and January with the sale of pumpkin. The next income high occurs in June, when produce such as mung bean, sesame, beet and onions are sold. In between these seasons, they do labor in other farms or other places for job opportunities. Expenditure is highest in September when farm households prepare their lands for pumpkin production. The demand for credit, likewise, crests during the period August- October because of major farm expenditures (land preparation, cultivation and purchase of inputs). They also borrow for the New Year festival (April). Savings tend to follow the income trend as well, with strong inflows during the months of high earnings (December-January, June). (Table D.2.) 14 Annex E Relative Preference Ranking of Product Features - Savings People’s Bank is first in terms of reliability. It has the reputation of being the oldest and one of the largest financial institutions in the country. It also helps that it is owned by the government. The governance structure of the Co-operative Rural Bank in a way promotes confidence in the organization. Clients noted that the Board is elected by primary co-operatives and management comes from the membership. With regard to Samurdhi, clients remarked that political affiliation determines management of the institution and its tenure. And their approach is modified whenever there is a change in government. People are concerned with the legal status of the ROSCA and are wary of the risk of losing their money in the scheme. Table E.1. Average ranking of savings service provider, in terms of trustworthiness Rank (Based on Score) st Financial service provider Average Score 1 People’s Bank 1.0 2nd 3 Co-operative Rural Bank 3.0 rd Samurdhi 3.4 th ROSCA 4.3 4 The convenience of having the ROSCA right in the village and with friends and neighbors as participants make it the preferred venue in terms of proximity. The branch offices of Co-operative Rural Bank and Samurdhi are also located close to the communities, while that of People’s Bank is located in the town centre and would require travel by bus. Table E.2. Average ranking of financial service provider, in terms of distance / proximity Rank (Based on Score) Average Score st ROSCA 2.1 nd Co-operative Rural Bank 2.5 rd Samurdhi 2.8 th People’s Bank 4.3 1 2 Financial service provider 3 4 Having the Co-operative Rural Bank nearby makes it easier for clients to make withdrawals too. While People’s Bank is far from the villages, they provide quick services because their system is computerized. Samurdhi is village-based, requires less formalities and clients can take their savings any time during regular working hours. In the ROSCA system, every member needs to wait for his/ her turn in the cycle to receive the money. 15 Table E.3. Average ranking of savings service provider, in terms of quick withdrawal of deposits Rank (Based on Score) 1 st Financial service provider Average Score Co-operative Rural Bank 2.0 nd rd People’s Bank 2.3 nd rd Samurdhi 2.3 ROSCA 4.3 2 /3 2 /3 4 th People’s Bank is believed to offer the highest interest rate (between 7 to 8% p.a.), while the Cooperative Rural Bank is perceived to base interest payments on the ‘minimum balance every quarter’. Samurdhi pays 6% per annum on savings. On the other hand, the ROSCA does not given any interest on member’s savings. Table E.4. Average ranking of savings service provider, in terms of interest rate Rank (Based on Score) Financial service provider Average Rank st People’s Bank 2.0 nd Co-operative Rural Bank 3.0 rd Samurdhi 3.3 ROSCA 5.0 1 2 3 4th 16 Annex F Life Cycle Analysis 1st/ 2nd Average Score ** 3.75 1st/ 2nd 3.75 Higher education 3rd/ 4th 3.50 Serious sickness 3rd/ 4th 3.50 Building a house / starting a family 5th 3.00 Birth of a child 6th 2.75 Funeral 7th 2.50 Wedding Rank* (Based on Scores) Life Cycle Event Emergency/ accident * From highest (most pressure) to lowest. ** Average score is based on a scale of 1 to 5 and taken from 4 PRA sessions. Households normally use a combination of savings, loans from their peers and money lenders, pawning and selling assets, to deal with financial pressures. Emergencies/ accidents are totally unexpected events, they happen suddenly and for which households are most likely unprepared. They cause much financial stress also because huge amounts are required and savings are not sufficient to respond to the need. Vehicular accidents, dog bites, work-related injuries (e.g. factories) were cited as possibilities. By the nature of emergencies, households cope mainly by borrowing money (money lenders, death donation society) and pawning assets (gold, jewelry). Some use savings, seek support from relatives and friends, and sell household assets, farm produce, livestock. The increasing costs (exams, admission fees, travel, accommodation) and weak institutional support system, make higher education a matter of high financial concern of families. As a matter of recourse, households pawn assets or mortgage property. They also save money in the bank (e.g. Peoples Bank’s Sisu Udana), seek the support of relatives and even sell assets to meet expenses for university education or vocational training. Serious illness in the family and home construction rank next in the order of household financial anxieties. Quality medical facilities are relatively inaccessible. Transportation, medicines and doctor’s services are costly. As it usually happens at an unexpected time, families are not prepared for it. In order to cope with this sudden need, they use whatever savings they have, take loans from moneylenders, pawn assets, mortgage property, and even sell assets like livestock and land. When someone starts a family, he/ she is expected to live separately from the parents. The social pressure to build a house is quite strong and there is the expectation to put up a decent home. Cost of materials is high, much work is involved and a long time is required to complete a house. Finding quality materials at low cost is difficult too. They take out loans from Samurdhi or a local NGO program (which is quite rare) and sell assets, such as, livestock. Oftentimes, households make do with a modest dwelling and gradually, in stages, build their ideal house -- using a combination of savings (either individually or through ROSCA), earnings from work, and sale of produce. Child birth is a financial concern, mainly due to the element of uncertainty. Expenses related to transportation and medical care are quite significant too but families can somehow prepare for this. 17 Savings are complemented with borrowings (from moneylenders, death donation society). Friends and relatives give money. And if needed, families sell some property to pay medical expenses. A funeral is a major expenditure that families have to contend with and the amount of money they needed for religious formalities and burial customs (coffin, attending to visitors) can be substantial. Social network composed mainly of relatives, friends and neighbors, and the support of the village death donation society are quite effective in helping households cope. A wedding, likewise, is an important occasion. Traditionally, families consider it a social obligation of the lady’s parents to cover the costs of the wedding. The attendant preparation and expenditures (food, clothes, jewelry, dowry) make it quite an expensive affair. However, it does not cause as much pressure as events mentioned previously, because both parents and their children have adequate time for preparations. In addition to savings (individual and ROSCA), relatives provide support, and families pawn assets and take loans from moneylenders and financial institutions (Samurdhi and Sanasa). 18 Annex G Relative Preference Ranking of Product Features – Credit Services In terms of loan requirements, the moneylender and death donation society are the preferred option. (Table G.1). The moneylender is flexible and may not require collateral, especially if the loan amount is relatively small. For larger amounts, the moneylender may require security but needs less documents and accepts assets to be pawned. The death donation society only asks for signatures of 2 co-members. Among the banks, Samurdhi is favored by the clients. The institution needs only signatures of its officers and co-members of the client. Other banks require land ownership documents, guarantors and even government officials as co-makers. Table G.1. Average ranking of financial service provider, in terms of loan requirements Rank (Based on Score) Average Score st Moneylender 1.6 nd Death Donation Society 2.3 rd Samurdhi 3.4 th Co-operative Rural Bank 4.7 th People’s Bank 4.7 th Sanasa 4.9 1 2 Financial service provider 3 4 5 6 In terms of quickness, however, the moneylender can provide the service within a day, while the funeral support group may take a week to release the loan. Samurdhi outranks all other formal institutions in terms of fast loan service. The bank releases loans quickly in an emergency. For regular loans, it usually takes 2 weeks to one month to complete the entire loan process; while other banks take between 1 to 3 months. Table G.2. Average ranking of financial service provider, in terms of quick service Rank (Based on Score) Average Score st Moneylender 1.1 nd Death Donation Society 2.3 rd Samurdhi 3.4 th Sanasa 4.6 th People’s Bank 5.0 th Co-operative Rural Bank 5.7 1 2 Financial service provider 3 4 5 6 The banks loan rate normally range from 18% to 24% per annum. Sanasa offers loans at 18% to 20% per annum. Clients generally feel, this is the best option. Even as some communities think that Samurdhi’s interest rate is 18% only and could go as low as 14% for enterprise activities, many are unaware of their pricing of loans. The moneylender consistently ranked lowest as they usually charge 10% per month compared with Death Donation Society’s 5%. 19 Table G.3. Average ranking of financial service provider, in terms of interest rate Rank (Based on Score) st Financial service provider Average Score 1 Sanasa 2.1 2nd Samurdhi 2.5 rd Co-operative Rural Bank 2.8 th 4 People’s Bank 3.2 5th Death Donation Society 4.9 Moneylender 6.0 3 th 6 The Death Donation Society is believed to offer the best terms for loan repayment. Borrowers can pay any time because officers know each member well and there are not many rules to follow. The moneylender is the next best option because many of them do not require collateral (thus, clients may feel no pressure to pay on time) and are willing to extend the duration of the loan, if needed. Among the banks, the people-owned institutions have slightly higher marks compared to the government banks. Other than its pawning service, the Co-operative Rural Bank runs an old lending scheme for its members who have been with the institutions for a long period. Apparently because of its strong financial base, the Co-operative can provide relatively easy terms to its members. Although Samurdhi allows rescheduling of loan during crises (floods, drought), it operates a fixed installment scheme. And in some cases, villagers also complained of unfriendly services and favoritism towards friends and relatives in Samurdhi’s operations. (Table G.4.) Table G.4. Average ranking of financial service provider, in terms of loan repayment terms Rank (Based on Score) 1st Financial service provider Average Score Death Donation Society 1.6 nd Moneylender 2.8 rd Co-operative Rural Bank 4.0 4 th Sanasa 4.0 5 th People’s Bank 4.2 6 th Samurdhi 4.3 2 3 The Death Donation Society is also the choice in terms of distance from the clients as the group is usually located right in the village. Among the formal institutions, the People’s Bank was consistently ranked last -- possibly because their office in the area provides pawning services only and does not handle regular loans. The Co-operative Rural Bank and Sanasa are perceived to be more accessible than Samurdhi and People’s Bank. Both are believed to have offices near the communities. (Table G.5.) 20 Table G.5. Average ranking of financial service provider, in terms of distance Rank (Based on Score) Financial service provider Average Rank st Death Donation Society 1.1 nd Moneylender 2.3 rd Sanasa 3.8 4 th Co-operative Rural Bank 3.9 5 th Samurdhi 4.5 6 th People’s Bank 6.0 1 2 3 21 Annex H Product Attributes Important to Clients, by Rank Rank* (Based on Scores) Product Attribute 1 Loan requirements 2 Loan processing time 3 Friendly service 4 Trustworthiness of the MFI 5 Interest rate on loan 6 Loan size 7 Loan repayment system * Based on scoring done by participants in 3 sessions Many institutions impose requirements which are deemed unfriendly by clients. Borrowers are expected to produce real property as security which many, especially the poor, do not have. For those who can, documentation includes survey and valuation of property. Many also do not have the legal documents to prove ownership of lands. For state banks and government programs, the guarantee of government officials is acceptable. But in many villages, there are only a few, and most of the time, they are reluctant to sign loan applications. In a group lending scheme, clients are required to obtain the guarantee or approval of other members. Processing of loan applications is slow. Documentation is a long process and it may take between 2 weeks to 3 months to approve a loan. For clients growing crops, timing of release is important and any delay could result in substantial losses. Related to this, clients think office staff are negligent and practice favoritism, and the lending institution has weak procedures. Clients are concerned about behavior of bankers and unfriendly services. Officers and staff of financial institutions are seen as unapproachable and uncaring people. They have to wait long in their offices. Clients want staff to be polite, to be friendly and greet them. Assistance in filling up forms would be appreciated too. Financial misadventures in the past continue to haunt people in the villages. There were reports of some organizations coming to the village to collect savings and but they did not return the people’s money. Clients would tend to be cautious in dealing with new institutions and programs, so perception of trustworthiness of the MFI is a key issue. Interest rates should be kept low. In consideration of their economic difficulties (availability of work, poor farm income), clients want concessionary rates. Prevailing rates are in the range of 18% to 24% per annum. A ‘straight forward’ scheme is preferred: i.e., reducing balance method of computation and no additional charges/ penalties. Clients believe that loan sizes are decided by the lending institution with little regard for the customer. Loan amounts required are never given and borrowers have to rely on other sources to meet their requirements. Loan amortization is inflexible. Prevailing collection arrangements do not allow flexibility in payment and do not consider client’s cash flow. Advance payments are not accepted either. Clients regard unbending payment requirements a discouragement to potential borrowers and dislike the practice of discounting first amortization due from loan disbursement. In the event of a calamity, they suggest loan restructuring should be undertaken and no penalties should be applied to the loan. 22 Annex I Focus Group Discussions on Financial Issues 1. Quality of current financial services Formalities in processing a loan take time and are inconvenient. Too many signatures are required to get a loan (referring to Samurdhi and Sanasa). Loan size do not match requirements Emergency needs are not served adequately. In a group lending scheme, members get loans in rotation. Participants cannot avail of loans at the same time. The savings requirement to qualify for a loan is difficult to meet. There is more opportunity to borrow but less to save. Emergency loans from relatives, neighbors and friends can be easily availed of, but the amounts are usually insufficient. Procedures are complicated, and too many forms and paper work are required 2. Financial services available in the community Samurdhi loans start at Rs 5,000, 10,000, 15,000 up to a maximum of Rs100,000. Interest rate is 12% - 16% per annum based on reducing balance. The death donation society has emergency loan scheme (maximum of Rs 5,000) and charges 5% per month. Shopkeepers provide loans in kind (food and other commodities) and payment is made after harvest Moneylenders provide loans by keeping legal document of land and other assets for security. Interest rate ranges from 5% to 10% per month 3. Prevailing credit needs For emergency requirements, people borrow from friends and neighbors (sometimes sell household assets and livestock) People need quick service, individual loans Cultivation (buying agricultural inputs, preparing land, hiring laborers) Education expenses Building house 4. Savings behavior Depositing with Samurdhi (compulsory and voluntary) Readiness to save small amounts every day (Rs 5, 10) Saving in ROSCAs Deposits with People’s Bank, Co-operative Rural Bank, Wayamba Development Bank, Sanasa Savings at home (pot) 23 Annex J Proposed System of Financial Linkage SEEDS will organize women (primarily) into neighborhood economic empowerment groups with 15 to 25 members who know each other well and are brought together by mutual trust and support for one another. They will be encouraged to save a fixed amount every week as “compulsory savings” which can be withdrawn only when the member leaves the group, retirement, in the event of serious emergencies and for higher education of children. In the future, when savings have reached substantial levels and the group’s financial system is ready, withdrawal of savings may be considered by the group. Three months after the EEG is organized, they will be encouraged to lend the pooled savings to members who need loans. After three months of lending out group savings to particular members, SEEDS will consider extending a loan equal to the savings accumulated by the group on the basis of consistency in savings, strength of leadership and group, attendance in group weekly meetings and repayment of loans. After 9 months, the group can leverage their savings with SEEDS up to two times savings collected. rd th The 3 and 4 loan from SEEDS (after 12 months) can be up to 3 times group savings and while the th 5 and succeeding loans can be up to 4 times the group’s internal capital. All loan releases to the EEG by SEEDS will be largely determined by the preparedness and qualities of the group (described above). The linkage banking method is summarized as follows: Assumptions: 1. Member compulsory savings per week = Rs 25 2. Number of member per group = 20 At end of … Month 1 Month 2 Month 3 Month 6 Month 9 Month 15 Month 21 Month 27 Month 33 Total Savings (Rs) 2,000 4,000 6,000 12,000 18,000 30,000 42,000 54,000 66,000 Leverage 1X 2X 3X 3X 4X 4X SEEDS Loan (Rs) 12,000 36,000 90,000 126,000 216,000 264,000 Total Loan Capital (Rs) 6,000 24,000 54,000 120,000 168,000 270,000 330,000 SEEDS will charge an interest of 10 percent per term of 6 months (20% per annum) and a loan service fee of 2 percent per loan release. The groups will be encouraged to charge at least 3 percent per month on their loans to their members. SEEDS will assist the groups so they can open a savings bank account with the People’s Bank (Polpithigama, Hiripitiya and Melsiripura Branch). Phases of Financial Linkage Phase 1. Community Mobilisation and Formation of Groups. Potential clients are identified and encouraged to form a group not exceeding 25 members. Meetings are conducted with the group and training sessions are arranged. Members are oriented on responsibilities and functions of the group. Savings is introduced. 24 Phase 2. Group Stabilisation. After 3 months of accumulating member-savings, the group starts lending to members. Group records transactions. Concept of linkage with financial institution, SEEDS, is introduced. SEEDS focuses training and mentoring on organisational and financial requirements of the group. Phase 3. Financial Linkage with SEEDS. Technical support to the group continues. Considering group strengths in three areas: institutional (e.g. leadership, group vision and mission, attendance and membership participation in group meetings), social (e.g. networking with other organizations and groups) and financial (e.g. savings, loan repayment, common fund), SEEDS extends a loan to the group to supplement their internal capital. External audit is arranged. 25