D+C Development and Cooperation (No. 1, January/February 2001,
p. 18-20)

In three regions of Mali, village banks have been established with German assistance to mobilise savings and provide micro credit. Refinancing is possible through the state-owned agricultural development bank so that the village banks can grant more loans than the volume of savings deposited. The network of village banks, which for 10 years was promoted from outside, has in the meantime proven its sustainability by expanding by its own efforts.

The 11 million people of the Republic of Mali are among the poorest in the world. Life expectancy is only 54 years, and the infant mortality rate at 144 deaths per 1,000 live births is correspondingly high. The average annual per capita income is DM 530 (about US$ 250 ). The majority of the poor people (86 per cent) live in rural areas, and the agricultural sector, mainly cotton and rice growing, accounts for 47 per cent of Mali's Gross Domestic Product.

The remote Dogon country in Northeastern Mali, one of the three project regions, is also affected by great poverty. Diseases due to poor hygiene are pandemic, and the level of education is extremely low. The inhabitants, mostly smallholders, live from onion and millet crops and livestock breeding. As the region often suffers from drought and plagues of locusts, the farmers' yields are scarcely enough to ensure them a living.

Before the project got underway, the villagers had only two options if they needed larger sums of money for purchases or emergency spending, such as in cases of sickness. They could turn only to traditional savings and loan associations, whose credit volumes are usually limited, or to private moneylenders, who charge usurious interest rates of up to 120 per cent. In addition, the modest amounts smallholders were able to save could not be deposited in a safe place (for instance as a reserve for the next sowing). Instead, the money was hoarded, or spent on consumer goods or buying cattle.

The state-owned agricultural development bank, BNDA, also was unable to offer the smallholders savings and loan options tailored to their needs. Besides that, the bank's branches were far too distant from the villages in the Dogon region.

To remedy this problem, self-administered village banks (Caisses Villageoises d'Epargne et de Crédit Autogérées, CVECA) were set up there in the mid-1980s as part of a project to promote income-generating measures such as rehabilitating small-scale dams. The project was supported by both German Financial Cooperation (FC) and Technical Cooperation (TC). The village banks were to provide the villagers with access to loans and at the same time mobilise their savings. The background was that the impact of income-generating projects, such as promoting irrigated rice growing, often was not sustainable due to a lack of local finance markets which could put the savings to more productive use.

Some of the village banks found very soon that they could no longer cover the heavy demand for loans out of the savings of their members. They were increasingly dependent on other refinancing sources. This was the starting point of something new in Germany's aid to the financial sector. The funds given to BNDA, which had been supported by the Reconstruction Loan Corporation (KfW) since 1986, were no longer to be used exclusively for the direct granting of individual agricultural credits, but also to be made available to the village banks. This concept was implemented from 1994 in Dogonland and in two other rural regions of Mali.

The village banks are based on the principle of self-administration. The villages themselves decide on the founding of a bank, and elect its "staff" - that is, the manager, the treasurer and the comptroller - from among their own people. Part of their funds is used for literacy programmes and initial and advanced training to turn the elected men and women farmers into real "village bank managers". The banks' self-perception rests on the ideal of village solidarity, which is why the villagers as a whole feel responsible for them.

The loans made available by the BNDA are passed on to individual banks by higher-level associations composed of representatives of the village banks. The interest rate for these loans is about 20 per cent, far above the national inflation rate of 2 per cent (1999). This rate is also offered for savings deposits. The village banks demand 30-40 per cent interest on their loans, so they have a margin of 10-20 per cent to cover their costs.

True, this margin may seem high. But it is quite reasonable given the time-consuming and costly processing of many microcredits and savings accounts and comparable with similar microfinance intermediaries around the world. The high rate of interest also does not deter borrowers because alternative sources of money, such as informal moneylenders, are much more expensive. In addition, unlike moneylenders, the village banks offer a safe place to keep savings, which for many customers is at least as important as access to loans.

The system also involves a former state-run and now privatised advisory and supervisory body ("service commun"), which is staffed by Mali specialists and for whose services the village banks and associations must pay (which also is covered by the interest margin). The body ensures an orderly handling of the financial transactions, carries out audits, and trains the village bank staff in book-keeping and financial management.

The villagers use the mostly short-term loans (3 to 6 months) to finance a great number of small-scale investments in income-generating activities and also to cover private financial needs for sickness, weddings and burials. Collateral is provided by "social pressure" and assets such as goats, bicycles and farming equipment.

What was achieved
through village banks?

1. Geographical expansion. In 1999, there were more than 150 village banks and 8 higher-level associations in the three project regions. The cooperatives have a total of almost 65,000 members, through which an estimated 500,000 people are reached. As members of their banks, about 70 per cent of the economically active villagers have access to savings and loans. That means the banks reach directly all economically active sections of the population. The remainder benefit indirectly from banks: higher incomes mean that children, the elderly and the sick can be given better care, and the traditionally strong social cohesion of rural people is further enhanced.

2. Orientation on poverty. The banks mobilise savings totalling DM 4.4 million per year. These savings are the main refinancing basis (about two-thirds) for the overall annual loan volume of DM 6.7 million. The remainder is made available via BNDA credits. These figures manifest not only a far-reaching impact, but also a clear orientation on poverty. In 1998, the average loan level, which is one of the relevant indicators of the share of poor households benefiting from the project, was the equivalent of about DM 180 for all village banks, DM 160 in the Dogon region, and only DM 80 in another region. That means the project's target groups, which mainly are among Mali's poorest people, were reached to a great degree.

3. Social closeness. The village banks usually have repayment rates of 95 per cent, an indication of their efficiency in allocating loans and the sustainability of their goal achievement. It shows that the cooperatives have become stable and thus reliable financing intermediaries in rural areas. In Dogonland, most of the village banks have even covered their operating costs since 1997. That includes not only their administrative costs, but also the interest on savings accounts and BNDA loans, including their repayment, and payments to the "service commun". This positive result is due to two factors. First, the village banks have a great "social closeness" to their customers not only because of their grassroots proximity, but also because they speak their customers' language. Second, their savings and loan terms are tailored to their customers' needs. Larger sums of money, be they savings or loans, are available when they are needed. What also counts is that the loan repayment burden is tolerable and that savings are safely invested, meaning family members cannot get their hands on them. In this respect, the BNDA's aim of improving the rural people's opportunities to generate or retain income in an efficient way has also worked out.

4. Increasing income. The project has shown how successful financial intermediation, meaning the efficient transformation of savings into loans, and going beyond pure access to financial products, can help tackle pressing social problems. An impact analysis of the Dogon region by Ohio State University in 1997, for example, found that the economic situation of local households had improved. The members of village banks were less vulnerable to the financial consequences of illness, death and other events of the life cycle than were non-members. True, the banks' members are not among the poorest households. But the demand for loans by the latter was greater than their mobilised savings, while richer traders were net savers. This means there was a transfer of resources in favour of the economically weaker members. In addition, the study said, the project had promoted the people's readiness for self-help and self-qualification, strengthened social cohesion, and improved both food security and the empowerment of women. These successes were achieved by measures such as the literacy programmes, which were extended to include entire village populations and had raised the level of education as a whole.

5. Linkage with the BNDA. The partner bank made a great contribution to the project's success. The bank's efficient, professional management by an experienced Mali specialist and the good level of training and motivation of its employees proved decisive. The BNDA sees the refinancing of village banks as an attractive business field both because of the lower costs of loans to them and their repayment pattern, which is much better than that of the bank's own individual borrowers. The BNDA has not yet had a default on repayments by village banks, compared to a 50 per cent default rate for the direct loans it made earlier to end-borrowers. In the final analysis, the bank can thus better fulfil its mission of also helping poorer people to gain access to financial services than by granting traditional agricultural loans. The BNDA is currently and for the foreseeable future the only bank that is both willing and able to operate to a substantial extent in Mali's rural areas and, alongside the regional savings and loan cooperatives, to refinance the village networks as well. This linkage of formal sector institutions with informal finance intermediaries, which is now recognised internationally as a "best-practice model", not only strengthened the business activities of a state-run agricultural development bank, but also got underway a "bottom-up development".

6. Knock-on effect. The village bank project had a "structure-building" effect in the sense of extending the "financial frontier". Aid from outside played an import catalyst role - without prejudice to the target groups' own efforts - not only in relation to their better access to sustainable financial services conforming to their needs (expanding the customer group), but also in terms of widening the offer of such financial products. New and similar village banks are now emerging in other parts of Mali at the people's own initiative, such as one promoted by the French in the Kayes region in the West of the country. In the Koro District of the Dogon region, the local village banks are themselves involved in selecting other villages and setting up new branches. Thus the venture is having a knock-on effect beyond its original project region and contributing to the spread and professionalising of rural finance markets. As a whole, the village bank approach has proven that even simple ways of organising the mobilisation of savings and granting loans in Mali can function sustainably and be developed further on-site.

7. Framework conditions. The project's success would have been inconceivable without improving the framework conditions in Mali's finance sector, in whose promotion other donors were involved as well. The main success factors included Mali's existing market economy system framework, the stability of its currency, and interest rates which are positive in real terms, conforming to market conditions, and cost-covering in the long term. The German development cooperation, involving inputs by the KfW, the German Agency for Technical Cooperation (GTZ) and the German Development Company (DEG), which is a BNDA shareholder, contributed to these conditions by:

• supporting and promoting the process of developing a Mali development plan, adopted in 1997, to promote microfinance institutions;
• achieving in consultation with other donors in the Mali finance sector the raising of the interest rate ceiling for microfinance institutions from 12 per cent to 27 per cent. This rate is still too low in terms of covering costs, but is an important step in that direction (the authorities tolerate for the time being that village banks exceed this limit); and
• cooperating closely with the Agence Francaise de Développement, including co-financing and joint evaluation of the BNDA.

The KfW has since 1989 frequently taken the initiative in this process, mainly by organising Round Table discussions with Mali partners and international donors and by deploying experts in the field. The KfW is also involved in the funding of the supranational RIECA network, an African union of decentral finance institutions.

Lessons learnt and
future challenges

Is the village bank model transferable to other countries? The building up of village networks is a lengthy process. In Mali, a promotion timeframe of more than 10 years was required. This means that staying power is needed, the amount depending on local framework conditions. In addition, based on the experiences in Mali the following minimum prerequisites should be in place to enable the transfer of the approach:

• the people must be keen to help organise a network;
• the population density of the village banks catchment areas should not be less that 15 inhabitants per square kilometre; and
• the village banks must be able to work together with an efficient formal finance institution (either a development bank or a commercial bank).

Besides making further efforts to mobilise more savings and cut costs, the main challenge for the village networks in future will be to remain independent of external donor inputs in refinancing their growing loan portfolios due to their own borrowing.

Regional commercial banks are following the BNDA's example only hesitantly because they can neither assess the risk nor hedge it. That is why the German assistance has provided the BNDA with a guarantee to facilitate its refinancing of the village banks on the regional finance market. This path will also be a long one. At the end of the day, it will be successful only if the Mali government continues consistently to pursue its development goals of democratisation, decentralisation and privatisation, and if the sectoral conditions also remain favourable.