Public Purpose Banking

[wlm4 at cornell.edu (Will]

If Community Development Banking is to expand, then we must have functional
development tools, trained people, and a verifiable record. I have FOUR
practical suggestions to bring public purpose banking into more low income
communities:
1) In service internships for new and continuing managers
2) Aid to troubled existing PPB institutions
3) Model product programs for PPBs
4) Social Impact Performance Tools

************************************
IN SERVICE INTERNSHIPS
************************************
The contact between public purpose lenders is limited. Often the only
contact is exchange of literature and exchange of pleasantries at
conferences. Contact across organizational types (Credit Unions, Banks,
Loan Funds) is even more sparse. I would like to encourage a more in depth
exchanges.

Alternatives Credit Union offers to host an employee from another public
purpose lender for a week in exchange for that public purpose lender hosting
one of our employees for a week. We offer in depth exposure to our
organization. We are sure there are ideas, forms, and procedures that would
be found to be useful. This would build personal contacts for future questions.

As I imagine it, the employer institution would pay the salaries and travel.
The Host would be responsible for lodging, entertainment, training. This
way no one's budget would get thrown out of balance.

************************************
AID TO TROUBLED PUBLIC PURPOSE LENDERS
************************************
An old member of our Credit Union and a current member of a community credit
union in Florida visited me. Their credit union is in trouble. Charlie and
I went over their difficulties and discussed approaches for dealing with
them. It sounds to me like what they need is 2-3 months time from a public
purpose lending expert. This expert would help turn their CU around and
locate and train a permanent community based manager. Charlie expressed
concern that that expert could not be someone unconcerned about public
purpose principles.

Could we develop a workout team? $5000 could pay an experienced manager to
take a two month sabbatical at an ailing public purpose lender and start
them on the path to stability. I know this is done in the corporate world
AND that our regulator has a workout team for troubled CUs.

I am sure other Managers of public purpose lenders are interested in the
survival of our species. I personally would be willing to devote a couple
of months every other year to such an effort.

************************************
MODEL PUBLIC PURPOSE LENDER
************************************
Martha Rose and I have developed a training program for public purpose
lender micro-business lending. One of the key concepts we use is building
on consumer lending, current loan policy, and financial skills already
present with public purpose loan officers.
Sometimes we joke that building on present skills builds on a weak
foundation. There is an unevenness in the application of business
principles at public purpose lenders. I have heard the foil that each
public purpose lender is so different that you can't build common skills. I
just don't see it that way. Part of the problem could be solved by
developing training. There are still areas that need training modules
developed.

Another part of the problem could be assumed by compiling current policies
and programs that public purpose lenders use. It often seems like each
reinvents the policy wheel. Can't a little more be done in developing
public purpose lenders standards?

Without a model, we all tend to slide backwards out of community
development. The examiners, the trade associations, the auditors, our
competitors all push us into a mold that doesn't satisfy our Community
Development goals. A strong program model would be a pole star for us.

************************************
SOCIAL IMPACT PERFORMANCE TOOLS
************************************
PPBs work on several different fronts: empowerment through training,
reinvestment, home ownership, small business lending, transaction fee
reduction. But which of these strategies has a positive development impact
on the community. How can outsiders looking to invest in a PPB tell which
is doing a good job.

I would like to see a performance evalutation tool developed for public
purpose bankers. It could combine CRA (Community Reinvestment Act), Social
Audit, and traditional financial analysis.
************************************************** **********
William Myers
Alternatives Federal Credit Union
301 West State Street, Ithaca, NY 14850-5431
Voice (607) 273-3582 ext 817
FAX 277-6391
E-Mail Alternatives-Myers@Cornell.edu

"The choice of where we do our business is one of our
most powerful political and economic tools."

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[wlm4 at cornell.edu (Will]

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To: owner-COMMUNITYDEVELOPMENTBANKING-L@cornell.edu
Subject: Public Purpose Banking
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William Myers ideas are interesting- since his organization is in Ithaca
it might be interesting to understand how his institution or others might
benefit from the HOURS program or Ithaca dollars or alternative cash systems
now being promulgated to help local commlunities and businesses- It seems
that banking in a commlunity could go a long way in helping businesses by
supporting such a dual economic concept.

I am interested in comments from those in the Ithaca area and others with
experience with such dual currency approaches to community development.

tom abeles
tabeles@tmn.com




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[lightp at morakot.nectec.]

Hi:
Your ideas seem to me to be in the right direction. I would suggest you
might like to take a look at the experience of banks lending in rural
communities in Asia. I notice that you referred to the Grameen bank in
one of your messages, but Grameen is only one example, and one which
might not be the most applicable in the US. I work in the BAAC, in
Thailand, where most of the loans are based on the "joint-liability"
principle rather than on mortgages. The principle certainly works here.
Roughly 90 percent of the loans are repaid on time, and much less than 1
percent have to be written off.

Best wishes, and Happy New Year

Paul Lightfoot
lightp@morakot.nectec.or.th



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[ziebarth at vms2.macc.wis]

Paul,
Please explain a bit more about the 'joint-liability' priciple. I'm a
newcomer to this concept.
Thank,
Ann Ziebarth


In Message Fri, 30 Dec 94 01:40:50,
communitydevelopmentbanking-l@cornell.edu writes:

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>Hi:
>Your ideas seem to me to be in the right direction. I would suggest you
>might like to take a look at the experience of banks lending in rural
>communities in Asia. I notice that you referred to the Grameen bank in
>one of your messages, but Grameen is only one example, and one which
>might not be the most applicable in the US. I work in the BAAC, in
>Thailand, where most of the loans are based on the "joint-liability"
>principle rather than on mortgages. The principle certainly works here.
>Roughly 90 percent of the loans are repaid on time, and much less than 1
>percent have to be written off.
>
>Best wishes, and Happy New Year
>
>Paul Lightfoot
>lightp@morakot.nectec.or.th


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[wlm4 at cornell.edu (Will]

> I would suggest you
>might like to take a look at the experience of banks lending in rural
>communities in Asia.... I work in the BAAC, in
>Thailand, where most of the loans are based on the "joint-liability"
>principle rather than on mortgages.
>Paul Lightfoot
>lightp@morakot.nectec.or.th
>
Do you have more information on this, or contacts we might follow up on?
Thanks.



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[lightp at morakot.nectec.]

Hi, I am attaching some notes on joint-liability, extracted from
another paper. I hope this makes sense.

Best wishes,

Paul Lightfoot
Bangkok

BAAC experience with joint-liability lending

BAAC, the Bank for Agriculture and Agricultural Cooperatives, is a
state enterprise bank which was set up in 1966. At that time very few
Thai farmers had land title documents which would be considered
acceptable as security for bank loans. Consequently it was clear from
the start that some other basis of security would have to be found if the
bank was going to make significant inroads into the rural credit
market, which at that time consisted almost exclusively of private
money-lenders of various kinds. BAAC adopted joint-liability as its
principal basis of loan security, following the use of the concept on a
small-scale by the commercial Bangkok Bank for a few years in the
early 1960s. Joint-liability has been at the heart of BAAC's operations
ever since. Without it, the bank would not have been able to find enough
acceptable farmer-clients to expand the size of its clientele as it has
done.

A basic requirement for joint-liability security for BAAC loans is that
the farmers concerned, after passing BAAC's basic eligibility criteria,
form themselves into groups of people who know and trust each other.
These groups may vary in size from a minimum of 5 to a maximum of
30 farmers, according to the bank's regulations; in practice most groups
consist of 12-15 farmers, and provided they pass the bank's basic
eligibility criteria the membership is decided by the farmers
themselves and not by the bank. Each year the group members who
want to borrow for seasonal production costs sign a contract in which
they accept liability not only for their own individual loans, but also for
the loans borrowed by other members of their group. Hence the term
'joint-liability'. In the very small number of cases where joint-liability
borrowers are taken to the courts for non-repayment, the whole group
will be involved in the court action.

The groups formed by the farmers are not legal entities, and cannot
borrow or enter into contracts as groups. The loans are made by BAAC
to individual farmers, not to the group collectively. The amounts
borrowed by each person depend on his or her individual needs, up to a
maximum of 50,000 Baht (US$ 2,000) which can be borrowed with this
form of security. The groups exist only insofar as their individual
members are legally bound to each other and to BAAC as the result of
signing a joint-liability contract. The legal commitment ceases once the
loans are repaid. Therefore joint-liability groups are conceptually quite
different from cooperatives and farmer associations, which are
permanent, legal bodies and which borrow on a wholesale basis from
BAAC for their own institutional development and for on-lending to
members.

The concept of joint-liability depends heavily on the establishment and
maintenance of good, trusting relationships between group members,
and between them and the bank. Therefore the security of the system
rests on systematic supervision by field staff who are able to visit
client farmers in their homes and at their farms.

To borrow under joint-liability a farmer must be able to join a group of
at least five members. Consequently this form of lending is not
appropriate to individual farmers who may be scattered in ones and
twos in many different villages. Moreover the group members are
supposed to follow similar production schedules, so that they can easily
keep track of each other's production activities and cash flow. And joint
liability loans are normally available for no more than 50,000 baht,
which tends to restrict this type of lending to relatively small-scale
farmers.

Disbursements (in million baht, 25 baht = US$1) and on-time
repayment rates (percent of matured principal) for joint-liability loans
for the three most recent financial years have been:

1991 16,199 89
1992 18,625 90
1993 24,028 89

Note that these are on-time repayment rates. Most of the remainder is
repaid late, the bank writes off much less than 1 percent of its
disbursements.

The bank has no way to measure directly the administrative costs for
joint-liability loans. However the system is inherently expensive,
because loans are relatively small, and success depends on frequent
contact between borrowers and the bank's field officers. Typically field
officers visit clients' homes or farms at least twice during the course of
each loan, as well as issuing repayment warning notices and making
supplementary visits to farmers with loans in arrears. One of the
bank's goals is to have experienced group leaders take more
responsibility for some aspects of loan administration.

Discussion

>From the above, the importance of joint-liability loans to the bank needs little
further comment: joint-liability loans make up a large proportion of BAAC's
lending, and they are repaid more reliably than is true for loans based on any
other form of security. A number of questions arise, including the issue of
whether or not BAAC should try to extend their joint-liability groups' sense of
common purpose and common interest to other fields, such as the acquisition
of improved technical knowledge and crop marketing. For present purposes we
will restrict ourselves to considering why it is that joint-liability groups have
been successful from BAAC's point of view.

>From BAAC's experience the success of the joint-liability concept has
depended on several factors. First, responsibility for each loan lies
unambiguously with individual clients, and not with the group as a whole.
The bank's experience shows that lending to groups collectively tends to result
in high rates of default. Within Thai rural society it seems that an individual
will accept responsibility for maintaining an asset and repaying a loan for it
only if he or she is the sole owner. If responsibility is shared, all too often the
result is that no-one will accept responsibility.

Second, the concept depends heavily on mutual trust within the groups, and
on peer-pressure for the repayment of loans. Therefore the groups must be
organised and approved by the villagers themselves, not imposed by the bank.
This also implies that the groups must be fairly small in size, so that the
farmers concerned do genuinely know each other. In practice some groups
have established their own eligibility criteria, which can be more strict than
the criteria applied by the bank itself. There are cases of groups who will not
admit new members unless they have an NS.3 land title document, which is
not a BAAC requirement. But there is no limit to the number of groups which
can be formed within one village, so farmers excluded in this can form their
own group with their own entry requirements.

Third, a related issue, the farmers must be involved in and can only borrow for
similar types of production. The bank will not normally lend on the basis of
joint-liability for activities which are not related to the production of the
farmers' main annual crop. Joint-liability loans are given for the production
of more than one crop, where all group members produce the same
combination of crops. It is common for farmers in the Northeastern region, for
example, to take a single "main crop" loan for the combined production costs
of rice and cassava. However, joint-liability contracts are not normally given
for term loans (there are exceptions to this) or for certain types of short term
loans, where only one or two individual farmers rather than the group as a
whole are involved. BAAC has other kinds of non-mortgage loan security for
cases like these.

Fourth, the quality of group leadership is critically important for the success
of the concept, particularly in terms of loan repayment. Clients can usually
repay their BAAC loans only at a branch office, and group leaders will often
arrange transportation and shepherd the whole group directly to the
repayment desk of the branch to ensure that they all honour their
commitments.

Fifth, the groups exist only for the single purpose of expediting certain
categories of BAAC loans; they are not multi-function groups, and have no role
in savings promotion, extension, the purchase of inputs, post-harvest or
marketing activities. There are cases of groups cooperating informally in
these other fields, but BAAC makes no special effort to encourage the
extension of the groups' functions.

Sixth, the success of the groups depends heavily on good, trusting and clearly
understood relationships between the groups and the bank itself. The
farmers have come to understand that by generally acting in a responsible
way with respect to their loans, including repaying on time, they can expect to
borrow from BAAC the next year. The combination of a close association with
the bank's field officers and the peer-pressures from other group members has
resulted in a sense of discipline with respect to financial matters, without
which the bank could not operate as effectively as it does.

Finally, it is important to stress once again that the farmers involved in joint-
liability borrowing are relatively small-scale farmers, who borrow relatively
small amounts. While branch managers are often reluctant to extend loans to
small-scale farmers, within BAAC as well as in other agricultural banks, the
fact is that the smaller-scale farmers among BAAC's existing clientele tend
to repay their loans more reliably than large-scale farmers. The likeliest
reason for this is that the small-scale farmers have only the choice of
borrowing from BAAC at about 1 percent per month or from private money-
lenders at interest rates as high as 10 percent per month; it is therefore
critically important to them to maintain a good repayment record, so as to
ensure that they will be able to borrow in future years. Larger-scale farmers,
who have more resources of their own and who may be able to borrow from
commercial banks, have a less powerful incentive to repay.




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