Objectives for Rural Financial Institutions

It is clear that in some measure financial institutions that function well can serve the two national policy objectives of generating more rural income and alleviating poverty. In order to fulfill this role, the institutions need to keep in focus their own objectives. Above all, they need to become sustainable, or otherwise their benefits to the rural population will be transitory, and perhaps their problems will damage the prospects of other emerging rural financial institutions. Sustainabil-ity can be defined in two basic ways: eliminating dependence on donated or subsidized funds and achieving profitability. Both are important and are indispensable for sustainability in the long run.

For credit programs that start out by being dependent on subsidized donations of funds and strive to achieve long-run sustainability, Elisabeth Rhyne and MarĂ­a Otero define four levels of self-sufficiency:

The lowest level, level one, is associated with traditional, highly subsidized programs. At this level, grants or soft loans cover operating expenses and establish a revolving loan fund. When programs are heavily subsidized and performing poorly, however, the value of the loan fund erodes quickly through delinquency and inflation.. . .

At level two, programs raise funds by borrowing on terms near, but still below, market rates. Interest income covers the cost of funds and a portion of operating expenses, but grants are still required to finance some aspects of operations.. . .

At level three, most subsidy is eliminated, but programs find it difficult to eradicate a persistent dependence on some element of subsidy. This is the level associated with most of the well-known credit programs, and it is probably necessary to reach at least this point in order to achieve large-scale operations. . .. The

Grameen Bank, for example, retains two kinds of subsidy: Its cost of capital is several points below market, and it receives income from soft loan funds placed on deposit. . . . The Badan Kredit Kecamatan (BKK) program has eliminated subsidy from its branch network but requires some grant support for supervision.. . .

The final level of self-sufficiency, level four, is reached when the program is fully financed from the savings of its clients and funds raised at commercial rates from formal financial institutions. Fees and interest income cover the real cost of funds, loan loss reserves, operations, and inflation. The only major microenterprise programs to have reached this level are those of the credit union movement in certain countries and the BRI Unit Desa system in Indonesia.44

Additional objectives for an institution that can be important for achieving national policy objectives include increasing the number of clients (outreach), increasing the number of poor clients, and improving both the quality and variety of financial services offered. However, care must be taken to ensure that pursuit of these objectives does not undermine the financial viability, or sustainability, of the institutions.

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