Financial systems and development

cooperatives' managers because it allows lending interest rates, dividends on shares, and lending
to expand quickly, but it weakens the incentive of policies. The credit unions are federated, and they
cooperative members to provide their own fi- jointly manage a central fund, invest in low-risk
nance. When loans are made according to govern- financial instruments, and mediate transfers bement
directive, lenders may find it difficult to col- tween member unions with surplus funds and
lect. Such loans are often seen as grants and hence those with deficits. Loans from the central fund to
as resources that can be spent on consumption. unions lacking liquidity amounted to only 13 per-
Often, cooperatives have been promoted as a cent of its assets; deposits with financial institucounter
to usurious moneylenders and marketing tions accounted for 81 percent. Togo's credit
agents. This has sometimes led the advocates of unions, like informal suppliers of financial sercooperatives
and credit unions to think that finan- vices, live or die in the marketplace. But unlike
cial services can be supplied to small producers for informal intermediaries, they have access to
less than the real cost.
broader financial markets through their federated
Moreover, the goals of government and coopera- structure. As a result, they can intermediate betives
can differ greatly: governments often view tween regions and diversify their assets.
cooperatives as instruments for the conduct of
broader policy. In Africa, for example, a ministry Improving finance for the noncorporate sector
wished to use the cooperative credit system to
channel low-interest funds from foreign donors to Although informal financial arrangements do
targeted programs. When the ministry's plan was serve the needs of the noncorporate sector, they
presented to the cooperative, the director declined cannot be regarded as adequate. Many of the atbecause
he felt that the funds would never be re- tempts by governments and international donors
couped by his institution. The director was told to to increase the supply of finance to the noncorreconsider
or resign. The plan went into effect, re- porate sector have focused on providing access to
payment rates were extremely low, and other co- affordable credit. They have foundered because
operative lending programs were undermined. they did not take into account the true costs and
The cooperative managed to refuse liability for risks of lending to the sector. Lowering the costs
nonrepayment, but the defaults affected repay- and risks would help to put the sector within reach
ments of the institution's other loans. of formal institutions. Greater competition be-
Similarly, the support of foreign donors can be a tween formal and informal lenders would improve
mixed blessing. Cooperatives may seem a suitable the allocation of resources.
channel for development funds, but they often
end up with heavy liabilities and a bad collection Improving the legal environment
record. This mirrors the experience of development
banks discussed in Chapter 4. Cooperatives Legal reforms could make it easier for small enterthat
lend internally generated funds with an eye prises with relatively large financial needs to use
on the rate of return do better than those that are formal services. Such reforms include better definitold
what to do by outsiders. Even those loans that tion and enforcement of property rights. Squatters
involve no liability for the cooperative incur staff and small farmers with clear land titles would then
costs which may overburden a small institution. have an acceptable form of collateral. Property
Despite the difficulties, cooperatives are a good laws that limit inheritance by women or prohibit
way of increasing access to financial services. Their married women from holding property in their
costs are often low because they use volunteer la- own names limit their access to credit. In many
bor and because they can reduce risk through countries banking laws require women to obtain
group accountability and local sanction. Where permission from their husbands or fathers to borgovernments
have been more concerned with the row. In much of Africa such laws reduce agriculviability
of cooperatives than with social objec- tural investment by placing an economically irreletives-and
where interest rate restrictions have vant barrier between the farmer and her source of
been relatively modest-cooperatives have flour- finance.
ished and the supply of financial services has Laws meant to protect borrowers have often
broadened. In Togo, for example, savings in the made loan contracts harder to enforce and have
credit union system grew by 25 percent a year and thereby raised the risk of lending. Licensing and
loans by 33 percent a year during 1977-86. Mem- registration formalities and taxation of businesses
bers elect a board of directors, which decides on need to be kept in check. Small businesses in Peru,
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