Financial systems and development

which reduced their incentive to collect deposits
and undercut their independence. Many coopera-
tive members, seeing that this new source of fi-
nance was risky, continued to rely on the informal
arrangements. If the advantages of formality are
visible and worthwhile, clients will participate and
the institution will prosper. If not, they will return
to the informal arrangements.
for example, are forced to operate clandestinely
because legal status costs too much. So regulation
fails even in its narrow objective. Meanwhile, the
economic welfare of suppliers and customers is reduced
because businesses would have better access
to formal credit if they were properly registered
and licensed.
Links between informal and fornal finance
Formal internediation for the noncorporate sector
Improvements in the provision of financial services
might be gained by upgrading informal Governments in many developing countries have
arrangements and linking them to formal insti- encouraged formal institutions to serve the nontutions.
This implies building upon, not sup- corporate sector. The means have included lowplanting,
the existing arrangements. The linking of cost rediscount facilities for targeted lending
informal arrangements with cooperatives is be- through commercial banks, mandatory lending
coming increasingly common in Africa. In Kinkala, targets, and state-supported lending institutions.
a small rural town in the People's Republic of the As Chapter 4 pointed out, these policies have cre-
Congo, a savings and credit cooperative, Coopera- ated weak institutions and have thereby retarded
tive d'Epargne et de Credit (COOPEC), has 268 the development of an efficient financial sector.
members. Informal arrangements operate in the They have been particularly damaging to the farm
local market. Among them is a ROSCA with sector. These failures have come to be widely rectwenty-four
members. Each member contributes ognized, and a search for better solutions is under
2,000 CFA francs a month (about $4.50 in 1985) and way.
receives the total collection of CFAF48,000 every Government-supported credit programs for the
two years. This scheme has been linked with noncorporate sector can work. This is shown by
COOPEC so that ROSCA members (who are also the Badan Kredit Kecamatan (BKK) program in Inenrolled
in the cooperative) make their monthly donesia (see Box 8.4). The program provides loans
contribution to the COOPEC manager, who de- to rural enterprises and other small borrowers. Its
posits the total CFAF48,000 in a savings account. viability has been maintained through interest
ROSCA members are considered a good risk; their rates that reflect lending costs and through the use
loan applications are looked upon favorably by the of local sanction to enforce repayment. Shared
COOPEC loan committee. In this way, COOPEC profits encourage careful lending by BKK staff.
has mobilized funds from its members and has sat- Funds for the program have come from a governisfied
credit demand. ment-mandated rediscounting facility, but the
An example of an apparently successful conver- scheme was designed to maintain its indepension
of borrowing groups into a cooperative bank dence.
is the Working Women's Forum of Madras. In 1978 Most of the successful formal institutions that
thirty women engaged in petty trade organized as serve the noncorporate sector, however, take dea
group to borrow from a commercial bank. De- posits. Some institutions have greatly improved
spite the success of this and other affiliated groups their position by doing so. The Banco Agricola in
of Indian women, dissatisfaction with delays and the Dominican Republic began to offer passbook
inflexible disbursement and repayment schedules savings services in 1984 because it was in serious
led them to form and staff their own bank in 1981. financial difficulty and urgently needed funds. By
An example of upgrading that produced mixed 1987 deposits had increased more than twentyfold.
results is the conversion of indigenous savings and Although 60 percent of the depositors were precredit
associations (isusu) into cooperatives in east- vious borrowers from the institution, the rest were
ern Nigeria. Cooperatives based on isusu per- a new clientele who demanded only a safe and
formed better in most respects than the rest. Mem- convenient store for liquidity.
bers of these cooperatives, however, not only Mobilization of voluntary deposits is desirable
remained members of indigenous savings and for several reasons. First, resource allocation can
credit associations but also held most of their sav- be improved if noncorporate agents have good deings
there. This was partly because the govern- posit opportunities with positive real rates of interment
gave the cooperatives easy access to funds, est and low transaction costs. Second, the flow of
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