Access to Rural Non-Farm Livelihoods - Natural Resources Institute

The RRCS started in 1992 and is implemented by the Centenary Rural Development Bank
(CERUDEB), with the capital fund and the costs of establishing CERUDEB’s Kyotera
branch, as well as a three year operational subsidy provided by Danida. The scheme was
initially managed by a local NGO formed by the RDC – however, poor institutional design
and political interference in lending decisions led to it being suspended twice until it was
revised and passed on in its entirety to CERUDEB in 1995. The capital fund, which is owned
by the district administration, is now over 500,000,000 shillings (~US$ 280,000), and the
CERUDEB branch operates at a profit and no longer requires subsidisation. In addition,
CERUDEB has also starting loaning out its own funds.
The scheme provides working capital to enterprises already in existence which are considered
to be too small to access credit from the main commercial banks. In Phase I conventional
collateral was usually required, and land title and permanent buildings were required for
loans of over 1,000,000 shillings (~US$ 555). In Phase II, more attention was supposed to be
paid to the needs of “weaker” groups, i.e. those with poorer security or without land title – it
is not clear how well this was implemented 35 . although by 1998 only 5% of loans were
secured by land titles, with the rest secured by chattel items, usually livestock and/or
household goods such as furniture or consumer electronics. However, the value of the chattel
items used for security must be 150% of the value of the loan, and a borrower must also have
two guarantors, each of whom has an account at CERUDEB, who will take responsibility for
tracing the borrower should he or she abscond. A borrower must also fund at least 40% of the
investment from other sources, with the loan covering no more than 60%. The minimum loan
is 100,000 shillings, although in reality few loans of less than 400,000 shillings are disbursed.
The average loan is about 1,000,000 shillings.
Interest rates and costs are very high and have been so throughout the life of the scheme,
although inflation rates have dropped considerably over this period. At the time of the
evaluation of the RDDP, the interest rate was nominally 22%. However, added to this was an
additional 2% per month (i.e. 24% per annum) for “monitoring”, as well as a onetime
appraisal fee of 2%, resulting in a total cost of 48% per annum, or more for short loans.
Fourth time exemplary borrowers are eligible for a special rate totalling 30%, but in reality,
few IGAs are even this profitable, and for many borrowers these high costs are a problem –
this is often exacerbated by unclear and/or incomplete explanations of the costs and
processes, so that some borrowers only find out the details of the repayments required when
the loan is actually being disbursed.
Most loans are short to medium term. Initially, most were for six months or less – at Danida’s
insistence, the number of those more than six months in term was increased to about 50%,
but it was only in 1999 that loans of more than a year were offered, and these to only five
existing or previous clients with exceptional repayment records. There are currently no grace
periods, so that loans for farming in particular have to be repaid from another income source,
limiting their usefulness to those without a second IGA.
35 The evaluation of the RDDP is critical of Danida in not setting out specific requirements and targets for
CERUDEB with respect to this, as, unless compelled, a financial institution with more demand that it can meet
is extremely unlikely to seek out clients with poor collateral and limited ability to absorb credit, i.e., these
“weaker” groups. Bird et al. (2000) further suggest that lending to such groups requires different, specialist
methodologies, which might be better undertaken by a separate, parallel, and possibly subsidised scheme.
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