Rural development and rural finance: the role of financial services cooperatives in the

Latin America region

Authors:
Jorge Coque (coque@uniovi.es)
University of Oviedo
Department of Business Management
C/ Wifredo Ricart, s/n
33203 Gijn
Spain
Inmaculada Buenda-Martnez (inmaculada.buendia@uclm.es)
University of Castilla La Mancha
Avenida de Los Alfares, 44.
16071 Cuenca.
Spain

Theme: TOPIC 15 STAGE 4 - MACRO

Key Words: rural development; financial systems; financial cooperatives; Latin America;
public policies, rural finance.
Abstract:
Over recent decades rural finance development has become a major topic in political agendas
across the globe. This is mainly due to the positive correlation between rural finance and rural
development; not only to fight against poverty but also for generating economic growth. The
new rural finance paradigm emphasises finance as a way to expand outreach to rural areas and
it requires specific government initiatives.
In the case of Latin America, where the 22% of its population lives in rural areas, the rural
development approach based on the new rurality paradigm requires innovative ways of
thinking about development from a multi-sectoral and diversified perspective in order to meet
the populations needs, facilitate agricultural modernization, and provide viable business
alternatives. Reaching these objectives entails efficient rural financial markets. Despite the
substantial financial deregulation in larger financial systems, the market failure remains
persistent in the region. This work proposes a study of rural finance policy initiatives in
several Latin American countries in order to position cooperatives as an effective and
alternative financial service provider.

Rural development and rural finance: the role of financial services cooperatives in the
Latin America region

1. INTRODUCTION
WHAT?: Rural development: fighting against poverty + economic growth.
HOW?: New rurality paradigm = multi-sectorial perspective: government initiatives +
efficient rural financial markets viable/modern business alternatives + populations needs.
WHERE?: Latin America: 22% of population in rural areas / financial deregulation larger
systems but persistent financial market failure: Another way, closer to people and better
helped by public sector is required?
WHITH WHOM?: Financial cooperatives as one of the 2 main historical coops branches in
the region (from European inmigrants / Catholic Church / US).
THIS WORK: Rural finance policy initiatives in 3 Latin American countries Can
cooperatives be effective/alternative financial providers?

2. RURAL DEVELOPMENT AND FINANCIAL COOPERATIVES

2.1. COOPERATIVISM IN RURAL DEVELOPMENT1
RURAL AREAS:
Low population densidity.
Close social relationships.
Diverse economic sectors Agricultural and livestock activities inform the rest.
Open spaces: flows with urban areas in both ways (beyond regional and national
scales).
PROBLEMS IN RURAL AREAS: DERURALIZATION:
Poor innovation skills and tools Labour productivity getting reduced.
Limited public services and infrastructures for business development.
Job opportunities decreasing.
Population decreasing and ageing.
RURAL DEVELOPMENT AS TERRITORIAL DEVELOPMENT (better than local
development):
Micro (local resources and needs) / Macro (networking) levels.
Short term / long term results.
Endogenous (from below: identity) / Exogenous (from above: innovation)
stakeholders. Risks at the extremes: localism identity loss + dependence.
Economic (core: people entrepreneurship) / Social (covering: people needs) / Public
(local/regional/national government = facilitator) initiatives.
COOPERATIVES AS RURAL DEVELOPMENT AGENTS:
Voluntary and Autonomy principles Collective initiatives from LOCAL NEEDS
Mobilization of LOCAL RESOURCES IDENTITY.
1

Coque (2005)

ECONOMIC and SOCIAL entities Participative entities (several principles)

Organisational flexibility (facilitated by Education and Democracy principles)
INNOVATION.
Intercooperation and Concern for community principles NETWORKING
Economic externalities & fixing resources to the territory.

ADVISABLE WAYS TO PROMOTE RURAL DEVELOPMENT BY MEANS

COOPERATIVES UNDER AN APPROACH OF TERRITORIAL DEVELOPMENT:
Combining stakeholders:
From self-promotion, then external support.
Intercooperation from local context and other social economy agents.
Avoiding paternalism / Encouraging entrepreneurship:
External support conditioned by viability.
Prominence of cooperative movement.
Analysing and designing integrally:
Value-added chain approach New links to the territory.
Combining business and social issues.
Linking rural areas with urban areas.
Combining different tools / Starting by awareness and training.
Long term perspective: self-sustainable development, life-cycle analysis
Acting on the environment: negotiations with beneficiary collectives,
institutions
2.2. RURAL FINANCE
Rural finance refers to financial services offered and used in rural areas by people of all
income levels.
PROBLEMS IN RURAL FINANCIAL MARKETS:
1. Combination of high levels of production and price risk and limited mitigation
techniques.
2. Imperfect or asymmetric information. Information is costly to acquire and transmit,
yet it is vital in assessing and managing risk. Good information can serve as a partial
substitute for lack of real collateral and a means to prevent moral hazard. However, in
rural settings the absence of formal credit histories, the absence of a tradition of record
keeping, and the heterogeneity of production conditions complicate creditworthiness
evaluations and loan/insurance monitoring activities.
3. High transaction costs stemming from peculiarities in the physical and institutional
setting. Rural areas are characterized by high levels of poverty, spatial dispersion,
marked seasonality of income, weak legal and contract enforcement frameworks, poor
physical infrastructures, and low levels of schooling. These features increase
transaction costs for both intermediaries and clients. Once transaction costs pass a
threshold, they stifle intermediation.
CONSEQUENCES OF RURAL FINANCIAL PROBLEMS: exclusion of rural people in the
financial markets with economics and social impacts:
Reducing investment in the human capital of their children perpetuating the cycle of
poverty.
Increasing vulnerability due to external shocks, limiting the development of
economics activities with positive returns as families become more risk averse.
EVOLVING PARADIGMNS OF RURAL FINANCE:
1. OLD RURAL FINANCE PARADIGM:
3

1960s-1970s: focus on promoting agricultural development.

Confronted with the need to address the special cost and risk related to rural finance so
that formal institutions could enter the market, governments and donors decided to
take action. Five types of intervention: lending requirements and quotas on banks and
other financial institutions; refinancing schemes; loans at preferential interest rates;
credit guarantee; and targeted lending by development finance institutions.
2. MICROFINANCE REVOLUTION:
Late 1970s.
Appearance of NGOs and credit unions.
Market targeted: the poor.
Based upon small, short-term loans with a gradually expanding credit line, depending
on the compliance of borrowers.
3. NEW EMERGING PARADIGM:
1980s-1990s
Finance as a way to expand outreach to rural areas instead of treating it as a policy
tool targeted to specific markets.
Focusing on market development focus on creating efficient financial markets.
Policies are oriented to establishing a suitable environment for the development of
rural finance.

For over a century citizens-consumers-entrepreneurs, unsatisfied by the available banking

services, have been creating financial institutions to satisfy their own needs. Among these
alternative financial service providers we can find financial services cooperatives (FSC). Lack
of accessibility to financial services was the main reason for their creation a century ago.
FSCs dynamics, based on specific values and principles and their structural integration of the
community interest, has allowed them to meet the needs of social groups, communities, and
regions improperly served by conventional banking institutions (Buenda Martnez et al.,
2006). If we add to these characteristics the higher stability during financial crisis versus
commercial banking institutions (Crear, 2009; Groeneveld, 2011) we can understand the
resurgence of the cooperative enterprises. FSC help to increase the diversity of the banking
sector, both in terms of business models as well as in terms of ownership structure, thus
contributing in a significant manner to improving the financial system (Ayadi et al., 2010).
More than a century has passed since the creation of the first FSC which largely contributed
to the accessibility to savings and credit for consumers, farmers, craftsmen, and SME in the
countries where they prospered. The representation model of institutional forms for activity
financing (see Figure 1) from Malo & Tremblay (2004) permit us to place FSC in the market
financial activities.
Historically, FSCs have been a form of social banking used by individuals and microenterprises, more or less marginalized, that must mobilize resources to reorganize their
activities using only market organizations. In the majority of developed countries, FSC have
the same banking statuses as their competitors. The intensity of the competition in profitable
niches limit their capacity to play their fundamental role of reintegrating in the market people
and/or SMEs excluded by economic and societal transformations. Additionally, the
transformation of FSCs in universal banking institution implies a diversification from
membership which hinders initiatives that require a strong solidarity of their constituents.
Despite this, FSC have succeeded in maintaining their distinctive characteristics: a strong
orientation towards their domestic market, a large margin for strategic intervention afforded
to local decision-makers and greater social and geographic accessibility for their members
which implies a certain equalization favoring their establishments in the more remote regions
(Malo & Tremblay, 2004).

Figure 1. Representation model of the institutional forms for activity financing

Source: Malo & Tremblay, 2004

Additionally, a review of state intervention mechanisms and the growing number of private
foundations shows they have undergone a multiplication of associations. Some of them have a
similar composition, rules, and activities to those of cooperatives. In the majority of the cases,
these associations emerge at the heart of solidarity movements, characterized by a strong
capacity of voluntary engagement and the financial support from third parties. FSC become
financial partners taking advantage of their social capital of proximity, highlight that this
option carry out that which they have difficulty to achieve in their banking dynamics.
Although the contribution of FSC in maintaining access to financial services is recognized
(European Association of Co-operative Banks, 2005; HM Treasury, 1999; Jones, 2007;
Lewis, 1982; Mayo & Mullineaux, 2001; Mckillop, 2011), FCS possesses a clear ability to
stimulate local development in both urban and rural areas not only with their financial
resources but also with their philosophy and organisational expertise (McCarthy, Briscoe &
Ward, 1999:8). In this sense, the Secretary-General of the United Nations, in his report to the
47th session of the General Assembly (United Nations, 1992), recognised that FSCs have a
strong potential for mobilizing local savings and providing credit to members, and are
particularly important in apparently capital-scarce conditions, thereby encouraging thrift and
entrepreneurial activity and hence stimulating local multipliers.
From a financial point of view, Douthwaite (1996) argues that conventional banks reduce the
purchasing power in a community since any money invested leaves the community of origin
and is employed elsewhere. Furthermore, once money leaves the community it will only
return at interest rates determined by the world market. Credit unions, on the other hand,
retain local money within the community by encouraging the pooling of local savings for
local lending. Loans are made to members for personal or business development purposes.
However, lending to business in general has been weak. McCarthy, Briscoe, Ward (1999)
estimate that FCSs lend less than 10% of their total lending to local enterprises. FCSs have
emphasised personal lending due to a legislative requirement to lend to individual members
although they are permitted to lend to individuals for business purposes. There is enormous
scope for FCSs to become more involved in business lending particularly as many are underlent.
5

Gormley (1993) asserts that by assisting in local development, FCSs can actually reduce local
migration and emigration, thereby sustaining populations and the demographic health of local
communities. From an organisational perspective, one of the most valuable contributions
FCSs make to local development in their communities is demonstrating the principle of cooperation. Generally speaking, involvement in local development assists FCSs in extending
their vision of social justice both to the individual members and to the larger community in
which they work and reside, as directed by their operating principles. FCSs are a means by
which a communitys financial resources in particular can be mobilised for the mutual benefit
of the community as a whole (Buenda et al., 2001).

3. MULTI-CASE STUDY
ACCESS TO FINANCIAL SERVICES IN LATIN AMERICA (ROA, 2015):
Since the end of the 18th and the beginning of the 19th century financial institutions of
a social nature began to emerge with the ability to promote finance access for saving
and credit to low income individuals and medium-size firms (SME).
80s-90s: More financial entities began to appear in the region: microfinance
institutions and NGOs. Cooperatives, microfinance institutions and NGOs are called
popular finances
In 2000s the priority in the public agendas of the national government and
international bodies. Reasons (Roa, 2015: 4): a) the appearance of a series of studies
demonstrating the high level of correlation between poverty and exclusion from the
formal financial sector; b) some types of financial exclusion came because a source of
instability; c) commercial banks have stated to see it as a niche for expanding their
business.
WHY THESE THREE CONTRIES?
Different levels of cooperative development (Coque, 2002):
1. Colombia: consolidated cooperativism but low present expansion.
2. Ecuador: latent cooperativism.
3. Peru: regressed cooperativism.
Clear Andean countries.
Mutually related economies.
Different levels of financial inclusion.
Different policies on rural finance promotion and FSC promotion.
Different roles of FSC.
GENERAL DATA:
Types of
FSC

Colombia

Ecuador
Per

Credit
unions
Financial
cooperatives
Cooperative
banks
Credit
unions
Credit
unions

Number of
entities

Assets
(millions
USD)

Participation
in the market
%

Exclusive
operations
with members

PR
%

Multiactivity

1998

2014

1998

2014

1998

2014

Saving

Credit

451

184

1,176

4,200

2.5

2.2

Yes

Yes

44

934

946

2.0

0.5

No

No

1,707

1,518

3.6

0.8

No

No

26

908

75

8,061

0.8

17.7

No

No

66.4

Partially

198

163

244

2,763

1.2

2.5

Yes

Yes

8.5

No

Yes
10.7

No
No

MEASURING FINANCIAL INCLUSION CRITERIA:

Access: number of access points per 10000 adults at a national level segmented by
type and relevant administrative unit.
Usage: percentage of adults with at least one type of regulated deposit account; and
percentage of adults with at least one type of regulated credit account
Quality: regulators/supervisors are responsible for mandates: consumer protection,
financial literacy, regulation of microfinance, savings promotion, SME finance
promotion; and rural finance promotion
MEASURING FINANCIAL INCLUSION: ACCESS AND USAGE
Outreach: branches per
Deposit: accounts Loans: accounts
100.000 adults
per 1.000 adults
per 1.000 adults
Total
Urban
Rural
Commercial banks
Colombia
1267,44
469,75
14,30
65%
35%
Ecuador
569,24
300,64
1,61
----Peru
783
317,22
7,31
82,21% 17,79%
Cooperatives
Colombia
27,34
24,24
0,78
60%
40%
Ecuador
372,06
48,15
0,36
----Peru
--25,43
1,46
46,5% 53,5%
Specialized state financial institutions
Colombia
----0,01
100%
0%
Ecuador
100,88
45,65
1,03
----Peru
242,89
24,02
2,25
23,11% 76,89%
Microfinance institutions
Colombia
----------Ecuador
----------Peru
84,88
75,04
3,78
41,53% 58,47%
Source: CGAP & The World Bank (2010: 56-63)
Nonbanks are more focused on rural areas.
MEASURING FINANCIAL INCLUSION: QUALITY
Aspects under the purview
Colombia
Ecuador
Peru
of the financial regulator
Consumer protection
A+
A+
A+
Financial capacity
A+
A+
A+
Regulation of microfinance A+
A
A+
Promoting savings
----A+
Promoting SME access to
----A+
finance
Promoting access in rural
----A+
areas
A: agency is responsible; A+: agency is responsible and it has a dedicated team/unit
Source: CGAP & The World Bank, 2010, pp. 67-69
Promoting financial access in rural areas is a topic for the regulatory authorities in Peru.

4. CONCLUSIONS
Public sector statements and macroeconomic figures draw a nice scene on rural development
policies by means FSC that would have been improving over the first decade and a half of this
century. And, apparentely, the ranking at the end of last century (Colombia #1, Ecuador # 2,
Peru # 3) would have been changed.
But, on one extreme, in Colombia and Peru the numbers of FSC drop while assets increase.
This proves a concentration process that could be putting at risk their participative feature
and, consequentely, the identification with their members that fix the entities to their rual
areas. Are FSC in these countries being left to their fate from a neoliberal approach that put
them al the same level that commercial entities, forgetting their social side to only paying
attention to economic issues?
On the other extreme, the amazing rise of both entities (34 times) and assets (107 times) in
Ecuador reveals artificial processes of promotion from above that would be obviating the lifecycle analysis, wich demands respect to the natural development pace of collective
entrepreneurship.
In spite of all that, small iniatitives either formal or informal, many of then with a cooperative
logic, are setting up in rural areas and reach to cover social financing needs where other
entities avoid to go.
To take advantage of natural FSC strenghs, the same as the rest of the social economy
movement, recovering the approach of rural development understood as territorial
development is necessary and urgent to balance micro and macro levels, long and short terms,
endogenous and exogenous factors, social and economic issues.

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