How to Create Financial Linkages to Rural Ethiopian Communities
Rural, poor households are typically excluded from formal financial sector opportunities. In fact, it is estimated that less than 10% of poor, rural households have access to the most basic financial services. Therefore, many poor households depend on informal financial institutions and private lenders that often charge high interest rates and exploit them. Microfinance via Rural Savings and Credit Cooperatives (RuSACCOs) plays a paramount role in income generation and poverty alleviation. These financial cooperatives reach out to areas where other formal service providers do not reach. Inclusive, rural financial services are particularly important for poor women and young people.
RuSACCOs are member-owned, member-managed financial cooperatives, providing poor populations living in rural areas with small loans and low interest rates while helping them accumulate savings, extend credits and access insurance services. The RuSACCOs play a crucial role in the access to finance ecosystem.
The RuSACCOS are crucial to form the base of a complete access to finance ecosystem.
RuSACCO members are simultaneously owners and users, which helps those financial cooperatives obtain information about each member’s financial viability and encourages them to monitor each other, even at a kebele (group) level.
Ethiopia has one of the lowest levels of financial inclusion in the world, with only 22% of adults holding an account with a financial institution and just 14% able to access credit. This is because more formal financial institutions are not able to reach the rural areas. RuSACCOs have better outreach in rural parts, with greater potential to serve the low-income and active poor, unbanked sections of the population. This is not only the case in Ethiopia, as RuSACCOs play a crucial role in other African countries.
Size and coverage of RuSACCOs often involve a trade-off relationship between substantial peer monitoring and financial strength. Besides the issues around the size and coverage, financial cooperatives often have weak management capacity — usually governed by a volunteer board of directors elected by and from the membership. They offer limited financial services and often lack timely auditing, knowledge and information on income-generating activities and accountability for donor funds.
No adequate tools were found to monitor and assess the performance or professionalism of RuSACCOs in developing countries. If such a tool were available, with support, these financial cooperatives could identify the gaps in their capacity and guide follow-up decisions on how to improve their capabilities to become efficient and effective institutions fighting against poverty. This was the impetus for the partners to work together to develop such a tool.
An approach with impact and potential
Both SCOPEinsight and A Glimmer of Hope — with the help of the Agribusiness Market Ecosystem Alliance (AMEA), a global network for accelerating the professionalization of farmer organizations — developed and piloted a tool for RuSACCOs in Ethiopia. The data from the SCOPE SACCO tool has helped A Glimmer of Hope provide the proper technical assistance to strengthen their service offerings to their members. As part of this project, nine diverse RuSACCOs and one union in Libo Kemkem were assessed regarding their strengths and weaknesses, and a list of recommendations on how to improve their professional acumen was provided. The results from these assessments were then used to design and target training and coaching plans for the cooperatives based on what they needed most. This is part of a five-year program intended to turn all the RuSACCOs into self-sustained financial resources for the local communities.
About the tools
While these tools are quite nascent, they hold much promise for helping to strengthen RuSACCOs in a data-driven way.