The Role of Cooperatives in Microfinance for development in Africa

In this article the emerging Information technology ICT and digitalization of microeconomics in Africa by use of mobile money and mobile telephone are factors that have facilitated financial inclusion, integrating economic activities and facilitating coordination of members of cooperative unions in enhancing micro financing. By any measure, cooperatives have played major role in development of Africa even before most of these countries became independent.

These took the form of agricultural produce platforms such as Coffee producers, Tea, Cashew nuts, Cotton and other produce. There were others which united producers of a range of cash crops as well as other rural based activities. The cooperatives had arrangement with rural and micro finance banks in Tanzania for instance there was Rural and Cooperative Bank that was a specialized bank to finance rural development through cooperative and micro level associations.

Kenya, Uganda, Ghana, Nigeria, Cameroun Zambia and other countries had almost similar arrangement. The economic reforms after independence and especially the 1990s reforms of structural adjustment programs under the World Bank and IMF brought in a new approach where now several local and international commercial banks with a special window of micro finance were introduced. This paved a way for a new dimension of micro financing in one hand and cooperative unions operations on the other. Some of the cooperative unions were closed down after privatization of major plantations and state run processing industries, banks now were diverse with different rates for the farmers and other micro financing seekers.

With emerging ICT and mobile telephone Africa has been able to catch up with the rest of the World in internet access. For instance, while traditional access to internet is 10 to 20 percent in Africa mobile telephone have facilitated financial inclusion by putting together up to 50 percent access to internet in some countries. Hence cooperative union members through digital platforms have in many dimensions increased their access to financial services. The growing need for micro financing and the reality that traditional banking system fails to cover rural informal economies with customers who have no reliable income, reliable address and inadequate economic activities have resulted into continuing need for further improvement of micro financing. This is partly due to the fact that African microfinance industry is diverse and geographically dispersed. Therefore, an array of approaches has been required ranging from the use of agent and village community banks and traditional group based- systems to specialized lending by various institutions. This situation is due to the nature of the financial systems in Africa, which has also influenced the evolving role of the major stakeholders of microfinance in the continent and their impact. It is also true that micro financing sector of Africa remains confronted with a number of features such as small size when measured by the absolute size of liquid asset and the ratio of liquid liabilities Also the sector is narrow and shallow when financial depth and efficiency, is measured by deposit resources mobilized by banks and near-bank intermediaries relative to economic activity (ratio of liquid liabilities to GDP) and credit extended (private credit to GDP) is low. The other significant features are high incidence of informality, disruption from social and political pressure.

Small-scale farmers struggle to obtain agricultural loans even where they have good access to commercial banks. Commercial banks are reluctant to lend to them, recognizing the severe barriers and risks these farmers face in successfully producing a crop, marketing it, and repaying loans. Smallholders face risks in transporting produce to markets, finding buyers there, and earning the value they expected at planting. This risk not only introduces uncertainty in their income stream but, as noted, also inhibits their ability to obtain the credit to make the productivity and quality improvements that will break the cycle of poverty. Much of the risk in accessing markets can be mitigated, and farmers’ access to credit can be improved, if farmer scan forge better links with agribusiness buyers such as domestic supermarkets, agro processors, or (further along the supply chain) exporters. When such links are weak, buyers also face problems in sourcing sufficient produce of the quality demanded by supermarkets or food processors. Farmers often do not know that the market is willing to pay a high price for certain products that meet certain quality standards; even if they do know, they lack the financing to switch to a new and more profitable crop or the knowledge to achieve the desired level of quality.

The cooperatives have a major role to play in reducing the challenges indicated since they can play a role of a credible and trustworthy institution that act to represent the rather scattered microeconomic actors in rural areas and the informal sector. The current information confirms that the economy of Africa is over 60 percent informal who are in micro enterprises and in need of micro financing. The financial inclusion has been facing difficulties because rural clients differ from the typical clients of financial service providers. They are located in remote and often sparsely populated areas, and they rarely possess the sorts of physical or financial assets that financial institutions customarily accept as collateral. The major prerequisites for using information and communication technology (ICT) to deliver these services in rural areas are robust national financial systems (for example, with national payment systems, credit bureaus, ATM switches, central platforms for microfinance) and the infrastructure that allows electronic financial transactions between institutions and individuals. Factors that are critical for ICT to expand financial services in rural areas are a supportive economic policy and regulatory framework; appropriate financial and nonfinancial products; and mechanisms, processes, and technology applications that can deliver products and services, improve transparency and accountability, reduce costs, and become self-sustaining. A number of nonbank institutions have developed innovative approaches to financing agriculture, enabled by or integrated with ICT, including mobile financial services, branchless banking, ATMs, and smartcards. It has been proven that ICT can also enhance the government’s capacity to monitor and evaluate financial services provided to rural clients and design effective financial policies and regulations for the rural sector.

A number of agents in rural areas—such as government departments, commercial banks, microfinance institutions, traders, telecommunications companies, community-based organizations, families, and friends—provide financial services, which can include credit, savings, insurance, transfers, and payments.

The platform includes mobile phones, SMS, and email to enable the parties to do business. All payments from buyers pass through special accounts at the bank. Information is transmitted up and down the supply chain during the crop cycle, primarily via SMS. Bank is informed about the area planted to estimate production and plans accordingly. The processor monitors crop progress and passes on important crop management information to farmers. Input retailers are updated on which products to stock at what time, and producers learn about collection dates and locations long before harvest. The input retailers, trained in basic recordkeeping for the platform, submit virtual receipts to the platform via mobile phone and receive payments into their bank accounts. Through this arrangement, farmers received credit for inputs from Bank upon signing a fixed-price contract. To ensure that the loans would be used for their stated purpose, farmers received no cash from Bank. The banks pay input retailers directly for materials purchased by farmers on credit. When the produce is delivered to the platform pays farmers, which first deducts the cost of the loan and transfers it to the Bank. The remainder is sent to the farmer’s account with the Bank. Farmer groups (typically consisting of 20–100 farmers in the same area) open an account with the Bank through which all payments are made. Individual farmers can be paid in cash, but cash is withdrawn from the bank at the group level to reduce transaction costs. Each member is required to contribute to a Transaction Insurance Fund, which is 25 percent of the value of the input loans and acts as security. The platform ensures that all financial transactions and communications take place within the platform. The platform includes mobile phones, SMS, and email to enable the parties to do business. In the role of ICT in supporting rural online banking have been providing loans to microfinance institutions such as SACCOS (the largest type of MFI in this program). Some cooperative banks have taken this approach in order to reduce their risks in microfinance by loaning to groups such as SACCOs instead of micro and small enterprise borrowers. In Tanzania for example CRDB provides SACCOs with financial stability.



Professor Godius Kahyarara

Professor Godius Kahyarara holds a PhD in Economics and Master of Philosophy in Economics from the University of Oxford of the United Kingdom, and a B.A in Economics and M.A Economics from the University of Dar-es-Salaam. Other Advanced qualifications attained by Professor Kahyarara are an advanced training on strategic studies from the United States of America, Environmental Economics from Sweden and Impact Evaluation from Germany.  He was the first Principal of the College of Social Sciences after a Split from the former College of Arts and Social Sciences in 2013.  He has published widely in academic Journals including the top scientific Journals of Bulletin of Economics and Statistics, World Development, Review of Economics and Statistics and Journal of Business and Economics.        He has served as external examiner to several universities in Mauritius, South Africa and the Netherlands along with local Universities of Sokoine, Mzumbe and Open University of Tanzania. He is currently a visiting professor at the Joint Facility of Electives Africa Program, University of Rwanda and Edward Mondlane University of Mozambique

                        He previously worked on the regional integration including SADC such as design of the Regional Industrial Strategy for Southern Africa-SADC submitted to the Development Bank of Southern Africa, and preparation of the Industrial development strategy for East Africa submitted to the East Africa Secretariat Arusha. He specializes in Micro econometrics and Microeconomics of firms, Industrial and Labour Economics. Some of the significant public services includes participation in a team of experts for preparation of Tanzania 50 Years of Independence report, Joint US-Tanzania team of experts that prepared a report on Growth Diagnostic-Partnership for growth.  From March 2016 till July 2018 he saved a Director General of the National Social Security Fund of Tanzania-NSSF. Besides he saved as a Board Chairman of Azania Bank, Jubilee Insurance, Ubungo Plaza, and an associate member of the Global Wage Foundation based in Amsterdam the Netherlands.