FINANCIAL COOPERATIVES AND RURAL OUTREACH IN ETHIOPIA

cooperatives is tool to involve rural poor in economic life

BY Feleke Borga

felekeborga@yahoo.com

Phone +251911516712/+251911050568

INTRODUCTION

ICA DEFINITION

A cooperative is an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and democratically-controlled enterprise.

VALUES

Cooperatives are based on the values of self-help, self-responsibility, democracy, equality, equity, and solidarity.

In the tradition of their founders, cooperative members believe in the ethical values of honesty, openness, social responsibility, and caring for others.

The Rochdale principles (ICA, 2008);

The cooperative principles are guidelines by which cooperatives put their values into practice.

1st Principle: VOLUNTARY AND OPEN MEMBERSHIP

Cooperatives are voluntary organizations, open to all persons able to use their services and willing to accept the responsibilities of membership, without gender, social, racial, political, or religious discrimination.

The cooperative is designed to be accessible to the poor and thus serving as a developmental organization.

2nd Principle: DEMOCRATIC MEMBER CONTROL

Cooperatives are democratic organizations controlled by their members, who actively participate in setting their policies and making decisions.

Serving as elected representatives are accountable to the membership.

In primary cooperatives members have equal voting rights (one member, one vote) and cooperatives at other levels are organized in a democratic manner.

3rd Principle: MEMBER ECONOMIC PARTICIPATION

Members contribute equitably to, and democratically control, the capital of their cooperative.

Profits to the user owner not to the owners of capital.

4th Principle: AUTONOMY AND INDEPENDENCE

Cooperatives are autonomous, self-help organizations controlled by their members.

If they enter into agreements with other organizations, including governments, or raise capital from external sources, they do so on terms that ensure democratic control by their members and maintain their cooperative autonomy.

5th Principle: EDUCATION, TRAINING AND INFORMATION

Cooperatives provide education and training for their members, elected representatives, managers, and employees so they can contribute effectively to the development of their cooperatives.

6th Principle: CO-OPERATION AMONG CO-OPERATIVES

Cooperatives serve their members most effectively and strengthen the cooperative movement by working together through local, national, regional, and international structures.

7th Principle: CONCERN FOR COMMUNITY

While focusing on member needs, cooperatives work for the sustainable development of their communities through policies accepted by their members.

Why co-operatives? Cooperatives can be significant economic players that

contribute to sustained growth processes. help create more equitable growth. help tackle rural poverty. expand poor people’s access to financial

services, provide a range of services such as health

care, housing, and utilities such as water and electricity.

can provide an opportunity for self determination and empowerment of poor people

can help with conflict resolution, peace-building and social cohesion.

Objectives of this paper

Gaining deeper understanding about financial cooperatives.(GO)

Identify and describe the socioeconomic characteristics of the cooperatives;

Examine contributions of the cooperatives to rural economic activities;

Identify the constraints limiting the optimum performance of the cooperatives

STATUS OF COOPERATIVES

Currently, there are over 38,000 cooperatives in Ethiopia. Different types of cooperatives

These Cooperatives are organized in to approximately 202 cooperative unions. (FCA, 2011 report)

FCA is the nodal organization to promote, regulate, register and supervise all type of cooperatives in Ethiopia.

Importance of financial cooperatives

Financial co-operatives play a vital role in bringing financial services to the unbanked in rural Ethiopia.

FC are key drivers in the promotion of financial inclusion.

are developed from the base. are usually formed through the initiative of the local

population have a simple organizational structure. Members are deeply involved in the running of the

co-operative as they see it as theirs and are really proud of it.

The status of Financial cooperatives in terms of number membership and savings is as shown in the table below: source FCA, June 2012

FC Number Menbers Saving mobilized

URBAN 3,573 381,212 994, 960,169

RURAL 6,134 529,063 211,358,991

TOTAL 10,270 910,275 1,206,319,160

Rural development and financial services.

The majority of rural HH in most developing countries like Ethiopia have only limited access to financial services, except from such non-institutional sources as traders, money lenders, voluntary saving clubs(Iqub), friends, and so on.

Yet, it is broadly accepted at the present that financial services are an important, and a vital factor for economic and social development.

Rural development and financial services

Financial services can help create opportunities for self-employment and reduce the vulnerability of poor families to hard times by offering opportunities to save or borrow.

Indeed, Substantial agricultural development—and development of related processing and Marketing facilities in rural areas—and Real increase of the incomes of the rural families have almost

nowhere happened without access to financial services.

This has been true in countries that are now advanced, and it is equally true for those countries that are currently attempting to accelerate their development and reduce the income gaps in relation to advanced countries.

Rural development and financial services

In addition, agriculture is linked with important ―up-stream and down-stream activities,

such as production and marketing of farming equipment and inputs, and

processing, transport, and marketing of agricultural output, which for their part also need financial services.

As a consequence of restricted residual claims and imperfect access to external funds, cooperatives are constrained in their ability to acquire risk capital for investment and growth purposes

Dearth of Financial Institutions in Rural Ethiopia.

More financial intermediaries, with a wider array of financial services, tailored to the needs of the rural populations, are needed than presently exist to reach rural populations more broadly, if low-income rural households are expected to manage their living expenses and enhance their productivity, which are key elements to improve their economic and social position.

Renewed interest in the potential of financial cooperatives.

Financial cooperatives may prove to be a channel able to reach the poor, as well as micro and small enterprises in rural areas.

Outreach and sustainability defined

Outreach or ―coverage

Measures the scale and depth of penetration of services (extent of services and number of clients in certain categories or areas) by providers of financial services to a targeted clientele–generally the poor. Rural outreach measures the penetration of these services in rural areas.

it is the number of clients or accounts that are active at a given point in time in the portfolio of an institution or service provider.

Sustainability.

Sustainability refers to the ability of an organization to survive over the long term. Critical aspects of sustainability include the permanency or stability of ownership, governance, management, and financial viability.

a financial cooperative must be profitable; otherwise it will not be able to cover its costs and provide its members with financial services over the long term.

Basic Presumptions for Involving Financial Cooperatives

1. Financial cooperatives are an opportunity for expansion of outreach.

Financial cooperatives offer an opportunity to achieve rural outreach at costs considerably lower than those of urban-oriented financial institutions.

The reasons for lower costs are several, including lower salaries, more modest premises, commonly practiced freedom from taxation, benefiting from local knowledge in lending operations and local ownership by the members.

2. Financial cooperatives are economic organizations.

Financial cooperatives are established for the economic improvement of their members.

Only economically strong institutions can be sustainable on a long run and continually increase their outreach.

3. Models from countries with a strong and successful history of financial cooperative development can be used in countries new to financial cooperatives, provided that the models are adapted to fit the local circumstances.

There is no need to reinvent the wheel.

FINANCIAL COOPERATIVES AND THEIR BUSINESS MODELS

FC are owned by members and follow a one-member one-vote principle.

The higher-level FC are owned by member cooperatives and voting is often according to share capital invested by the member organizations.

Small local cooperatives are usually managed by voluntary members on a part-time basis.

Bigger cooperatives have paid managers and staff, but the members still elect among themselves the management organs of the cooperative.

Services provided by financial cooperatives.

Locally-based small financial cooperatives provide only basic products, that is, loans and savings. These are the most important financial services for low-income HHs.

FC provide

safe facilities for savings,

enabling savers to smooth consumption,

prepare for emergencies,

gradually accumulate financial resources,

self-finance the purchase of durable goods, and make investments.

Conclusions The coordination of the effort of different stakeholders is also vital

to utilize the available resources properly/wisely and avoid conflicts of interest among implementers and beneficiaries.

Strengthening the tier structure of SACCOs is also equally important to enhance their development and performance and provide efficient & quality service to members on a competitive basis.

Setting up of strong and efficient regulatory and supervisory environment is required prevailing is not sufficient enough with the ongoing development and demands of financial cooperative general.

.

Constraints of cooperatives

Some of the major factors that lead to malfunction of the cooperatives. Most of the problems militating against optimum performance of the cooperatives

Poor education among the members. lack of member’s commitmentInadequate government supportlack of capital (limited access to

external sources of funds)

Conclusion The placement of financially skilled professionals to

support and make them subject to financial norms and prudential regulation is needed to ensure the healthy growth and/or development of FCs

Creating linkages with other financial service providers (MFIs and Banks) is very important to know what is going in the industry and gain experience and adopt best practices which assist them to improve operational efficiency.

There is the need for financial co-operatives to embark on financial literacy especially in the rural areas.

To reduce the level of illiteracy and educate the members, the cooperative movement should organise adult education classes for the members at the primary cooperatives level.

Furthermore, training of leaders is also important. It should involve exchange of experience with other leaders and taking part in meetings to compare their ideas and common problems.

THANK YOU FOR YOUR ATTENTION

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Thank you all for your attention

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