CASE STUDIES IN DONOR GOOD PRACTICES No. 18 December 2004 From Project to Institution: AFD and Crédit Rural de Guinée Invest in Rural Finance for the Long Term by Bonnie Brusky with Ruth Goodwin-Groen This case study examines how Agence française de développement (AFD) made a long-term commitment to provide financial services to very poor, rural customers in the Republic of Guinée through a network of rural community banks. Overview When Agence française de développement (AFD) agreed to support a government-initiated rural finance project in Guinée in 1989, no one expected it to be easy. The Republic of Guinée was primarily rural, extremely poor, and fraught with corruption. Furthermore, the country's tumultuous political past had resulted in the emigration of many well-educated citizens. The Crédit rural de Guinée (CRG) project sought to meet the financial needs of very poor rural residents, nationwide--a very ambitious goal. Elected president of a local CRG rural bank at a General Assembly The project would require AFD and project manager meeting in Conakry, Guinea. (Photo: François Doligez. 2002) IRAM (Institut de recherches et d'applications de traditionally monopolized financial resources. With the méthodes de développement) to engage in developing a support of AFD, IRAM conducted a feasibility study that rural social fabric to support locally managed rural banks. recommended the development of a rural finance project. As AFD would discover, it would have to make a trade- IRAM was subsequently chosen to implement the CRG off that it might not make again--it sought to establish project as technical assistance provider. pro-poor outreach and depth before sustainability. Achieving financial viability would consequently require a "Operations for CRG began in early 1989 within the frame- 20-year commitment, perseverance, and significant work of an experimental project [which aimed] to put in place financial and institutional investment. a policy of rural financing in conjunction with development projects, and to test credit provision adapted to the needs of Its efforts have begun to pay off. As of March 2004, the poorest." Crédit rural de Guinée, CRG, offered savings and loan Lucien Humbert, task manager for CRG, AFD (late 1990s) products to over 130,000 members across the country through individual rural banks. While not yet sustainable, Rural finance is challenging in any environment, but the it has a high-quality portfolio and is projected to break acute poverty and economic and social crisis in Guinée even in 2007, when the consolidated net income of its made the creation of a self-sustaining network of rural community banks will cover costs without subsidies for banks exceptionally difficult. The execution and exile of the first time. millions of Guinéens under the 26-year regime of Sekou Touré stifled development and left an exceptionally poor In addition to providing a valuable service to clients, CRG and uneducated workforce in its wake. When the project today is one of Guinée's top 20 employers and, as the began in 1989, Guinée was ranked by the UNDP Human largest financial institution with countrywide coverage, it Development Index as the poorest developing country is a significant force in local development. This is no worldwide. The extremely limited transportation, power, small achievement. and telecommunications infrastructures exacerbated 1989: CRG Is Launched operational problems. For example, only 16 percent of the population had access to electricity in 1999, a situation In the late 1980s, the Guinean Ministry of Rural Develop- that has not appreciably improved. Eight of 33 ment was determined to develop a financial structure for government prefectures nationwide still do not have a the rural poor in a society where local elites had telephone line, and what roads exist are in poor condition. Page 2 A DIRECT Case Study 2004: CRG Today (1.8 percent), and Société d'investissement et de By the first quarter of 2004, CRG had achieved développement international, a French social investment remarkable rural outreach, with 109 community banks institution (8.2 percent). across the country serving 130,000 members (including Table 1. CRG Indicators borrowers and savers), 43 percent of whom are women. The institution has an outstanding loan portfolio of 5.9 Average for million and some 2.7 million in member savings. As of Item CRG medium-sized African MFI ** July 2003, its portfolio-at-risk ratio (greater than 30 days) Community banks 109 N/A was 2.6 percent (see table 1). Since the bankruptcy of Members 130,244 N/A Crédit mutuel de Guinée in 2001 (another AFD-supported Active borrowers 76,746 29,935 rural finance institution that targeted larger traders, Average loan size 97 158 entrepreneurs, government workers, and employees of Savings 2.7 m* 273,000 large companies), CRG is the only financial services Outstanding portfolio 5.9 m* 3.1 million Portfolio at risk > 30 days 2.6 %** 2.1% provider to operate on a nationwide scale. Although it Adjusted return on assets 14.3%** -2.3% began with an exclusively rural focus, CRG now works in Adjusted operating some urban and peri-urban areas as well. expense ratio 40.6%** 28.3% Borrowers per loan officer 419** 423 Compared to its peer group of medium-sized African Sources: IRAM; PlaNet Finance rating, July 2003 (December 2002 MFIs defined by the MicroBanking Bulletin,1 CRG has a numbers); MIX (July 2003). Notes: *December 2003 **July 2003 much smaller average loan size (97) and much higher productivity, with 519 members and 419 borrowers per "[C]onditions in the country and the very small average out- loan officer (December 2002). However, CRG's adjusted standing balance per client (12 percent of GNP) limit econo- return on assets is much lower, and the network of rural mies of scaleafter 14 years of operation, total outstanding banks is not expected to reach sustainability until 2007, 18 loans in December 2002 were only 4.4 millionand make it difficult to break even." years after the project was launched. PlaNet Finance rating report, July 2003 [transl. by CGAP] The slow progress towards financial viability can largely be attributed to working in a rural environment, which AFD Rural Finance Strategy means higher costs. Transportation costs in Guinée are AFD's uncompromising priority was to provide very poor very high and the average CRG loan size is very small. In rural people with access to credit and, later, savings fact, transportation is a greater expense for CRG than staff services. AFD achieved this goal by emphasizing human salaries because most of the community banks are often resource development, local ownership, and supporting located deep in the countryside on unpaved roads. the development of an informed government supervisory Furthermore, the management information system for capacity. CRG's 130,000 members is largely manual, although the MIS of 20 community banks will be computerized in the Significant investment over the long term. AFD made an near future. While operating expenses have shrunk by 10 initial investment of 760,000 to establish physical percent over the past two years and financial revenue has infrastructure, finance the technical assistance provider, risen due to a 2002 rise in interest rates, high operational and begin credit operations. High demand and good costs and an inefficient MIS remain serious obstacles to repayment rates encouraged AFD to continue its support. sustainability. From 1991 to 1998, AFD supported CRG's expansion with three different grants totaling 10.33 million. In late The apex structure that oversees the individual com- 2002, AFD agreed to provide a 5 million subsidy to CRG munity banks project was transformed from a gov- so that the network of community banks could consolidate ernment project into a for-profit private institution, CRG, its activities (including computerizing 20 banks which Société Anonyme (CRG, S.A.) in 2001. By December represent 40 percent of the total CRG outstanding loan 2002, CRG, S.A. had an equity base of 4.6 million portfolio), and make investments in technical assistance divided among three major shareholder groups: the and training. Over the same period, the European Union, community banks (40 percent), CRG employees (35 the African Development Bank, and the United Nations percent), and external parties (25 percent). The last group Capital Development Fund, collectively provided CRG consisted of the Guinean government (15 percent), IRAM another 7.6 million in support (see table 2). 1The MicroBanking Bulletin Peer Group No. 2, "Africa Medium," Such large investments in the Guinean rural finance consists of CRG, Finadev, FINCA Uganda, PRIDE Tanzania, PRIDE project were not always easy to justify within AFD. Yet Finance, UMU, UWFT, Vital Finance. A DIRECT Case Study Page 3 the positive evolution of CRG and its success in mobil- decisions. Elected borrower representatives hold positions izing, training, and penetrating poor rural populations on the community bank's management committee that provided strong arguments in the project's favor. oversees loan approvals and repayment policy, as well as on a supervisory committee. They also hold positions on Table 2: Donor Support of CRG (in millions) Board of Directors of the corporate structure, CRG, S.A. Operational AFD EU AfDB UNCDF Savers and employees, on the other hand, are represented phase grants grants grants loan* Total only in the supervisory committee at the community bank Pilot phase: level (see figure 1). This arrangement guarantees that 1989-1990 0.76 0.68 1.44 decisions on loans are essentially made by local Growth: community peers of loan applicants. 1991-1998 10.33 3.84 0.49 14.66 Institutionalization: 1999-2001 1.90 0.56 2.46 Also represented on the Board of Directors are external Consolidation: stakeholders (donors, IRAM, and the government of 2002-present 5.00 0.41 0.15 5.56 Guinée) who provide technical advice and play a TOTAL 16.09 6.42 1.05 0.15 24.12 mediating role. As a result, the three distinct groups of Sources: PlaNet Finance rating, July 2003; AFD. stakeholders--employees, client representatives, and Notes: *UNCDF concessional loan external partners--effectively have an equal say in management decisions. The unique model is designed to "It is not easy to make a case for an institution that still hasn't preserve the institution's core mission of serving the very achieved sustainability after 15 years, even if performance indicators are improving." poor. Anne Clerc, chargé d'affaires, Bank and Financial Markets Developing a supervisory model. Although the Division, AFD (task manager for CRG, June 2002-present) community banks are member-based and not financially linked to one another, the Central Bank of Guinée, CRG, Creation of human resource capacity. Training has been and AFD wanted a system that could effectively protect a mainstay of the CRG project. From 1989 until its for- poor people's savings. CRG proposed a National malization in 2001, CRG was provided with on-site Solidarity Fund housed within the corporate structure of technical assistance from IRAM, whose goal was to CRG, S.A. Community banks that are five years or older transfer all necessary management and financial skills to must give the Fund 50 percent of the loan insurance fees CRG staff and members. In that same period, AFD also that they impose on loans (1 percent of loan value). In the sponsored 19 Guineans at a three-week technical course in event of bankruptcy, the Fund will cover the losses of the microfinance management at the Center for Financial, failing community bank up to the limit of the Fund. This Economic and Bank Studies in Marseille, France. Some arrangement means the corporate structure can be 16 others have received or are currently pursuing supervised directly by the Central Bank of Guinée, while recognized diplomas in finance via distance-learning the financial responsibility for the rural banks remains courses. Members have also benefited from financial with the banks themselves. literacy programs through grants from the US Agency for International Development, the United Nations Devel- Moving from project to institution. Because it was set up opment Programme and AFD. Elected representatives of as a government project, the assets of CRG, S.A., the community banks often receive management training originally belonged to the Guinean government (assets of during quarterly CRG board meetings. the community banks already belonged to the individual rural institutions). Institutionalization of CRG required the This investment has yielded impressive results: CRG has transfer of these assets to the new corporation. Although a competent and trained staff of roughly 200 employees government stakeholders in the ministries of finance and and its clients are sufficiently versed in finance to agriculture wanted to maintain an influential role in participate in managing the community banks, although managing the new institution, CRG and its partners felt credit management skills still need improvement. the government could be most effective as regulator and supervisor. Ensuring local governance. The CRG governance structure is a unique mix of cooperative and corporate AFD used its political clout, local presence, and repeat elements. At the community bank level, borrowers, savers visits by Paris-based staff to actively lobby government and employees all participate in management decision authorities for the transfer of assets. Although the making, but their relative influence is weighted to insure government ultimately decided on a 15 percent equity that depositors and employees (who could potentially participation in CRG, S.A., the institution and AFD direct credit toward themselves) do not control lending viewed this as an acceptable compromise. Page 4 A DIRECT Case Study Figure 1. CRG structure Stakeholder Groups in Stakeholders in the Corporate Community Banks Structure (CRG, S.A.) Elected Elected CRG External CRG Savers CRG Borrower Employees Partners Representatives Representatives Community Community Board of Bank Bank Directors of Supervisory Management CRG, S.A. Committee Committee Cash flow Loan approvals Loan policies Internal Controls Repayments Strategy Looking Back repeat such a long-term project in the same manner. The Support of CRG has been debated within AFD, especially agency's new microfinance strategy gives priority to in recent years. The French development agency allowed financial sustainability over geographic expansion, CRG to pursue a geographic growth strategy that focused requires that exit strategies be defined early, and uses on extending financial services to poor populations across performance-based contracts. the country. Considering that CRG serves over 130,000 clients in 109 communities, who previously had no access "If you had the same level of commitment, creative manage- to financial services, the strategy has been successful. But ment, ingenuity, and resources in a more favorable context, you'd have had a winner years ago, but in a context like it has been time-consuming and costly for AFD. Guinée, you need time." "There has been a very long learning curve with the CRG Paul Rippey, PRIDE, Guinée (1991-96); currently Head, DFID Financial Sector Deepening Unit, Uganda project. When the project began, AFD did not have a well- defined strategy for microfinance. We know now that institu- tionalization would have probably been quicker had AFD been References more demanding of financial sustainability early on." Dominique Gentil and François Doligez, "La gouvernance du Laurence Rouget-Le Clech, task manager for CRG, AFD (1999-2002) Crédit Rural de Guinée: un essai de synthèse. " CERISE working document, version 3, Paris, 2002. www.cerise- microfinance.org/ publication/gouvernance.htm#etudes. For people with experience in Guinée, it is no surprise that reaching the break-even point has taken much longer than Government of Guinée, "Poverty Reduction Strategy Paper." for a typical, urban-based MFI. And while AFD's Conakry, Guinée. www.imf.org/external/np/prsp/ investment has been significant, Luc Lefèvre, former 2002/gin/01/013102.pdf. IRAM project manager for CRG, points out that rural PlaNet Finance, "Report PlaNet Rating: CRG ­ Guinée," Paris, development projects like CRG can be considerably less 2002 and 2003. expensive than physical infrastructure projects. UNDP, Human Development Report (New York and Oxford: Oxford University Press, 2003). Conclusion Websites With Crédit Rural de Guinée, AFD chose to support the AFD: www.afd.fr formidable task of building from nothing a broad network IRAM: www.iram-fr.org of grassroots financial institutions to serve the rural poor. AFDB: www.afdb.org This decision required long-term commitment, extensive Photo reprinted with permission of Francois Doligez. resources, and a willingness to forego financial viability in the medium term. Results have been significant in terms Bonnie Brusky is a microfinance consultant based in Rio de Janeiro, Brazil, and Ruth Goodwin-Groen is a senior microfinance consultant. of building a nationwide, pro-poor institution that plays an The author thanks Yves Boudot, Anne Clerc, Jocelyne Delarue, important role in the country's local development. While François Doligez, Frédéric Guillaume, Bakari Koulibaly, Luc Lefèvre, proud of its contribution to CRG, AFD is unlikely to Alice Nègre, Paul Rippey, Laurence Rouget-Leclech, and Martha Stein- Sochas for their insights and assistance.