IICD supported project: Design and implementation of the SERVIR regional credit evaluation service

Countries: Ecuador [EC]

Summary

In the Chimboraza and Tungurahua provinces of Ecuador, over 33 local financing bodies - or Estructuras Financieras Locales (EFLs) as they are known locally - currently serve around 30,000 small and medium-sized enterprises. To help these EFLs improve their services and become more efficient, IICD is working with three local organisations - the Fundación SEDAL, the cooperative Acción Rural and the Red Financiera Rural - to set up the SERVIR Regional Credit Evaluation Service. The goal is to boost the region’s economy by increasing the efficiency of the EFLs on the one hand while reducing the amount of debt incurred by individual smallholders on the other.

Update

Updated: 2007-10-29

The project set out to involve informal credit providers in gathering and sharing data on credit information to help farmers avoid falling into serious debt and to help micro-credit organizations avoid risk. The project has been a success in so far as it has helped to significantly reduce the number of bad loans while generating more new loans at the same time. The project team had hoped to construct a client database but this proved impossible because of government regulations. Instead, a central database maintained by the credit purveyor Creditreport was fed with data generated within the framework of the project.

Introduction

The risk of working in the rural sector is high because agricultural activities are subject to nature, and to limited understanding of credit as a way to facilitate development of production activities. In order to prosper, smallholders need to have access to rural credit. To meet this demand, it is essential that the local finance sector works efficiently so that it can keep track of transactions, particularly with regard to loans and debt repayments. Setting up an automated credit registration system on debtors and debt repayment schedules can make a significant contribution to strengthening the position of local financing bodies. For these reasons, a partnership among the SEDAL Foundation, the Rural Action Cooperative, and the Rural Financial Network was established in March 2005 to start the SERVIR project.

Objectives

To improve efficiency and effectiveness in credit and loans management on behalf of small-scale producers. This is reached through:

• the implementation of a regional service for information exchange on credit;
• Increase the efficiency of services rendered by Local Finance Structures (EFL - Estructuras Financieras Locales) to small and medium-scale producers.

To systematise the pilot experience and expand and deepen this in other regions.

Planned outputs

• Selection of an existing credit bureau to form an alliance.
• Preparation of a situational analysis for access to credit.
• Design of a model 'scorecard'.
• Design of strategies with local financial entities to prevent the people from getting over-indebted.
• Construction of an on-site and virtual inter-institutional meeting-place for local financial structures, support organizations, STOs, NGOs, and international agencies.
• Means of dissemination (v. gr. Website and electronic newsletters).
• Construction of a document with lessons learned, and then design of an expansion plan on that basis.
• Prepare a document with adjustments made to promote the project, including planning of differentiated strategies.

Development Impacts

The pilot project’s beneficiaries are a population group that can be protected against over-indebtedness and local financial entities that, without abandoning their social basis, will be able to survive, by having a tool to make better creditworthiness analyses of new customers, and identify risks. Additionally, the project will help improve yields from small and micro producers’ activities. Impacts will be lower default rates, and a quick, timely approval process.

Management and organisation

The SERVIR project is a collaborative effort between three very different organisations in the micro credit field: Red Financiera Rural (RFR) (a network that supports and promotes the use of micro-credit in rural areas); SEDAL (a small non-governmental organisation that provides micro-credit loans); and Acción Rural (a large micro-credit cooperative). At the end of 2005, this consortium entered into a partnership with a fourth organisation, Creditreport, which offers software and services to the financial sector.

Market and finance

The project is planned to be replicated throughout Ecuador. To operate, different organizations are required to provide coverage in each province. For the project to be sustainable, 7/10 of a cent (USD 0.007) will be charged per credit bureau query. It is estimated that there will be an average of 1000 monthly queries per organization. Alliances will be sought with other credit bureaus as well.

Results

After one year of collaboration, the project owner and partners have managed to:

• Design a credit information system that can be accessed 24/7 and which is now used by all 33 micro-finance bodies.
• Have the system validated and thoroughly tested through some 58,000 consults.
• Compile a situation analysis of access to credit in the three provinces.
• Share results and disseminate lessons learned through a series of regional workshops around the various EFLs.
• Create an inter-institutional space for information exchange and dialogue among the EFLs. Some of the issues covered so far include: socio-economic reality in Tungurahua and Chimborazo; the role of the state in developing micro-finance structures; the impact of micro-finance on the local economy; practical lessons learned from the SERVIR project; approaches to providing and following up on small loans.
• Train 60 individuals within the EFLs to use the tools that have been developed and to improve their understanding of some of the themes linked to micro-credit.
• Use the data to develop a set of criteria that has to be met in order to obtain a loan. As a result of the project it has become impossible for a lot of families to apply for a loan at two or more different regional credit banks. While it can be said that, in the short term, these families do not benefit from this new database, in the long term it is better for them. In addition, the credit banks themselves can now work more efficiently and will be more sustainable in the long term.

The long-term plan for the project is to focus mainly on improving services in the region by developing a credit scoring method. At the same time, there are also plans to involve more micro-finance institutions in the Sierra region, possibly through other donors, and to document the experiences and lessons learned from the project so that they can be shared with other EFLs in Ecuador’s eight other provinces. Ultimately, SERVIR’s systematic and practical approach has enabled an impressive number of EFLs to cooperate together in a single network and, in so doing, improve credit services to smallholders in Chimboraza and Tungurahua within just two years.

Lessons learned

It is necessary to legally reformulate the project, because Ecuador’s legal framework recently changed, and only credit bureaus can handle credit information. It has become necessary to seek a strategic alliance and, on the basis of evaluation, CREDITREPORT was selected as the credit bureau for the SERVIR project.

Budget

The pilot project cost is $131,415.72 USD to be invested in hardware, software, service development, operational costs, project personnel, training, communication services (Internet, radio), office expenses, management and maintenance. The partners’ counterpart contribution will be $37,950 USD.

Project Owner :

Project management: Rural Action Cooperative accionrural@andinanet, SEDAL sedal@interactive.net.ec RFR Rural Financial Network rfr@uio.satnet.net www.rfr.org.ec

Project Partners :

Project funders: HIVOS - Humanistic Institute for Cooperation with Developing Countries (hivos@hivos.nl); COSUDE Swiss Development Cooperation (info@deza.admin.ch).

Project partners: Rural Action Savings and Loan Cooperative; SEDAL Foundation (Services for Alternative Development); Creditreport.

Project Contact : IICD