Design and Implementation of the SERVIR Regional Credit Evaluation Service - Ecuador

Lack of access to rural credit for smallholders negatively influences rural development and innovation. Strengthening local financial institutions greatly enhances access to credit, at the same time improving effectiveness of loans and increasing reimbursement rates.
The set-up of a credit registration system on debtors and debt repayment schedules is very instrumental in strengthening the position of these local financing bodies. The SERVIR project supports over 55 financing bodies in Chimborazo and Tungurahua provinces in Ecuador, in this manner improving effectiveness and efficiency of services by local financing bodies to small and medium-scale agricultural producers, while reducing the individual debt level of the producers. The SERVIR project is born out of cooperation between the Fundación SEDAL and the Red Financiera Rural.

The project has completed its second phase, during which the focus was on developing a Credit Scoring Card allowing for a better evaluation of potential clients’ credit worthiness.

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.

Read more about IICD's Ecuador Country Programme.

 At the end of the first project phase, 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 55 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 local financing institutions (known as EFLs).

These are but a few results. 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 Chimborazo and Tungurahua within just a few years.

The SERVIR micro-credit project has completed its second phase. The first phase has met with considerable success, in terms of number of loans granted, in reducing the percentage of bad loans, and in speeding up administrative procedures. Because of the unique nature of this project within the IICD National Programme in Ecuador, the SERVIR consortium has not been much involved in exchanges with other network partners. SERVIR works with an ever increasing number of Estructuras Financieras Locales (EFLs) (currently over 50) through which loans are granted to smallholders.

The aim of the past project phase was to even more increase the number of loans –while at the same time continuing to reduce the bad loans percentage- through reaching more smallholders in the project zone and, possibly, by carefully expanding this zone to other areas. During this new phase, a Credit Scoring Card has been developed for evaluating clients’ credit worthiness, holding indicators that reflect the reality of the rural smallholder. Using this CSC, loans are granted with greater effectiveness and security. The indicators vary considerably from CSCs as used by commercial banks in mostly urban environments.

The CSC has been programmed by an external consultancy company. In the final stages of the second phase training has been given to personnel of the associated EFLs and the CSC has been tested using data of 10 EFLs. As a result some variables have been adapted.

During a ‘Foro de Microfinanzas’in November 2010 the CSC has been widely shared with RFR’s partners, thus clearing the way for its massive upscaling.

From January 1st 2011 the servir project has been in independent continuation.

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

• Implementing a regional service on information exchange on credit.
• Increasing the efficiency of services rendered by Local Finance Structures (EFL’s) to small and medium-scale producers.
• Systematising the pilot experience and expand and deepen this in other regions.

The pilot project’s beneficiaries are a population group that can be protected against over-indebtedness and local financial entities. Without abandoning their social basis, they 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 farmers’ activities. Impacts will be lower default rates, and a quick, timely approval process.

SERVIR has developed a number of exchange formats for capturing data on loans and for uploading these data into a central database.

Read more about IICD's Ecuador Country Programme.

Read more about IICD's approach towards Livelihoods.

The project is targeted to be replicated throughout Ecuador. To operate, different organisations 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 organisation. Alliances will be sought with other credit bureaus as well.

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 Chimborazo and Tungurahua within just two years.

Over 50 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.