FAO has developed a set of financial strategies designed to reduce the cost to banks of delivering savings and credit services to small farmers and to lower the cost to project participants of gaining access to these services.
Although PPP financial approaches vary according to local conditions, all of them share five basic elements:
▪ Savings first. Groups are encouraged to initiate group-based savings schemes prior to applying for bank loans. Progress in mobilizing group savings provides a measure of members' commitment to the group enterprise and their loan repayment capacity.
▪ Group savings and credit. Delivery of financial services to participatory groups, rather than individuals, carries cost advantages for both banks and the poor. A joint loan application submitted by a group of ten farmers reduces the bank's loan administration costs tenfold; group members need to prepare only one loan application and make a single trip to their local bank branch.
▪ Credit Guarantee Fund. To encourage an interested institution to lend to participatory groups, each PPP project provides a special Credit Guarantee Fund (CGF) to cover losses resulting from loan defaults. The fund, held in an interest-bearing account at the institution, is governed by a written agreement that sets out conditions under which loans are to be granted from the bank's own capital, as well as procedures to be followed in case of non-repayment of loans.
▪ Linking savings with credit.
The cooperating bank requires that groups open a joint savings account and make regular deposits before becoming eligible for loans. Some projects limit the maximum amount that a group can borrow to a multiple of the amount in the group's savings account, or require the group to deposit part of its loan as savings.
▪ Loans based on social collateral. The cooperating bank is encouraged to relax requirements for physical collateral and use “social collateral” in its place. Members of borrowing groups are held jointly responsible for the repayment of the loan. Should one member of the group fail to repay his or her portion of the loan, the entire group may be barred from obtaining credit until it has been repaid.
