Cooperative Linkage Model: MFI and Cooperative Partnership for Better OutreachDecember 26, 2019
The Bageshwari branch of Vijaya Laghubitta Bittiya Sanstha (VLBS) has been listed as one of the fastest profit-earning branches in the history of the organisation. Despite being a late mover in an area crowded with other Microfinance Institutions (MFIs) the branch in Banke district has been one of the top-performing branches of VLBS. Introduction of the Cooperative Linkage Model in this branch has had a significant impact in this branch’s impressive performance.
Innovative Alternative Delivery Channel
The Cooperative Linkage Model was developed and implemented for the first time in the MFI sector of Nepal by VLBS in partnership with Sakchyam Access to Finance Programme. The linkage established through this model addresses the limitations faced by MFIs in expanding their outreach to remote locations and the inability of the cooperatives to meet their members’ demands for larger size loans and other financial services.
One of the core interventions of Sakchyam is to promote alternative delivery channels for financial services to serve the unserved and underserved market. And this linkage model provided an innovative approach to provide financial services to a niche segment of the population in the remote areas. Sakchyam’s technical team worked closely with VLBS in the process of formulating and the implementation of the Cooperative Linkage Model.
Under this linkage model, an MFI evaluates a cooperative’s portfolio quality, outreach and its need for the loanable fund before partnering with it for the model. After several rounds of discussion and appraisal of the cooperative’s system an agreement in drawn outlining defined roles and responsibilities for both – MFI and cooperative.
The cooperative acts as an agent for the MFI to recommend and manage the clients. It identifies the prospective clients from its membership base and recommends a group of at least 10 eligible members to the MFI. The members are enrolled by the MFI as borrower clients and it conducts Pre Group Training (PGT), Compulsory Group Training (CGT), Financial Literacy and other necessary activities with the enrolled clients.
The MFI can provide either ‘group-based’ or ‘collateral-based’ loans as per the demand of the clients. The cooperative ensures timely processing of the loans and guarantees the loan repayment on behalf of its clients. The cooperative is paid a service fee by the MFI as per the agreement.
Figure 2 below shows the cooperative linkage model adopted by MFI and partner cooperatives
Motivation for the Linkage
In recent times, Nepal’s MFI industry has gone through a phenomenal growth – the number of MFIs has increased from 31 to 90 and the number of branches has gone above 3412. This has led to tough competition among MFIs for client acquisition.
VLBS saw the linkage model as a way to secure a substantial client base to get ahead in the competition. The promoters of VLBS, who are from the cooperative background were aware of the constraints cooperatives have when it comes to larger loan demand from their members. “The idea of a cooperative model was promoted to expand the outreach of the financial services of VLBS in the local community. It’s the first alternative delivery channel in which local cooperatives were mobilized as agents of the microfinance,” said Basanta Lamsal, CEO, VLBS.
The model was pilot-tested in two of the four branches established as a part of the second partnership project with Sakchyam. Bageshwori branch, which was facing the late mover disadvantage, was one of the pilot-tested branches for the linkage model. The implementation of the cooperative linkage model has helped the branch reach out to a different market segment of the small cooperative clients.
Similarly, the small cooperatives were struggling for a loanable fund for its members due to the small equity base and saving mobilization from the clients. Through this linkage partnership, the cooperatives could fulfil the credit demand of their members. The cooperatives also got a new income source; under the revenue sharing mechanism, at the end of a fiscal year, VLBS shares 10% of the total interest income generated from the loans given to the cooperative members with the respective cooperatives. Thus adding to the equity base of the cooperatives.
For the clients, the linkage between VLBS and cooperatives brought a larger pool of fund which could meet their increased loan demand for productive enterprises which the small rural cooperative was unable to fulfil because of the limited capital base. Most of the partner cooperatives of VLBS provide a collateral-free loan of up to 1 lakh to their members. Meanwhile, an MFI can provide a loan of up to 5 lakh without collateral to its members. This has helped provide opportunities to the members of rural cooperatives to expand their enterprises and/or launch new businesses.
Impact of the VLBS Cooperative Linkage Partnerships
Currently, VLBS has seven partner cooperatives under this linkage model – 6 in Banke and 1 in Dailekh. Out of the 7 cooperatives — 2 are savings and credit, 2 are multipurpose cooperative, 2 are agriculture cooperatives, and 1 is a dairy cooperative.
The six partner cooperatives of Bageshwori branch are:
- Darpan Agriculture Cooperative Ltd
- Lalpur Milk Producers Cooperative Ltd
- City Saving and Credit Cooperative Ltd
- Bhumi Saving and Credit Cooperative Ltd
- Mahatab Multipurpose Cooperative Ltd
- Jayashree Bageshwori Agriculture cooperative Ltd
Business and Outreach Expansion
As of September 2019, the total number of borrowers of the Bageshwori branch is 1806 of which 700 are members of the partner cooperatives. This partnership has contributed to 38% of the total borrowers of the branch (see Table 2). The cooperative linkage model has ensured better outreach for the branch in a competitive area where several MFI branches are operating.
Also, as Nepal Rastra Bank (NRB) had issued a circular stating that MFIs need to disburse 25% of their portfolio in the agriculture sector, this has helped VLBS fulfil the disbursement quota by partnering with agriculture-based cooperatives.
Enhanced Lending Capacity
Similarly, out of the total loan disbursed by the branch — 588.20 million, the loan disbursed to the members of the partner cooperatives amounts to 133.37million. The cumulative loan disbursed by the branch to the enrolled cooperative members and the disbursement by the cooperatives is documented in Table 3.
The table shows that the availability of higher-size loan has encouraged increased uptake of loan among the cooperative members. The loan provision from an MFI has especially helped smallholder farmers and small traders as they now have access to more finance to meet their demand and they no longer have to face the capital constraint.
Portfolio Risk Management
Cooperative Linkage Model also ensures an added security to the MFI as the partner cooperatives are liable to repay the loan amount in case of any payment default by its clients. Also, if the loan repayment doesn’t happen from the clients and the cooperatives, VLBS can adjust the amount from the cooperative’s share of interest income.
In this way, VLBS can minimize risk and maintain the portfolio quality of loans. Along with the business expansion, the linkage has helped the branch combat portfolio risk at a time when many MFI branches are facing the pressure to manage the portfolio quality.
The remarkable performance of the Bageshwari branch has exhibited the benefits of cooperative linkage model to all parties involved. Encouraged by this, VLBS is exploring the scope of scaling up this business model by implementing it to six branches located in three districts – Banke, Bardiya and Kailali.
Text by Iswar Atreya with inputs from Pratik Devkota