Sakchyam Supported Heifer-MBL Lending Model Promote Cross-sector LinkagesMarch 4, 2020
Five more banks partner with Heifer to provide loans to cooperative members
Ganga Gharti, a resident of Hardwa village in Dang, had the skills and a strong desire to start goat rearing at a commercial level. A member of Karmath Social Entrepreneur Women’s Cooperative – a Heifer International supported cooperative – Ganga had also received two goats through the ‘Passing on the Gifts’ initiative under Heifer’s Strengthening Smallholder Enterprises of Livestock Value Chain (SLVC) project. Ganga’s expansion plan had but one major obstacle – lack of finance. “I needed around 30-50 goats for a steady income but I didn’t’ have money to purchase so many, and borrowing from local money lenders meant that I would have to pay very high interest,” shared Ganga. Another option for her was to take a loan from the local saving and credit cooperatives but they usually require immovable assets – land/building as collateral which she didn’t have.
Lack of required capital has been identified by Heifer International as a major constraint in its initiative to support cooperatives and their farmers – involved in livestock farming – improve their livelihood. Programmes like SLVC by Heifer are building technical skills and capacity of livestock farmers to motivate them to move up from subsistence farming. This has, in turn, increased the demand for loans as the farmers want to expand their enterprises. However, cooperatives generally lacked resources to meet loan needs that exceed NPR 50,000 per member.
“Non-availability of sufficient capital was a significant constraint most cooperatives were facing to meet the members’ credit demands. This often forced member farmers to sell their goats outside the cooperative structure and at lower prices or borrow from local money lenders even to support their cost of living. Increase in available capital, for both cooperatives and the farmers, is essential to enable the farmers to take better advantage of the value chain improvements provided by SLVC. This further helps them increase income and improve their livelihood,” said Adhish Karki, Project officer-Digital Finance at Heifer International.
These rural, semi-urban and often agricultural sector based enterprises fall under Micro, Small and Medium Enterprise (MSME) segment which is one of the major contributors to the nation’s GDP and employment. Still, in Nepal these type of MSMEs are often called the ‘missing middle’ as the financing need of this segment is too large for the local Microfinance Institutions (MFIs) but considered too small by larger financial institutions such as commercial banks. To meet the financing gap of such MSMEs, UKaid Sakchyam Access to Finance programme has outlined improved SME Finance as a major output. Sakchyam, through its interventions, has been supporting commercial banks to strengthen their approach towards MSMEs to meet the segment’s financial needs.
In the above instance, one potential solution was that the commercial banks provide wholesale loans to the cooperatives, which they could on-lend to their members. However, many cooperatives, especially those operating in rural and sub-urban areas with their small capital base, small portfolio do not usually meet the eligibility criteria set by the banks for the wholesale loans.
It was clear that if the banks were to finance these micro-enterprises, a new model of lending had to be developed. An ideal model would allow the banks to reach out to these relatively new clients in a cost effective-way, offer loans without any physical collateral requirement and maintain the same, if not lower, level of risk with proper monitoring and control.
Sakchyam in coordination with Heifer International organised a workshop with potential commercial banks to emphasize the need for the intervention and to assess the appetite of the banks to work on such a model. This was followed by another level of discussion with a couple of interested banks and a series of field visits. After a series of brainstorming sessions, an understanding was reached between Sakchyam, Heifer and Machhapuchhre Bank Limited (MBL) to conceptualise an innovative linkage-based financing model utilizing the distinctive competency of each party. As per the agreement:
- Sakchyam would provide required Technical Assistance (TA) to design the model, provide Challenge Fund grant support to MBL to operationalise the financing concept and also establish a guarantee fund to partially cover the default risks.
- Apart from providing capacity enhancement training to cooperatives and their members, Heifer would also help identify and screen viable cooperatives to the bank. The selected cooperatives would act as an intermediary to facilitate the application of loans to MBL by their members and monitor the proper utilisation and repayment of the fund.
- MBL would use the linkage with selected cooperatives to design and implement a tailored loan product targeting members of the cooperatives through a simplified process without any physical collateral requirement.
In 2017, the model was pilot-tested with three cooperatives in Dang district – Karmath Social Entrepreneur Women Cooperative and Deepan Social Entrepreneur Women Cooperative in Satbariya, and Nilkamal Social Entrepreneur Women Cooperative. Within the first six months of the pilot, MBL disbursed loans over NPR 15 million, benefitting more than 100 women run micro-enterprises and without a single case of default. This success was key in helping the bank overcome its initial apprehension about such type of unsecured lending. “It is difficult for commercial banks to initiate financial outreach, through standard lending practices, to smallholder farmers involved in agriculture and value chain activities. So, MBL partnered with Heifer and Sakchyam to pilot the new lending model to fulfil the bank’s vision towards increasing its micro-lending sector and adopting a more inclusive financial model,” said Amod Shrestha, Head of Micro Finance Unit of MBL. Karki from Heifer added, “Response for capital deployed under this model has been encouraging and there are numerous success stories of farmers expanding their enterprises and developing successful agro-businesses.”
The successful pilot-project resulted in the formation of a separate project agreement between Heifer and MBL in December 2018 to replicate the model across the entire country. The new project also supported by Sakchyam is expected to reach out to more than 3,000 micro-enterprises based on various agricultural value chains with aggregated loan disbursal over NPR 500 million. The new partnership has already reached an encouraging level of outcome reinforcing the success of pilot-testing. Shrestha shared that the bank has disbursed loans of more than NPR 225 million to 860 members of 42 cooperatives through its 15 branches in 11 districts.
“The results of this lending model have challenged the prevailing cautious approach banks have regarding loans without collateral to such rural and underserved market segments. We believe this model has improved access to finance among micro and small enterprises run by women and provided a boost to their economic condition. The positive feedback we have been receiving from the women entrepreneurs (loan clients) as well as the branches implementing this model, is a testament to this belief. We have also launched MBL Kisan Card as one of the innovative credit tools to aid in their working capital needs,” stated Sarju Kumar Thapa, Deputy General Manager- Business, MBL.
Following the success of the pilot project and subsequent upscaling of the model by MBL, several other A-class commercial banks expressed interest to invest in Heifer-supported cooperatives. “Our project with Sakchyam and MBL opened doors for other banks to collaborate with us for the new lending model. It is a positive shift that the private sector, especially commercial banks are eager to invest in MSMEs based in agriculture and livestock sector,” said Karki.
“It’s a simple model which capitalises on the strengths of different stakeholders, emphasizes partnerships and leverages the linkages to offer financial services to the low-income and rural market segments. The model ensures a win-win situation for all the parties involved – a key ingredient for sustainability,” said Raju Shrestha, SME Lead at Sakchyam, who is overseeing the partnership and related activities.
Heifer has already partnered with five other commercial banks – Laxmi Bank, Rastriya Banijya Bank, Agriculture Development Bank, Everest Bank and Himalayan Bank. The loan capital commitment from the six partner commercial banks is above NPR 4.2 billion. “We are following an improved model where these banks provide loans, mostly within the framework of Unified Procedure of Interest Grant for Concessional Loan 2075 to beneficiaries. To ensure that we reach a maximum number of beneficiaries, the working areas of the banks have been segregated without any duplication.”
Out of the NPR 4.2 billion of loan capital committed, loan of more than NPR 475 million has been disbursed by the new partner banks and Heifer aims to facilitate deployment of the whole amount by the end of 2021. Access to finance has become lesser of a challenge for Heifer and the affiliated cooperatives; their focus now is on the effective utilisation of the funds. “Our vision now is to develop frameworks, structures and programs that support our existing model by increasing proper utilisation of funds. Heifer wants to ensure that the end product of the capital deployment results in inspiring progress for farmers,” Karki shared.
Heifer is confident that the capital commitment it has received from the partner commercial banks will contribute to a further increase in the annual income of all value chain actors, mainly farm enterprises, thus ensuring upward social mobility.
Ganga who was one of the first beneficiaries to get a loan under the new lending model now owns more than 60 goats and is already planning to expand it to 100.