Environmentally and Socially Sustainable Development Department Europe and Central Asia THE WORLD BANK AND RURAL FINANCE IN MOLDOVA: Credit Unions EastAgri Annual Meeting Berlin May 2006 Pierre-Olivier Colleye Senior Microfinance Specialist

Environmentally and Socially Sustainable Development Department Europe and Central Asia The focus of World Bank effort in rural finance is changing  Emphasis is shifting from provision of credit lines to building sustainable institutions;  Emphasis from credit only to access to a range of financial systems;  Diverse institutions world-wide are offering such services to rural populations;  Innovations to address different issues are well beyond pilot stage in many countries.

Environmentally and Socially Sustainable Development Department Europe and Central Asia Moldova: Initial Situation  Initial situation: –Extremely poor rural population –No banking or other financial institutions presence in rural areas –No long-term financing in the country –Rapid change in the landscape of the rural economy

Environmentally and Socially Sustainable Development Department Europe and Central Asia Moldova: A first wave of interventions  Rural Finance Project tested cooperative approach to financial services (village-based, credit-only, very small and short-term loans).  Rural Investment Services Project scaled it up (triple digit growth, introduction of deposits, introduction of microenterprise loans).

Environmentally and Socially Sustainable Development Department Europe and Central Asia Moldova: The Credit Union industry today  National coverage  Over 500 SCAs  Over 100,000 members  US $25 million in total assets  US $1.5 million in deposits  A very healthy portfolio But…..

Environmentally and Socially Sustainable Development Department Europe and Central Asia Moldova: Scaling up  A lack of donor coordination lead to a large number of inefficiencies, duplications, ending up with far too many SCAs, too small, too weak to professionally provide a range of financial services.  Deposits have been growing rapidly (a good thing), but without the Government being ready to supervise them

Environmentally and Socially Sustainable Development Department Europe and Central Asia Rural Finance Industry R.F.C. SCAs FinancingMonitoringTraining Commercial Bank National Federation of SCAs RDC SSB DFIDSIDA USAID SME EBRD

Environmentally and Socially Sustainable Development Department Europe and Central Asia New phase, new strategy: Institution-Building  Completely new legal and regulatory framework: Provide incentives to grow/merge, tailor supervision to risk profile of the institutions  Re-build Regulatory/Supervisory Body (leaner, with true enforcement powers)  Streamline supporting institutions to avoid duplication and enhance sustainability  Provide capacity-building for the SCAs to meet the challenges of the new legal framework and more demanding client- base

Environmentally and Socially Sustainable Development Department Europe and Central Asia Lessons  Need to work on a wide range of financial institutions (microfinance, banks, leasing, insurance….)  Need to complement with new tools for agriculture (e.g. weather-related insurance, warehouse receipts, value chain financing)  Shift from pure credit lines to TA (trying to!)  Good donor cooperation makes considerable difference (use each donor’s comparative advantage).  The system has to work in coordination with efforts to make the rural and agricultural sectors more competitive

Environmentally and Socially Sustainable Development Department Europe and Central Asia Questions  Are member-based institutions (e.g. credit unions) the best mechanisms for retailing massive public funds into rural areas ?  What can Governments do to make credit for agriculture more affordable (how do we move away from interest rate subsidies ?)

Environmentally and Socially Sustainable Development Department Europe and Central Asia Medium-Term strategies  Continue wave of reforms, including privatization  Strengthen legal, regulatory environment and supervision  Broaden range of financial institutions  Possibly address liquidity shortage with long-term credit lines Financial Sector Farmers and rural entrepreneurs Address collateral constraintsAddress collateral constraints Improve competitiveness of farmsImprove competitiveness of farms Improve access to information on farmerImprove access to information on farmer Reduce agriculture- related risksReduce agriculture- related risks Improve access to marketsImprove access to markets Extension servicesExtension services Facilitate Transaction Business PlansBusiness Plans Loan ApplicationsLoan Applications Extension ServicesExtension Services Training of banksTraining of banks New Product DevelopmentsNew Product Developments

Environmentally and Socially Sustainable Development Department Europe and Central Asia More efficient financial system => cheaper credit  Through increased Competition  Through Risk-mitigating measures and improved competitiveness  Through technical assistance of farmers/entrepreneurs and through broader range of institutions  Through increased efficiencies  Through improved macro- environment and completion of reforms Banks’ cost of Borrowing Banks’ cost of Processing Client’s cost of Processing Lending Risk- Related Costs Profit Margins TOTAL COST OF BORROWING