Topic Area: Micro-lending
Geographic Area: Costa Rica
Focal Question: Is Costa Rica's micro-lending method sustainable?
Reviewer: Kate Lowe, Colby College '99

Costa Rica is a country with a long history of micro-lending. In the 1880's, beneficios operated as small rural banks where British coffee importers loaned money to local producers. In 1914, Banco Internacionale de Costa Rica established a local bank that gave credit to small groups of farmers. In the 1970's and 1980's, lending slowly stopped as inflation rose and real lending rates became negative. Finally, a crisis in the financial sector in the mid 1980's left small farmers with no ties to formal financial institutions and lending stopped altogether. In 1983, this situation attracted the attention of John Hatch, the founder of FINCA International, a non-governmental organization credited with developing the concept of village banking.

A village bank is a support group of about 20-35 members, who meet either monthly or bi-weekly. Small loans are given to each member which can be used to start or expand personal businesses. The village bank group provides members with an incentive to save their earnings, as well as a place to store such savings. The incentive to save comes from the fact that in order to receive a new loan, members must first repay their initial loans. This community-based system provides mutual support as members attempt to start or expand businesses. The members of the village banking group guarantee each others loans. This is extremely important because it serves as the only form of collateral many of the members have.

Together with Maria Marta Padilla, Hatch created FINCA Costa Rica in February of 1984. Initially, thirty village banks of about twenty members each were formed in rural areas, including the Eastern and Southern regions of the country which were devastated after a recent earthquake, the death of the banana industry, poverty, and poor infrastructure. In the beginning, loans and repayments were made in kind, usually in grain. While no interest was charged, members were required to save twenty percent of their loans, in order for the bank to make more loans in the next year.

After a few years, lending and repayment in kind was eliminated. Cash provided a much more logical medium, both because of its divisibility and its homogeneity. Also, rules were changed so that legal liability to repay a loan was left with each individual. Initially, the rule was that no more loans were given out until every member had repaid his/her first loan. With this rule change, an individual's ability to get a second loan wasn't dependent on his/her group repaying all their loans.

In the 1990's, the group began increasing interest rates to try to bring the organization to a more sustainable level. Also, a new legal status was introduced with different voting rules. Formerly, each group was considered an association with legal status and one vote was given per member. Now, village banks are considered a non-profit legal entity, which sells equity to its members. Voting privileges correspond to the number of shares an individual buys, and credit is loosely based on the number of shares as well. This purchase of shares allows individuals to have greater member ownership. Also, the weighted voting gives greater incentives for those with a greater share of the bank to take a greater role in monitoring and shaping the banks development, and prevents the shirking that might occur with a one vote per member system. Finally, the new structure makes it easy to prosecute both group and individual members in the event of a loan default.

Today, FINCA Costa Rica is based upon a two-stage design. In the first stage, groups are loaned between fifty and four hundred dollars per person, for up to a year. In the second stage, groups are loaned up to two thousand dollars for up to five years. In the first stage of a village bank, FINCA presents a model to all interested parties. Usually, the organization goes to rural villages, where individuals have low to middle income levels, and a large enough population to form a successful village bank. After FINCA's initial visit, those individuals who are interested democratically elect a leadership group, and contact the organization to let them know of their interest. FINCA then trains individuals to run the bank, resulting in a high degree of autonomy for such groups. The village bank decides it's own internal procedures, such as meeting times, and penalties for failing to repay a loan, and elects it's own Board of Directors. FINCA promoters occasionally return for further training and to check on the status of the village bank, but day-to-day activities are left up to the members of the group themselves. FINCA also reviews applications for loans received by the bank, and decides what line of credit to make available to each group.

The typical FINCA beneficiary is a male, head of household, with about six years of primary education. This is one of the ways FINCA Costa Rica differs from other micro-lending organizations; it targets men instead of women. Generally, such men engage primarily in grain production, on less than twenty hectares of land. Usually, they own the land on which they farm, but have no clear title to the land, and therefore no collateral. Also, they rarely own farm equipment, another possible source of collateral.

FINCA Costa Rica has been unique from other village banking organizations from the start. In general, the unique features arise from the fact that social and economic conditions in Costa Rica are unusual. The country is labeled as developing, with a primarily export oriented economy, however it is unlike other developing countries in many regards. First, it has a high literacy rate, which reduces the amount of time FINCA has to spend training it's employees, and allows for the high degree of autonomy seen in Costa Rican village banks. An established legal system makes enforcement mechanisms credible. Finally, because the majority of farmers own their land, small-scale farming is much more predominant than in other countries. This means that larger and longer lasting loans are necessary in Costa Rica.

FINCA Costa Rica is also unique from other FINCA programs due to its separation from FINCA Internacionale. The management of FINCA Costa Rica felt that FINCA Internacionale demanded too much time and requested regular progress reports while not providing enough technical and financial support. As FINCA Internacionale turned increasingly towards micro-finance for women, FINCA Costa Rica viewed their guidance as increasingly irrelevant. FINCA Internacionale, on the other hand, was frustrated with FINCA Costa Rica's lack of willingness to share information, especially financial information. As a result, the two officially split in 1997.

Such a split has had both positive and negative repercussions for FINCA Costa Rica. On the positive side, it allowed the group to pursue it's own path and experiment with new ideas. It also forced them to borrow money from a variety of sources. This diversification is good because it prevents the organization from becoming dependent on a single borrowing source, a common problem among micro-finance organizations today. However, on the negative side, as FINCA Internacionale grew, it's ability to offer technical assistance in areas such as training, accounting and management also increased. Today, FINCA Costa Rica admits that such increased technical support would be helpful. Also, FINCA Internacionale requires the use of standard accounting techniques and frequent evaluations, a hassle in the short run, these become a valuable resource when the organization is trying to make long-term decisions.

The successful aspects of FINCA Costa Rica are many. Most of its members report FINCA loans as having successful terms and conditions, and view village banks as an asset to their communities. Also, the transfer of organizational skills away from FINCA Costa Rica officials, and into the hands of group members themselves is a success. The village bank promotes community action, and the credit groups created as a result of these banks, often use funds to finance playgrounds, improve roads, and restore public works such as cemeteries.

However, adverse effects have come as a result of FINCA Costa Rica. In particular, the organization has had a detrimental effect on the environment of the country. In Costa Rica, cattle production ranks second to agricultural as the most profitable activity available to the typical FINCA participant. As cattle production has increased as a result of micro-financing, tracts are continually being cleared for pasture resulting in soil degradation and deforestation. The mountainous lands of Costa Rica, and uninterrupted use of these poor pasture lands, make long-term sustainability of these activities as they are currently practiced impossible.

Costa Rica's current form of micro-lending is economically sustainable, however it is not environmentally sustainable. The impact that FINCA Costa Rica is having on the country environmentally is important because it will carry over into the future. Eventually, Costa Ricans will increase cattle production and destroy enough land so that the industry will no longer be profitable. At that point, not only will they be left without such a source of income, but they will also be left without productive and fertile land.

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