The Association for the Rural Development of Yilong County has established a proven and reliable system for effectively distributing and managing its own micro-loans to local peasants. In the last several years, however, ARDY has also demonstrated that distributing microfinance management responsibilities to peasants themselves can help to build local capacity and encourage a greater degree of financial independence in rural communities.
Since 2006 ARDY has been supporting the creation Rural Mutual Cooperative Associations (RMCA) in villages throughout Yilong, which support economic independence by fostering cooperation among village residents. Each RMCA operates a “village fund,” comprised of villager contributions matched by ARDY itself and by the local government, which it uses to distribute its own microloans to residents of the village. Similar to each ARDY loan branch, each village fund has three managers, which are chosen for three-year terms from among the village by democratic vote. These village funds then grant their own microfinance loans to residents of the village. Through allowing peasants to administer the lending process themselves, ARDY helps to slowly foster their own financial management skills and to increase their economic independence. All members of the village fund must undergo certain financial training sessions provided by ARDY, with village fund managers undergoing special additional training.
The members of each village fund meet to determine their own regulations and bylaws, which often vary slightly from ARDY’s official lending policies. Many of the village funds lend at 9% or 8% interest, less than the 10% rate at which ARDY itself lends, and some require only one repayment a month, while ARDY requires repayment every two weeks. The managers of each fund then receive loan applications themselves and do the follow-up research on each applicant’s character and economic background. Following their approval each applicant is brought to a vote before the full membership of the cooperative at their monthly meeting. The villagers are entirely responsible for the results of their own financial management. The profits garnered from interest collection each year are distributed among all of the shareholders, and in the event of a default the fund is responsible for diverting some of its profits to cover the lost funds.
While ARDY played a major role in establishing the funds and setting up the management structure, the goal is to create a system which the peasants themselves are personally and financially invested in, so they will take responsibility for its management. The villager’s own personal contribution to the fund helps to incentivize their continued participation in its management. In the meeting that establishes a village fund, villagers discuss and agree on which families are too poor to be able to support a 500RMB contribution. In the first few iterations of the project, the contributions of these especially poor families were completely covered by ARDY. However, it was discovered that peasants who had made no contribution were unlikely to show up to meetings and other activities related to the village fund; with none of their own money invested in the project, they had little motivation to spend the time to be involved in it. In the new village cooperatives being set up this year, even especially poor families are required to make a contribution of 200 RMB, so that they have some incentive to participate in the project and follow their money.
Communicating this concept of personal responsibility to village fund participants sometimes requires some patience. At a recent training session for managers of RMCAs in the town of Dingziqiao, one peasant manager complained to ARDY director Gao Xiangjun that the fund had distributed loans more quickly than expected and was running low on liquid reserves. Mrs. Gao replied that there was nothing she could do. Every time you have problems you come running to me! This is your village, and it’s your village’s money…this isn’t “Director Gao tells you how to solve your problems,” this is “you figure out how to solve your own problems.”
While this type of financial responsibility is a new experience for villagers, ARDY has found that, when left to their own devices, villagers generate their own creative solutions to the problems they face. In particular, the strong cohesion of each village community plays a major role in enforcing loan repayment. I learned about this principle during a visit a few weeks ago to the rural fund in the village of Chajiaping 察家坪, when I asked the rural fund managers how they would respond if a borrower failed to meet repayments. Late payments are followed up by a phone call to the borrower to remind and urge them to repay. If the borrower gave no response within two days, then the loan officers, along with several of the borrower’s neighbors, would descend on their house. “The money they borrow is the town’s money,” the manager explained to me, “it belongs to all of us.” This awareness creates a strong enough social pressure on the borrower that almost always is enough to convince them to find a way to repay. “If they failed to pay back the loan then they would still have to continue to live next to the people who had loaned them the money.”
Gao Xiangjun once related to me a story from the early days of one of the village funds, when the villagers encountered a particularly stubborn borrower. The village managers and several other neighbors arrived at the peasant’s home, only to be refused once again. The neighbors then informed the borrower that they would be staying at his home for dinner, and that they would continue to come over for dinner until the borrower re-payed his loan. The borrower made his installment payment the next day.
This system of mutually enforcing social pressure has resulted in an extremely high repayment rate for the village funds. The Chajiaping fund has only had one failed repayment in its four-year history, when a borrower got in a bad car accident while driving his supply of ducks to market in Chengdu.
In a community with little or no previous experience in personal financial management, the road to economic independence is a long and rocky one. However, by encouraging personal responsibility and providing guided instruction along the way, ARDY has taken significant steps in building the capacity of Sichuan’s peasants to manage their own money and fuel their own economic development.