May 14, 2002
The Historical Perspective – Case Study of Savings and Credit Associations in Albania
Case study of the Finsol workshop
Ruth Egger

1. General information about the institution and its environment 1.1 Albania

Albania covers an area of 29000 km2, which is approximately the size of Belgium, and with a population of 3.5 million. Until 1991, the country was closed to the outside world by one of the strictest Communist regimes. Since then, the country has started opening up to the rest of the world. This process was slowed in 1997 by the catastrophic failure of the pyramid investment system.

Even today, 70% of Albania’s population is made up of farmers and 20% by public sector workers. Unemployment is very high (official figures show 18%), and life is difficult for farmers. The country is bordered by Montenegro and Kosovo to the North, and by Macedonia and Greece to the South. Possibilities for the export of agricultural products are limited, and the influence of competition from neighbouring countries can even be felt on local markets. Additionally Greek farmers currently receive subsidies.

1.2 A History of Credit and Savings Associations

In 1992, the programme of Rural Credit, a project of the World Bank (WB) started in the mountain villages of Albania. Its purpose was to reduce rural poverty by means of small credits destined for farmers and small entrepreneurs living in distant villages who, until then, had no access to financial services.

So as to manage the programme and grant credits, funds were made available by different financial backers, partly on credit (WB to the Albanian government) and partly at a loss. They were managed by the Albanian Credit Foundation created by the Albanian government in conjunction with these organisations.

Towards the end of 1999, the programme operated in eleven districts in the country and in more than two hundred villages through the Villagers’ Credit Funds (VCF) managed by the villagers on the initiative and with the support of the programme. At this time, 16,000 credits to a total value of 2.2 Million US$ (outstanding discounted invoices) were attributed. The amount of these loans varied between US$200 and a maximum of US$2000 and their repayment schedule varied between six months and three years with an average of two and a half years. Interest rates varied between 18% – 24% for a loan in local currency (commercial lending rate) and inflation rates of around 7%. Repayment rates were around 100%, and this in an environment characterised by political instability as well as a slow rate of economic development and the recent “failure” of the pyramid system. This failure disrupted Albania’s entire political and economic system.

To expand on this conclusive experiment so as to provide the programme’s services on an ongoing basis and make them independent from the backers’ finances, the programme decided to create Savings and Credit Associations (SCAs) and to gradually transfer the VCFs to SCAs when this was possible and desirable. At the same time, it was anticipated that intervention areas would be extended to several new villages located on the plains, areas with higher economic potential, and to withdraw from mountain villages whose population was decreasing (due to factors such as youth migration etc.).

This process is currently underway. 590 SCAs were created at the end of 2001, of which 39 were in established villages with VCFs, with 73 villages participating. The creation of 200 SCAs serving 347 villages is planned for 2004. The VCF programme will finish at the end of 2004, and with it, the services to the villagers, either where there is no SCA or where people have chosen not to join it. The constituent assembly of the Union of SCAs took place in January 2001 and the transfer of human resources and funds and liabilities is currently under negotiation with the Albanian government and should be resolved by June 2002 at the latest.

2. Strengths and constraints of the Villagers’ Credit Fund system

¨ In a large number of villages, the Villagers’ Credit Council created for the provision of funds was the first economic institution in civil society.

¨ Potential customers, made up of small farmers and entrepreneurs living in the mountains and having little or no access to markets, employment (outside seasonal migration) or a banking system, were quite homogenous with similar limitations and needs.

This enabled the simplicity of the system and its products to be maintained, and since the duration of the loan was negotiable (up to three years), there was a very flexible use of credit that was tailored to families’ cash flow.

¨ Awkward social pressures that were hard to avoid, were created by the fact that an elected entity, the Villagers’ Credit Council, represented the families in accordance with the traditional system and decided on the allocation of credit. Furthermore, there were no alternatives to this programme. If a new credit were sought, the previous one had to be repaid.

¨ Either the villages or the groups served by the VCFs were small (around 30 customers per village); this facilitated long-term relationships. Creditors often belonged to the same clan.

¨ The rule was one credit per family, which seemed logical considering the size of family farms. However, at the same time, this tended to exclude women from credit, except for widows.

¨ Given the size of villages, the bankruptcy of the Agricultural Bank and the impossibility for the villagers to become customers of other banks in the meantime, a legally recognised institution able to offer ongoing financial services had to be found.

¨ For reasons of security, the credits were to be repaid in two payments made annually, or be supplemented by fresh money. The VCFs could not have the money in their coffers, or more exactly, could not have coffers. This also excluded the possibility of savings, or at least deposit accounts. Money transfers were made by means of savings banks in the nearest towns.

¨ The local knowledge of the programme’s team as well as the esteem and mutual trust between the team and the farmers were at the root of the programme’s success. The training and technical support were developed by a department of international consultants with considerable experience in financial services for the poor.

3. How can the strengths of the system be maintained while making it evolve towards an autonomous financial system?

¨ The technical nature of the Savings and Credit Association (SCA) is more specialised. This means there are more people to be trained. Villagers who had been accountants or who had managed cooperatives etc. can be found. These people seem to benefit from the villagers’ trust and esteem.

¨ Several villages have decided to create an SCA while keeping the credit committee in each village so as to grow and increase their efficiency. During communism, cooperatives were often spread over several villages and there were always alliances between villages.

¨ There is a social capital or business consortium for creating each SCA. In addition to each member’s initial contribution, each borrower must pay 3% - 4% of the credit sum to the consortium of his or her SCA each time he or she takes out credit. This helps to capitalise the SCA and, at the same time, can create a certain solidarity (equity) with those not taking any credit.

¨ It was decided to introduce savings and to make the system of refinancing credits more flexible, thus enabling better services to members both in terms of coordination and the reimbursement of new credits. Furthermore, saving creates liquid assets. Again, for reasons of security and management, the savings product introduced corresponds to a deposit with a term of six months.

¨ With this new formula, women are becoming members little by little. The savings product could be especially attractive to a female clientèle.

¨ The programme’s team has heavily invested in terms of preparing people for their new roles and tasks (as well as in the social and economic analysis of potential new villages.) The results of this were felt during general meetings: discussions were lively and exposed people’s problems, especially those of farmers and women.

¨ It still needs to be proven that SCAs will develop a spirit of solidarity among themselves outside collaboration with the programme’s team. Until today, few instruments have been developed to ensure this solidarity. While funds for solidarity have been mentioned, there is still nothing concrete. Many things will depend on recently elected Councils of Administration and Surveillance from the Union.

4. Several Hypotheses and Reflections on the Solidarity and Social Ties 4.1 Honour

We are dealing here with a financial system that has for the past six years benefited from a highly laudable discipline in repayment, with the money of others (in large part, credits from the World Bank to the Albanian government).

Where does this discipline stem from? The programme built the VCFs on the villages’ traditional systems of organisation, systems with rules and unwritten laws that outlived communism which were revived in the new system with several amendments when these were deemed necessary; qualified young people sometimes took the place of village elders etc. The organisation is pyramidal (representation by clan) and the spoken word is binding. Insofar as people taking out a credit are committed to the Credit Council, which in turn is committed to the Albanian Development Foundation, non-repayment is not an option. This is independent from people’s will to receive subsequent further credits. Honour is paramount to the success of the scheme and is valued due to social ties.

A concrete example to illustrate the point: When the pyramid system had collapsed and one of the VCFs was not repaying in time, the programme’s director personally visited the village’s chief at home to make him aware of the problem. (Her concern was that if one VCF defaulted on repayment, all the others would do likewise). The village chief’s answer was clear: for his own honour and that of his village, he had to commit to reimburse the totality of the sum the following day. This was a vital sign for the system.

The big question is: How long can this informal law survive, and what will supersede it? Will it be replaced by State laws and judicial services or by external influences (whether good or bad)? Will the Union and technical department grant the necessary instruments and stimulation to ensure the continuation of good management?

In any case, it is vital that SCAs rely on this strength for as long as possible. To do this, transparency on all levels is necessary, and both those elected and employees must live up to the same standard. As one of the borrowers put it, “in this system, honesty is profitable”.

4.2 The Homogeneity of the villages

VCF villages were relatively homogenous in terms of economic (mainly agricultural), and their population was mostly traditional. This is less the case for newer villages located on the plains (until now, the programme was able to avoid villages with heavy migration). Investment projects in these SCAs range from small restaurants and tourist bedrooms to vineyards etc. These villages are more open to external influences. In this context, it will be necessary to closely monitor whether this discipline can be maintained by those elected and members alike.

Today, the majority of the SCAs are in the mountains. In the future, will the Union find an interest and know how to emphasise solidarity so that the peculiarities and specific needs of these villages have a place in the system (access, small income etc.)? While this is possible, it will require the Union’s political will.

4.3 Security

The incoherence between discipline developed in point 4.1, and the question of insecurity, which does not enable normal fluid functioning is striking, at least initially.

Where does this divergence stem from? Is the situation of insecurity due to the behaviour of people outside the village system (social control)? Is knowing how to steal from others (but not one’s own) a social value? Unfortunately, we do not know.

4.4 The Transformation of VCFs into SCAs The project foresaw that all borrowers from the VCFs could, if they so chose, create their SCA together. This turned out not to be the case. In many villages, people from the VCFs hesitated; a group would join, others would join later, and still others would choose not to join. A study of beneficiaries is currently underway and will provide information as to the different motives for joining SCAs and at what time.

For the author, it is not surprising to notice that it was rather easier to create an SCA in a new village rather than in an old one with VCFs. In the planning stages, this may not have been sufficiently taken into account.

5. The Historical Perspective

A comparison with other experiences: In Albania’s case, the collapse of the Communist regime left an institutional vacuum that was filled by traditional structures (organisation on a village level). In fact, in terms of economic activity, the population was already used to cooperation. In the past, tomatoes were exported by collecting produce in commercial; under Communism, cooperatives played this role; today, there is no problem in cooperation for economic advancement…

This is a very different situation from Nicaragua under the reign of Sandinists where cooperatives were, amongst other things, a political instrument (an organisation) where traditional social structures had already disappeared by Samoza’s time (and even before this). After the civil war, the climate had dented confidence and had strongly favoured individualism, at least in terms of economic life (each person for his or her own) and the term “cooperativism” could not be used, at least not in its strictest sense.

In the villages of Western Africa where there were fewer political “ruptures” in terms of villages, an integration of traditional structures can be seen in associative and economic life, for instance, the village coffers of the CIDR (Centre International de Développement et de Recherche). This close cooperation between social and economic organisations does present some advantages if the objectives and intentions coincide, but where they do not, there can be negative consequences such as an exploitation of power. Changes in terms of social structure are equally under way in Africa, and it will be necessary to see what the long-term implications are for different self-managed credit and saving systems.

We have noticed that these different examples reflect very personal interpretations and points of view and that these are far from complete or representative. However, have we tried to share several observations and possibly contribute to a discussion.

Complete article in word on the WSSE website