Summary of Chapter 7

Chapter 7 presented and discussed the results of the empirical research and addressed the topic of credit unions as a possible solution for farmers’ financial problems. With regard to access to credit, one-third of respondents have taken a loan, while over two-thirds of respondents have no credit experience. A great majority of farmers rated the implementation of a rural credit system as ‘very important’ or ‘important’.

Respondents would invest a real or a hypothetical loan predominantly into agriculture.

Many farmers chose a twofold investment strategy: agriculture and a second income source. This indicates that agriculture alone is not perceived to generate sufficient income due to the small plots and the lack of [export] markets. The average loan size of those respondents who took a loan is 1000 lari, which is about 10 times the monthly average household income. With regard to rural credit systems, farmers strongly prefer loans with individual liability. The single main reason for the choice of individual loans was distrust amongst villagers. Smallholders gave detailed information on the attributes of an ideal loan, including loan size, interest rates, collateral, instalments, commission, and loan duration. Loan duration and loan size have the highest importance to them. Concerning socio-economic characteristics, the majority of respondents are married and well-educated with approximately one-third possessing a university degree. Respondents’ main job is agriculture, and over the half of them lives on the selling of agricultural products. The area of most respondents’ farmland is about one hectare. Households control an average income of 100 lari (€44) per month, which is below the Georgian average per capita subsistence level income (113 lari). With respect to the CE, respondents preferred the loans depicted on the choice card over no loan, showing that the attribute levels for the loans on the choice cards comply with the sampled population’s notions about credit. The attribute coefficients of loan size, interest rates, and loan duration are significant — meaning that these attributes are the most important ones in a loan scheme. Respondents expressed preferences for a small loan size, low interest rates, and long loan duration. Latent class analysis offers a more differentiated view of preferences with respect to loan conditions. Model results

suggest that respondents could be grouped into four classes that differ in the preferences regarding the characteristics of individual loans:

- Class 1 (size = 47 percent of those respondents who preferred individual loans):

Small loans, relatively low aversion against higher interest rates.

- Class 2 (size = 23 percent): Long loan duration, relatively low aversion against higher interest rates.

- Class 3 (size = 20 percent): Lower interest rates, movable assets.

- Class 4 (size = 10 percent): Large loans.

The calculation of interactions shows that only five of the socio-economic variables influence loan attributes. Elasticities were calculated for the loan cost (interest and commission). With regard to interest rates, the direct effects are -0.410 and -0.397 with respect to choice alternatives 1 and 2. This suggests that an increase of 1 percent in interest rates will decrease the probability of selecting alternative 1 by 0.410 percent and of selecting alternative 2 by 0.397 percent, all else being equal. An increase of 1 percent in commission will decrease the probabilities of choosing alternative 1 and 2 by 0.102, and 0.098 percent respectively. Both elasticities are relatively inelastic. For the loan-providing institution this means that the revenue gained by any increase in interest rates and commission will be larger than the loss of clients the loan cost increase may generate. In a wider sense, farmers in Shida Kartli prefer to take up a loan irrespective of the loan cost, indicating a high demand for loans. With regard to acceptance of the empirical study in the research area, 85 percent of respondents took part in the survey, and 81 percent did the CE — both of which are high acceptance rates. The question whether credit unions are a suitable institution to solve farmers’

financial problems can be answered ‘yes’ from the theoretical standpoint and ‘yes’ if they employ the individual lending approach. But credit unions cannot solve all agricultural problems farmers in Georgia face, and it is difficult to implement them due to distrust amongst the rural population and farmers’ distrust of any cooperative system based on negative experiences with compulsory collective farming in the Soviet period. Credit unions can succeed only under appropriate management. To convince farmers of the benefits to using CUs’ credit, advertisements in the mass media and in the press, as well as training courses are necessary.

In the last section of Chapter 7, two models for the implementation of credit unions and two business models for the four different credit preference classes out of

the latent class analysis were presented. These models were developed based on the experiences the World Bank and the International Fund for Agricultural Development (IFAD) made with a credit union project in Georgia. All in all, the project failed, but a small number of CUs was very successful and its members benefited to a high degree from this institution. The CUs from the credit union project and cooperatives in India, which are very successful, could serve as template for a new credit union implementation project in Shida Kartli. As to implementation, a bottom up-approach is proposed, which starts by a cooperation between villages in an EU member country and villages in Shida Kartli. The intermediary between the EU villages and the villages in Shida Kartli could be a NGO, a CU in the EU country or other associations, which apply for project funding. The other implementation type includes a top-down approach. The CU project is funded by an international donor and is set up as an independent unit in Georgia in cooperation with Georgian personnel and managers.

With regard to the the credit union business models, two different models were developed:

a) A credit union model for farmers who prefer small loans with low interests and who do not have experience with business. Credit unions would be the most appropriate institution to start small business projects, because CUs only provide small loans with short duration in the initial stage.

b) A service cooperative model with integrated CU for farmers who prefer large loans with long duration, and who have experience with business. Service cooperatives could help them with input, training, advice, and marketing to set up a larger long-term business project. Loans can be taken directly from a commercial bank at good conditions, which the service cooperative negotiates for its farmer members, or the service cooperative sets up its own CU financed by loans and/ or grants from an outside donor, e.g. a NGO.