US aid to Paraguay : assistance to CREDICOOP's agricultural credit union system

CREDICOOP has established a significant network, growing from 16 to 70 credit unions, doubling its membership, and evolving from a savings and loan institution to a multipurpose cooperative. Its effectiveness, however, has only been fair to poor, being seriously hampered by a high loan delinquency rate due to unwise early lending policies, poor harvests caused by bad weather, and a wildly unpredictable crop market. Yet despite apparently steady decapitalization, CREDICOOP survives; it has developed an institutional toughness which defies logic. CREDICOOP's impact on small farmers has been mixed. Many fell into debt and have gone back to the private traders who have no collateral requirement and a short loan process; others have graduated to seeking credit from commercial banks and the National Development Bank. The key lesson learned is that, despite several decades of public sector support for CREDICOOP and other large, formal credit institutions, the private sector credit delivery system continues to command 84% of the overall agricultural credit market and fully 98% of the small farmer market. A.I.D. should learn from these village-level businesses and seek ways of working through them. Other lessons learned are that: (1) integrating farmers and non-farmers in the same credit union can level financial flows within a union and provide relatively sophisticated leadership; (2) a credit institution must take into account both its operating costs and the costs of its competitor's money if it is to develop long-term sustainability; (3) the greatest weakness in any agricultural credit program is the unpredictability of weather and market conditions; (4) determination is the key to succeeding in a free market environment; (5) the ability to lend without requiring mortgage collateral, while raising the risk of default, also raises the ability to reach small farmer borrowers; and (6) availability of a credit union tends to make other agricultural service suppliers more competitive. Appendices provide greater detail on the individual A.I.D. projects involved and discuss traditional and CREDICOOP interest rates.