Case Studies in Community−Based Credit Systems for Low−IncomeHousing

Table of ContentsCase Studies in Community−Based Credit Systems for Low−Income Housing.........................................1

FOREWORD..........................................................................................................................................1I. COMMUNITY−BASED CREDIT SYSTEMS: AN OVERVIEW............................................................2

A. Introduction..................................................................................................................................2B. Types of institutions.....................................................................................................................3C. Mobilisation of funds for housing.................................................................................................4D. Allocation of funds for housing....................................................................................................5E. Management and Administration.................................................................................................6F. Types of Loans............................................................................................................................6G. Cost of Loans..............................................................................................................................8H. Linkages......................................................................................................................................9

II. URBAN THRIFT AND CREDIT COOPERATIVE SOCIETIES: A CASE STUDY OF COLOMBO, SRI LANKA......................................................................................................................10

A. Background................................................................................................................................10B. Organisation and Management of Urban TCCSS: Evaluation of Performance.........................14C. Community Participation in Banking and Social Development Through Thrift Societies...........21D. Lessons learnt: Some Recommendations.................................................................................24

III. PUNERVAAS HABITAT AND LIVELIHOOD MOVEMENT, DELHI, INDIA.....................................29A. Background................................................................................................................................29B. The Case Study.........................................................................................................................30C. Lessons Learnt..........................................................................................................................36

IV. MUTUAL AID COOPERATIVE MOVEMENT IN URUGUAY..........................................................38A. Mutual Housing Cooperatives: What They Are and How They Work........................................38B. Advantages of cooperatives......................................................................................................40C. Conditions and replicability........................................................................................................41

V. THE HISTORY OF THE GROUP CREDIT COMPANY: CAPE TOWN, SOUTH AFRICA...............42A. Phase I − Research and Feasibility...........................................................................................42B. Phase II − Pilot...........................................................................................................................43C. Phase III − Expansion: One Region..........................................................................................45D. Phase IV − Multiple Regions.....................................................................................................46E. Phase V − Current Strategy.......................................................................................................51

VI. THE DANISH MODEL.....................................................................................................................52VII. CONCLUSIONS.............................................................................................................................54SELECTED BIBLIOGRAPHY...............................................................................................................55ENDNOTES..........................................................................................................................................56

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Case Studies in Community−Based Credit Systems for Low−IncomeHousing

UNITED NATIONS CENTRE FOR HUMAN SETTLEMENTS (Habitat)Nairobi, 1995

This document has been reproduced without formal editing

The designations employed and the presentation of the material in this publication do not imply the expressionof any opinion whatsoever on the part of the secretariat of the United Nations concerning the legal status ofany country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers orboundaries.

HS/337/95EISBN 92−1−131298−1

FOREWORD

For good reasons “Community Participation” and “Housing Finance” are two important activity areas ofUNCHS (Habitat). Experience has demonstrated time and again that each of the areas are absolutely crucialto the provision of shelter for the poor. Taken together they can make the difference between being housed orbeing homeless.

Community participation in the field of housing is not confined to finance. In fact, it permeates all kinds ofactivities in the community involved not only in the planning and building of houses but in many other activitiesrelated to the maintenance of structures and infrastructure. In addition it has some important spin−offs interms of learning to organise, manage and to solve problems. In this sense it becomes a valuable exercise indemocracy.

Most housing finance is not done by community groups with democratically elected leaders. But a lot of otherfinance is. Typically, it is in the form of “savings−and−credit societies” or groups with similar designations andfunctions. On the basis of members’ own savings they are known all over the world as providers of small,short−term loans for all kinds of domestic needs. To expand this kind of lending to bigger, longer−term loansfor housing seems obvious. However, as many case studies show, this is a very difficult step to take.

This publication aims to illustrate how some of these problems can be overcome. This is done through theselection of four cases from various parts of the world where conditions differ, but where the object is thesame: Access to housing finance for the poor. The problems encountered are similar, but the solutions are notalways the same. Local traditions, political climate, level of literacy, etc. are some of the many obstacles to thetransition from consumer credit to housing finance.

Some of the cases also show how vital linkages among members and the all important, yet very delicate,“peer pressure” operate to make community−based finance successful. Similarly, the larger organisationsdemonstrate how linkages to formal sector institutions are extremely important for expansion of their capitalbase and their lending activities. The distinction between formal and informal sectors is not always useful. Butin terms of housing finance the interface between them is a very useful concept to explore.

The report draws upon four case studies. One each from India, Sri Lanka, Uruguay and South Africa. Thestudies have not been reprinted in extenso because the aim was to highlight differences rather thansimilarities in problem solving.

Research on housing finance, undertaken by the UNCHS (Habitat), has over the past years focused onmobilization of finance, mortgage instruments and problems of lending for low−income housing. Theseresearch activities have led to a number of publications, including “Mobilization of Financial Resources for

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Low−income Groups” (HS/167/89E), “Financing Human Settlements Development and Management inDeveloping Countries” (HS/174/89E) and “Case Studies of Innovative Housing finance Institutions”(HS/301/93E).

In contrast to past research which has focused on aspects related to formal finance mechanisms, thispublication presents some examples of informal financial systems. The aim is to contribute to the Centre’son−going activities related to poverty alleviation as well as to the forthcoming Second United NationsConference on Human Settlements (Habitat II). The four case studies show unequivocally thatcommunity−based finance systems can, indeed, become one of the most potent instruments in alleviatingpoverty.

I gratefully acknowledge the contribution of Dr. Niels O. Jorgensen in the preparation of this publication and ofthe case study authors: Sanat Kaul (India), Upali Vidanapathirana (Sri Lanka), Christine Glover (South Africa)and the Centro Cooperativista Uruguayo (Uruguay).

Wally N’DowAssistant Secretary−General

United Nations Centre for Human Settlements (Habitat)

Secretary−GeneralUnited Nations Conference on Human Settlements (Habitat II)

I. COMMUNITY−BASED CREDIT SYSTEMS: AN OVERVIEW

A. Introduction

Finance is one of the most important factors in the provision of housing everywhere, and for low incomefamilies in developing countries it is critical. Like most other families, who want to buy or build a house, theycannot pay for it out of their existing savings. They need access to credit in one form or another.

The formal housing finance systems play a major role in mobilising and allocating funds for housing also indeveloping countries. However, they often fail in providing credit on terms which meet the specialrequirements of those most in need, namely the poor. This situation is understandable from the point of viewof the formal institutions, because there is normally a large effective demand for housing finance fromborrowers who have little or no problem accepting the terms on which such finance is being offered.

It is too simplistic to view the problem of housing finance for the poor as merely a matter of reducing the costof houses through subsidies or the price of finance through lower interest rates. There are many otherconstraints − apart from affordability − to potential borrowers’ willingness to take up a loan. Some of theseconstraints are in areas such as: ownership rights, collateral requirements, unsteady income and cash−flows.

Informal or community−based credit systems have been able to break through some of these barriers whenproviding finance for consumer goods, cattle, seeds, school fees and a variety of other household needs. Insome countries they have also shown an ability to meet the need for low income housing to such an extentthat informal finance, comprising loans from friends, money−lenders and community−based institutions, nowaccounts for 80 per cent of shelter investments in developing countries.1 This fact gives encouragement to ourefforts of describing how such credit systems operate. To disseminate information about their activities shouldstimulate the creation of new user−friendly credit systems and the expansion and strengthening of existingones to the point where they become accepted as part of the formal financial system.

Community−based credit systems − which are an integral part of the so−called informal sector − consist of alarge variety of organisational arrangements ranging from the small locally−based savings and credit clubs tosome large city−based housing co−operatives to nationwide organisations such as the well known GrameenBank in Bangladesh. All of them have certain unique characteristics, but with one thing in common: to extendcredit to their members on the basis of their savings. The distinction between formal and informal is largely afalse dichotomy, but with respect to mobilisation and allocation of funds community−based organisationsdistinguish themselves from formal sector institutions in two important respect:

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(1) The organisation is owned by its members in equal parts, thus being a democratic entityas opposed to a corporation or company.

(2) With a common bond between members they rely on them to run the organisation throughelected − sometimes paid − leaders and to enforce its rules especially with respect torepayment of loans.

Four case studies form the basis for this publication − two are from Asia, one from Africa and one from LatinAmerica. They are all different in certain respects, and they are used here to illustrate how poor familiesovercome the hurdles which prevent them from being borrowers in the formal housing finance market. Of thetwo cases from Asia one is from India and one from Sri Lanka. There is a case from South Africa while theUruguay case represents Latin America.

The reason for publishing yet another study on housing finance for low income groups is − apart from thesignificance of community−based credit systems − the importance of introducing new paradigms into thefrequently stale discussion of how to “solve” the housing problem in developing countries. Terms such as“housing needs”, “affordability” and “subsidies” have become standard phrases which most people accept asuniversal and virtually static concepts. The result is that the housing problem also becomes static and onewhich can only be tackled (not solved) by cutting costs and increasing subsidies. Instead, concepts such as“effective demand”, “user−value” and “willingness−to−pay” combine well with those long known to communityorganisations, such as “mutuality”, “responsibility” and “self−help”. Possible combinations of new theoreticalconcepts with old, practical approaches are described in the following section (B).

Chapter two is a case study of Urban Thrift and Credit Cooperative Societies in Colombo, Sri Lanka. They areformed within a clear legal framework and characterised by their separation from public sector interference.Membership tends to be from middle and lower−middle income groups where literacy and numeracy are thenorm. Investing in housing is not the only aim of these members, but in those cases members start savingwith their society. These savings will eventually pay for a large part of their house cost.

Chapter three first describes in detail the Indian “Punervaas Habitat and Livelihood Movement”, which is anApex organisation set up to assist housing co−operative societies − much like the National Co−operativeHousing Union in Kenya2 or Technical Service Organisations (TSO) in some Latin American countries. Aspecific example of how it operates is then explained in the case of the Ekta Vihar squatter settlement inDelhi.

In contrast to the Sri Lanka case, chapter four describes a case from Uruguay of state−supported Mutual AidCooperatives typical for many countries in Latin America. It is characterised by its simplicity and for being ableto cope with a high rate of inflation which otherwise discourages long−term savings. But its over−dependencyon the public sector, which by policy or simple directives can spell its demise, is a lesson to heed.

Chapter five is the story of the Group Credit Company in South Africa. While not exactly a success story, ithelps illustrate many of the typical things which can go wrong when trying to transform existing“savings−and−credit” societies (called Stockvels in S.A.) into a housing finance mechanism. The case historyhas been thoroughly analyzed and remedial action taken. It serves as a recipe for new groups who would liketo expand their lending activities from small, short−term consumer loans to large, long−term housing loans.

Finally, chapter six contains some observations on the Danish system of “Mortgage Societies” which hasflourished to the point where 98% of all family homes and many other types of properties are financed throughthem. In this case, what was once a typical community−based housing finance system has transformed itselfinto a very effective formal sector system. The advantages of this transformation will be explained for thebenefit of the inevitable long−term development of informal systems.

B. Types of institutions

The two principle aspects of housing finance are mobilisation and allocation of funds. Both of these functionsare fraught with problems. However, many formal sector institutions let the “market” solve some of them, suchas determining interest rates, others are legislated by the government, such as procedures for repossessions.Competition for savings is tough. Cost of operation is therefore a crucial factor in reducing “the margin” i.e. thedifference between the borrowing and lending rates of interest. Everything else being equal, the institutionwith the lowest margin can attract most business. In principal, this is how the private formal sector works.

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Public sector institutions, on the other hand, are largely working without competition, because their fundscome from government allocations at below market interest rates, if any at all. Allocation of these funds areoften guided by government directives and are on terms, including rates of interest rates, which are morefavourable than in the private sector. It should be noted, however, that there are institutions wholly owned byGovernment which operate as private sector institutions. They can be ignored for the purpose of thispresentation or be grouped with the first category of institutions.

In terms of their objectives and mode of operation, community−based organisations fall between the formalprivate sector institutions and those in the public sector. Although firmly based in the private domain, theseorganisations mobilise and allocate funds according to criteria similar to what public sector institutions wereset up to follow. The difference being the “common bond” among members which tends to remove theimpersonal and bureaucratic administration of loans in public sector institutions.

C. Mobilisation of funds for housing

As pointed out above, competition for savings is tough − much keener than for loans. In theory there shouldbe no difference, but practice is different in most places, particularly in countries without a fully developedcapital market. There are several reasons for this phenomenon:

− the quality of savings is much more uniform than it is for loans. Savings can be small orlarge, short−or long term, but loans, in addition, have different degrees of risk. It is thereforesafe to assume that, in fact, there is keen competition for “first class” loans

− there is a strong reluctance by housing finance institutions to differentiate interest rates forloans with different kinds of risk or for large and small loans. This fact obviously tends tofavour large loans over small and “safe” loans over more risky ones

− in many countries, Government interferes directly in the capital market either by dictatingmaximum interest rates for certain kinds of loans, such as for housing, or by issuing tax freebonds. The result is that some housing finance institutions buy Government bonds, becausethey get a higher return on them than on housing loans after deduction of administrativeexpenses.

There are several other factors which influence the mobilisation of funds for housing, such as political stabilityand inflation, which are outside the scope of this study. But factors such as: security of funds, return oncapital, terms of savings, rate of loan recovery (because what is collected from existing loans is the mostimportant source of new loan funds). All of these and more will be addressed in turn. It is important to note,however, that if the allocation of resources is interfered with so that they do not seek the investments with thehighest return, less will be saved and the economic health of the whole country will suffer. Because of its highpolitical profile, housing is an investment good which suffers from a lot of − mostly well intended − interferencein terms of capital and land allocation and the supply of infrastructure. In addition inappropriate buildingstandards, complicated conveyancing and other legal and bureaucratic snags create the paradoxical situationwhere it is easier for the poor to mobilise funds for cars than for housing.

Community−based housing finance is in many ways better suited than formal sector institutions to overcomesome of the problems listed above. But some basic problems remain, of which some are common to allhousing finance systems, and others intrinsic to community−based organisations. For instance: selectingleaders, making decisions, to manage and run an administration, dealing with defaulters, etc. How theseproblems are tackled by groups of poor people is the focus of this study.

Whether formal or informal, the best incentive for people to save for housing is for them to see that they are,in the end, rewarded with a loan to buy or build a house. In most private, formal institutions this connection islost as seen from the savers perspective. In public sector institutions it rarely exists, if at all. This is anotherarea where group−based saving has a considerable advantage.

Various incentives to save have been described in numerous case studies. The prospect of a house is one ofthe strongest. An example of this is a Kenyan case3 where groups of people having been allocated servicedsites pooled their building materials loans in order to complete one house at a time, so the income from roomslet could help other members complete their houses in turn. But even more important are the cases wheremembers of the group are gainfully employed in the construction of houses for themselves and other

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members. In this way they have not only the incentive to save, but a (new) source of income from which tosave.

Some of the more sophisticated savings−and−credit organisations with a record of success, such asJamaica’s Co−operative Credit Union League,4 have managed to link up with formal sector institutions as asource of funds. To be able to use the formal banking and/or Housing Finance sector as lenders of last resortis a natural way for the informal sector to be incorporated in the capital market. More will be said about thissource of funds in the subsection dealing with “linkages”.

D. Allocation of funds for housing

As pointed out above, repayment of loans is the most important source of funds in the long term. It is thereforeimperative that funds are allocated in such a way that they are repaid on time without undue hardship to theborrower. The orthodox approach to this by institutional lenders for housing has been to screen applicants onthe basis of “affordability” defined as a simple relationship between the required monthly payment, and theborrower’s income (usually 25% − 30%). Since these institutions use the “fixed annuity” method of repayment,they effectively bar most low income families from obtaining a loan.

There are, of course, other lending criteria:

− is the applicant’s income stable?− is the property in a “good” area and is it up to standard?− how old is the applicant, − old people need not apply?− can the applicant raise the deposit and all the other fees?− what will happen if the borrower looses his/her job!

From the point of view of a lender comfortably placed in a “sellers market” these are all very reasonableselection criteria. In fact, there is a strong incentive for such an institution to prefer few large loans to manysmall, since each loan costs about the same to process, which is yet another mark against the poor.

One mark for the poor, though seldom recognised in formal sector lending institutions, is that those with smallloans are less likely to default than large borrowers. In the same vein: Women are normally more reliableborrowers than men, and more likely to hang on to the house in times of hardship. This contrasts sharply withthe fact that in several developing countries women cannot own property and can, therefore, not obtain loans.Community groups recognise these facts and consider them when allocating their resources, as several of thecase studies show.

The rigid “affordability” criterion explained above along with an unrealistic repayment method are the maincauses for making poor people “defaulters before the event”. But if the lender operates in a seller’s markettheir is little incentive to innovate. Co−operatives have another perspective on these things, because theirmain objective is different: to help their members acquire a house. In this regard they not only rely on “peerpressure” for members to repay loans, they also try to ascertain what lending terms fit their members best. Afew examples will suffice:

For a poor, self−employed head of household with a fluctuating income, it is most impractical to have to repaya loan according to a fixed annuity schedule at the end of every month. Instead, a repayment schedule whichaims at a certain sum to have been repaid at the end of each year is much more acceptable.

If a member wants to conduct a business from the house or will want to lease some rooms to lodgers, itmakes no sense to restrict the size of the loan to what is justified by “present income”. “Future income” is therelevant criterion in this case. Moreover, the repayments should be lower in the early years of the loan thanlater on. This loan form is called a Graduated Repayment Mortgage or GRM.

Most poor members will have difficulties raising the required “down payment” or deposit on a house whichthey can otherwise demonstrate they can afford. In this case it makes sense to offer 100% loan, if the lendingcommittee agrees. Such a loan may have to be secured by extra collateral e.g. a guarantee from one or moremembers. In one of the case studies, all members are collectively responsible for all loans, in which case thequestion of guarantees does not arise.

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One of the most controversial issues in community−based lending is the selection of members eligible forallocation of loans. The case studies will describe different selection criteria. There could be the “first come,first served” approach. Seniority of membership i.e. longest saving record, the “smallest loans first” or the“biggest savings first” criteria, or a combination of these. In the Latin American case, a point system of “needs”was established to determine preference in loan allocation.

Whichever selection criteria are chosen, the guiding principle is that allocation procedures satisfy the largestnumber of members in the long term, and that the allocation committee consists of members who are(s)elected on the basis of trust and credibility. In the case of the Delhi squatter cooperative, a conflict arosebetween the elected committee members and the traditional leader in the area. It was eventually resolved byappointing the traditional leader to the committee.

E. Management and Administration

All of the case studies highlight the severest problem for community−based organisations of all kinds: lack ofmanagement and administrative skills. This state of affairs is inevitable in organisations based to a largeextent − initially, at least − on volunteers. This fact, coupled with the inherent “democratic” decision making inall matters make for a very difficult management style. Exacerbating this problem is, more often than not, thelow education level of members.

In sharp contrast to formal sector institutions which theoretically select the most competent person to run theorganisation and pay dearly for the best experts in all aspects of their operations, we are dealing here withalmost the exact opposite situation. This has important consequences for efficiency and cost. Both of theseaspects of running a housing finance co−operative will be dealt with below and highlighted in the case studies.

The first thing members will notice and complain about in a newly formed organisation is if management failsor operates incompetently. In spite of the fact that they may have been directly involved in appointing thepeople in charge, it is typically the real reason for such organisations to collapse. It is difficult to avoid thissituation other than by securing the help of some professionals as in the South African case, or an NGOspecialising in such support activities, as in the Delhi case.

Administrative tasks can be simplified to such an extent that a competent manager can supervise a largenumber of people. Over the years, basic bookkeeping procedures and simple forms have been developed bynational and international NGOs for group savings−and−lending operations. Still, staff need training in usingthem.

Training of staff is stressed in many case studies.5 This is an on−going activity which assists not only inintroducing new staff to their tasks, but which assures that existing staff is always kept abreast withdevelopments in the organisation and with new techniques and procedures. Training also serves the purposeof keeping staff − and committee members − informed about what goes on in the various departments, so thatthey can easily substitute for each other and, perhaps most importantly, be able to spot irregularities in theprocessing of savings and loans.

The above point cannot be made strongly enough, because fraud, theft, graft and pure incompetence aresome of the typical problems community−based savings and loan organisations have faced over the yearseverywhere. In some cases these problems are solved by “nipping them in the bud” and getting rid of theculprits. In other cases it goes on for some time and leads to the demise of the organisation with severelosses for members as a consequence.

F. Types of Loans

The success or failure of Community−based Housing Finance Institutions (CBHFI) can be very directlyinfluenced by the type of loans they give. For instance: Short−term credits are less risky than long−termhousing loans. The same can be said − with some qualification − for small and large loans. But the use towhich borrowers put their loans is perhaps the most critical aspect of lending. Apart from the pervasive peerpressure, a measure of “carrot and stick” incentives are useful in order to keep members actively engaged inthe activities of their savings−and−loan group and to keep the funds flowing. These incentives can take one ormore of several forms:

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First, the prospect of getting a loan when a certain savings record has been achieved is themost common as well as the most effective.

Second, small loans initially, which are properly serviced, leads to increased creditworthinessand larger and/or longer loans.

Third, a default on a loan need not lead to permanent exclusion, but it should severely restrictaccess to a new loan for a limited period of time.

Fourth, if goods are purchased for the loan proceeds such goods must act as security alongwith other assets owned by the borrower.

Fifth, in the case of a house purchase, the loan must be secured by the property. If there is noformal title deed a written agreement to this effect is sufficient.

Sixth, mortgage insurance is obligatory in some groups, but could be optional if the housingproduced is collectively owned.

There is always the danger that when all members have acquired houses through loans from the group theycould − intentionally or accidentally − default collectively. If there were no external funds involved, only theirown savings are lost. However uneven individual losses may be, it is not as serious as when the group hasborrowed funds from other institutions. In such cases, depending on the arrangements, members should stillbe collectively responsible and the completed houses ultimately serve as security.

The above scenario was the fate of one of the best known cases in a developing country, namely the “GhanaRoof Loan Scheme”. As the name implies, loans were only granted for roofs, and no new loan could begranted if any of the existing loans were in arrears. Groups were formed on the basis of villages, and when allof the members had acquired their roof they intentionally defaulted. Since no external funds were involvedonly their savings were lost, and since they had all saved the same amount − though some had repaid morethan others − losses were shared. This type of arrangement is also known as a “terminating society” and iswell known from the early history of Building Societies − only in the Ghana case it terminated prematurely.

In modern times and with the groups saving for housing forming mostly in urban areas, the concept ofterminating societies has all but vanished. This is understandable because new members replace those whohave achieved their objective e.g. a house, and have paid off their loans or sold their house to anothermember. In fact, the more sophisticated mortgage societies never question the sale of a house, because thenew owner automatically becomes a member and takes over the existing loan. Exceptionally, the new owneropts to join another society and redeems the existing loan, but that usually involves extra costs and is onlydone, if the other society has more favourable lending terms.

Prevalent among housing finance societies in developed countries, but not limited to them, are such flexibletypes of lending terms as:

− no−deposit loans− graduated repayment loans− choices of variable or fixed interest loans− reversed mortgages− index loans

Among the more innovative loan types in CBHFIs in developing countries are:

− sweat−equity loans− repayment in kind− front−end interest loading− equity loans

A short description of each of these loan types follows:

No−deposit loans or 100% loans are given in circumstance where the borrower cannot find the deposit, butwhere other security than the house is available, e.g. guarantees from fellow members of a savings groupand/or an employer.

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Graduated repayment loans means that instead of fixed monthly payments which are often incompatible withthe income profile of borrowers over time, the repayment schedule allows smaller payments initially. GRLs arealso known as “progressive annuities”6

Variable or fixed interest loans allows borrowers to opt for one or the other depending on their personalcircumstances and prevailing trends in the capital market. Most people prefer fixed interest rate loans,because there will be no changes in monthly repayments.

Reversed mortgages is a loan form created to serve older members who already have a house with amortgage loan they can no longer afford to service. Interest on the loan − and sometimes a monthly paymentto the borrower − is debited to the loan. The lender ends up holding a claim on the house at the borrower’sdeath which may be higher than the original loan sum, but calculated to be less than the value of the house atthat point in time.

Index loans are similar to GRMs in that repayments are adjusted according to an index of the inflation rate,such as the Consumer Price Index. This loan type resembles the “adjustable balance” loans well known inhigh−inflation countries in Latin America.

Sweat equity loans are given to poor families in the form of credits as the construction progresses and thehouse attains an increasing value. These loans − also known as construction loans − will therefore alsoacknowledge the owner’s own work as a substitute for a deposit. Repayment in kind can sometimes bearranged for a borrower in terms of work on a house of another member or on houses being developed by theCBHFI.

Front−end interest loading implies that interest on a loan is added to the borrowed amount from the start. Thisis similar to how Hire Purchase loans work. Poor families are familiar with them and expect their payment toreduce their indebtedness by the full amount of their payment. This need not result in exorbitant interest rates,if their group knows how to calculate them correctly.

Equity loans simply means that whatever is borrowed becomes equity capital at the original proportion of loanto house value. It stays that way until the owner reduces it by buying back “shares” according to an agreedtime schedule or by choice. Such loans carries little or no interest, since it is assumed that the propertyincreases in value over time.

G. Cost of Loans

It is said that “small is beautiful”, but another saying is just as true in the context of community−based housingfinance, namely “it is expensive to be poor”.

The beauty of being small informal organisations, as opposed to large formal and anonymous institutions, hasalready been described by pointing to the personal treatment and the collective concern for the individual. The“down side” of this personalised service is that this is an expensive way of doing business − even if committeemembers and others work for free and if losses on loans are reduced to a minimum.

The “cost” of housing finance in small groups and in large institutions alike can be measured by the interestrate differential (the difference between what savers receive and what borrowers pay). Although other chargesare often added on to this so that loans become even dearer, it simplifies the analysis to first look at theinterest differential. In savings and loans co−operatives it is common to keep the interest rate for loans doubleof what it is for savings.7 This may sound exorbitant, but that is not necessarily so. In fact, when it isconsidered that saving carries with it a right to borrow, then to save at a lower interest rate is worth more tomany than to get a few percentage points more in a formal institution, but with no such right.

A possible higher rate of interest for loans (though many groups prefer to keep the loan rate the same asformal institutions and the savings rate lower) demonstrates another important aspect of housing finance tolow−income groups: It is less a question of “affordability” than of “accessibility”. The main reason for this is thefact that many house−owners turn their premises into income earning assets, therefore not minding the higherprice of borrowing. A typical example of this scenario is the previously cited Kenyan case, where extra roomsare rented to lodgers at market prices which were higher than the loan repayment for those extra rooms. Inpractical terms, this meant that a given loan was affordable by even poorer families than would otherwisehave been the case.

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A higher interest differential is also easier to accept for potential borrowers if there are no “extras”, which areso typical in formal private sector institutions. However, it is a fact that many small accounts are moreexpensive to administer than large ones. If the practical handling of savings and loans can be streamlined, forinstance by making collective payments of monthly dues (by employer), cost can be reduced significantly. Thesalary levels of staff is normally lower in community based housing finance, but the fact that they arenon−profit organisations accounts for substantial cost reductions.

In some cases − for instance the Delhi group − it was decided to build up a reserve fund, so that short arrearson loans could be covered without immediate recourse to members. Likewise, some groups decide to includecompulsory insurance in the loan arrangement in such a way that the interest rate differential covers thepremium. These are all collective expenses which members have agreed to or are obliged to pay. In othercases extra charges are optional, such as for having additional (mortgage, life, house) insurance.

As mentioned before, there are economies of scale in housing finance. So if groups want to expand thenumber of members, cost can usually be reduced. The risk is, of course, that the organisation becomesimpersonal and that “peer pressure” is eroded. This tendency need not be all negative. In some developedcountries, as in the case of the Scandinavian countries (see Chapter VI), the organisations have becomesomewhat impersonal, but collective responsibility is maintained and cost of administration has been reducedto the point where the interest differential is significantly lower than in large building societies.

H. Linkages

Informal institutions do not exist in a vacuum and it is important to know the social and economic environmentin which they operate. Needless to say, this environment varies a great deal from one country to another andwithin any given country. Still, there are many similarities and valuable lessons to be learnt by highlightingsome of the typical constellations.

Two kinds of linkages will be addressed:

(1) Membership linkages and (2) Financial linkages.

As regards membership linkages, it is the rule rather than the exception that groups form among individualswith a common bond. This is their strength, because it provides the all important peer pressure. In addition, itmakes communication easier and is more likely to produce leaders who are respected for their communityspirit and competence.

Common place of employment, church affiliation, tribal and ethnic origin, residential area, etc. are traditionalrecruitment bases. Linkages here are to other organisations, such as to the company, the church, burialsocieties, etc. which can be very helpful in terms of moral and practical support. The distinction between basicsavings−and−credit societies and those specialised in housing finance is important in this context, becauseloans are larger and of longer duration. Moreover, property is involved as security and therefore tyingmembers to a certain location.

There are many examples of employers being actively involved in assisting housing finance groups amongtheir staff with land, building materials, administrative services and general encouragement. If this is donewithout such strings attached as having to sell back houses to the employer or to another staff member, this isadvantageous. To attach conditions to who can live in the house or to whom it can be sold or rented is arestriction on normal legal rights of individuals and, in any case, extremely difficult to enforce.

Another crucial linkage for “primary” groups is to an Apex organisation. Such unions or leagues are found inmost countries with an informal savings−and−credit movement. They are useful in a number of ways: Theyprovide practical support with administrative tasks, such as membership books, loan application forms, ledgersheets, bye−laws, etc. Some also provide technical assistance, insurance and guarantees and periodicinspection visits. The bigger organisations become politically influential as lobbyists. But in all cases, they arevaluable sources of information and give status to small and newly formed groups. There is normally a fee tobe paid for this service, but it is worth it, if the Apex organisation is properly run by a democratically electedboard and a competent staff.

Financial linkages are rarer than those for membership, but equally important. As individuals, members ofprimary groups are unlikely to have access to loans from formal sector institutions. This, after all, was the

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raison d’être for primary groups. Collectively, members represent more continuity and security which is whatformal lenders are looking for. Another attraction for institutional lenders is the ability of primary groups,possibly through their Apex organisation, to perform some of the administrative tasks, such as collection ofpayments and pursuance of arrears. The financial linkage can take different forms depending of thesophistication of the capital market and the track record of primary groups. A simple version is for the primarygroups to have a credit line in a commercial bank secured by its portfolio of loans. This is a usefularrangement, because members’ savings often run out before loans are repaid, thereby restricting the numberof new loans which can be approved. By pledging existing loans as collateral for extra funds, the group’smoney is not completely tied up in long−term loans. Apart from Commercial Banks and Housing FinanceInstitutions, the public sector is also a common lender to primary groups through government−owned banks orspecial funds for housing. There is no reason to make a distinction between public and private sectorinstitutions here, but in practice there can be considerable differences in lending terms and interest rates.There can also be differences in the way resources are allocated. On the positive side, public sectorinstitutions give preference to low−income housing. On the negative side, political preferences sometimesoverrule socio−economic considerations. But formal sector financial institutions are not the only ones knownfor extending loans to community−based housing finance organisations. Insurance Companies, PensionFunds and other institutional investors are known to look for secure, long−term investments. If these consist ofa portfolio of housing loans (mortgages) with more than half of the original loan sum already paid off, thenthey are considered a low−risk investment. If in addition the original lender continues to service these loans,then administrative costs are reduced, making them even more attractive to large investors. The mostadvanced approach to re−financing is the so−called “securitisation” of individual mortgages. This form ofmobilising funds for housing is characteristic for many developed countries (see the case of Denmark). Itworks as outlined above for institutional investors, but instead of selling a portfolio of individual mortgages inone lot, low−denominated shares in this portfolio, which is retained by the primary society, are sold to anyinterested party, including individual savers. These are very popular, because they are secure and yield ahigher rate of interest than is obtained on normal savings accounts.

One of the future linkages for developing countries will be to the international donor agencies. Increasingly,the bilateral agencies in particular will be looking towards viable NGOs for implementing developmentprojects. Experience has shown time and again that there is no shortage of external funds for developmentprojects. The problem of shortage is of viable projects. In this respect, low income housing has the potential ofbeing economically viable as well as socially desirable. An Apex organisation or a co−operative bank will bethe best suited intermediaries for donor funds. However, if these funds are given as loans, not grants, there isa foreign exchange risk which must be hedged against. This risk makes such funds more expensive than theyat first appear.

Over the years, some of the major development agencies have invested millions of dollars in low−incomehousing. The World Bank is the biggest source of funds in this regard. But its funds, unlike those of itssubsidiary, the International Finance Corporation, must go to public sector intermediaries. The second biggestsource, USAID, has a housing guarantee programme which acts as an incentive for financial institutions toinvest in low income housing. Unless borrowers default on their loans the guarantee is not called, and theforeign exchange risk is therefore reduced considerably. A third agency worth mentioning is theCommonwealth Development Corporation which has a long record of investing in equity capital of localhousing finance institutions.

II. URBAN THRIFT AND CREDIT COOPERATIVE SOCIETIES: A CASE STUDY OFCOLOMBO, SRI LANKA

A. Background

Thrift and Credit Co−operative Societies form the oldest type of co−operative institutions in Sri Lanka. Withtheir history dating back to the early parts of this century (1906), credit societies continued to sustain in manyparts of Sri Lanka even during their lean years of 1940’s and 1960’s. Around 1979, the Department ofCo−operative Development of Sri Lanka (DCD) introduced a set of changes to enhance its nationwidecoverage and further revamp the organisational structure of this movement. These changes includeconverting the efficiently run societies into rural banks by granting them limited liability status and morepowers to determine policies and procedures with regard to financial matters. The new policies have made a

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significant effect on the outlook and status of credit societies; their numbers rapidly escalated, in servicing adiverse cross section of the underprivileged communities of Sri Lanka.

What is a Thrift Society?

As spelled out in the preamble of the Co−operative Credit Societies Ordinance No. 7 of 1911, the broadphilosophy of a Thrift Society (TCCS) encompasses thrift, self−help, and co−operation among agriculturalists,artisans and other persons of limited means.

A thrift society is an autonomous community based organisation (CBO) having a democratically institutedsystem of organisation. At its supreme level, the general membership formulates rules and by−laws and electleaders who are accountable to the membership. This makes Thrift Societies independent from state andpolitical interference.

The other cherished principles of the movement include the promotion of thrift habits, self help and voluntaryaction in order to upgrade self−reliance among its membership and eventually to enhance economic wellbeing of its members. Hence, a thrift society is a democratically instituted community−based organisation thatupholds broader principles of thrift, self help, and co−operation among its members with the intention ofuplifting their standard of living.

Organisational Structure of TCCSs

The organisational structure of a Thrift Society includes the general pattern on which the societies are built,and the relationships that have been established between various levels of the same structure of thismovement. It also covers the basis of ownership as it applies to these societies and also the manner in whichthey are steered and controlled.

Today Thrift Societies in Sri Lanka have a three−tier structure of operations. The Federation of Co−operativeThrift and Credit Societies Limited (FTCCS) which is the apex body of the TCCS movement was formed in1978. This body co−ordinates matters pertaining to overall management and well−being of the District Unionswhich form the secondary level of operations. While the FTCCS functions as the National level co−ordinatingbody, District Unions operate as the co−ordinating body at the district level. There are twenty seven (27)district Unions (DTCCS) established to perform this activity in all the 27 Co−operative districts in Sri Lanka.

Table 1. Profile of TCCSs in Sri Lanka (as at 31 December 1990)

Indicators DataTotal No. of Primary TCCSs 6871Total No. of Limited Liability PTCCSs 507Total Membership served 675000Share Capital (Rs.Mn) of PTCCSs 80.2Total Savings from Membership (Rs.Mn) of PTCCSs 371.6Total Non−Member Savings (Rs.Mn) 39.3No. of District Unions (DTCCSs) 27

Source: FTCCS, Colombo

The foundation of the TCCSs movement rests on societies formed at local levels. They are known as theprimary societies (PTCCSs), and by the end of 1990 there were 6871 PTCCSs established throughout thecountry. These PTCCSs include those societies of Limited Liability Status which are popularly known as RuralBanks and Credit Societies established in both urban and rural areas of the country.

Table 1. above provides a glimpse of the operations of PTCCSs in Sri Lanka.

Accordingly, of the 6871 PTCCSs that have been established by the end of 1990, only 7.3% have graduatedto Limited Liability status. Thus quite a majority of PTCCSs that are scattered in various parts of Sri Lanka areunlimited liability societies set up during the recent years.

The setting up of DTCCSs and FTCCS during the recent years has enabled TCCSs to enhance their resourcebase by exchanging know−how, information and also by transferring funds from surplus to deficit areas.

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Neither the Department of Co−operative Development (DCD) nor the Federation stipulates conditions todetermine the optimum size of operation for a Thrift Society. However, depending on the performance ofsocieties, those which are efficiently managed are transformed into banks or Limited Liability Societies. Thismakes the legal framework and the operational capacity of such banks superior to the unlimited societies.

How does a TCCS function?

Flexibility of those transformed societies are quite different from other unlimited societies. This makes thefunctioning of Limited Liability Societies unique, specially when compared with those unlimited societies. Thefollowing sections spell out the similarities and differences in the functioning of TCCSs.

A PTCCS, whether it be a Limited Liability Society or an Unlimited Liability Society is a democratic institutionespousing independence, self−help and voluntary action.

As a democratic institution, the general body forms the most important constituent of the TCCS structure fromwhich power and authority are derived. It is the general body that elects Office bearers including theleadership, and decides on by−laws and other rules. The leadership, and the appointed staff are accountableto the general body and therefore every society which functions properly makes it a point to have meetings ofthe general body once a month. Decisions taken by the Office bearers and various other Committees (e.g.Credit Committees, Women’s Development Committees etc.) are expected to be ratified by the General Bodyat its monthly meetings. This makes the general body the ultimate source of power and authority.

As discussed later those Limited liability Societies have their own offices and a team of appointed staffmembers who perform managerial functions which include the maintenance of accounts. However, in thecase of Unlimited Liability Societies, the overall management including maintenance of accounts and handlingof funds etc. are done by elected members on an honorary basis. Incidentally, almost all the Urban TCCSs inthe district of Colombo belong to this Unlimited category, and thus the majority of these societies do notmaintain offices with regular working hours.

Urban Housing Programme

Notwithstanding some of these success stories, mentioned in the preceding section, there have been fewother areas where TCCSs have not been able to make a successful impact on its membership. These includefacilities for the new irrigation settlements in the Dry Zone of Sri Lanka, and urban settlement developmentschemes in slums and shanties. Ironically, these two areas have been the lead projects in the overalldevelopment strategy of Sri Lanka during the past decade. Of them, the urban housing programme consistedof many facets. This programme included the construction of new flats, housing estates, model villages etc. aswell as improvement of existing slums and shanties.

The first phase of the housing programme was known as the One Hundred Thousand Houses (100,000)programme implemented during the period of 1978 − 1983. The second phase which started in 1984, wasknown as the One Million Houses Programme (MHP) in which the role of the State was changed from itsoriginal provider (or delivery agent) to a facilitator. The emphasis of housing was accordingly shifted from theconcept of constructing physical structures towards a holistic development activity. In theory this approachencompassed, shelter, housing, environment, infrastructure, and human development, leading eventually to abroader socio−economic development process for the beneficiaries.

Evolution of Urban TCCSs

The year 1985 marked another turning point in the history of TCCS movement. In this year Thrift Societies inKandy district joined the National Housing Development Authority in the process of disbursement of housingloans facilitating the One Million Houses Programme. Although this started as a pilot project it was picked upby the other districts, during the years that followed. As a direct response to this enhancement of scope, whichwas found very attractive by many, new societies sprang up in many parts of the country, primarily to obtaineligibility for housing loans.

Unlike the past societies, this new breed of societies did not confine themselves to rural areas alone. Manysocieties came to be established in the urban areas too. It is this scenario that induced the emergence ofmany of the urban TCCSs in the latter part of 1980s. This process which commenced towards late 1986 withinthe city limits of Colombo, showed marked improvement by the end of 1990, (See Table 2 below).

Table 2. Evolution of Urban Societies in Colombo

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Name of Society Year of EstablishmentBandaranayakepura 1986Nugagahapura 1988Eksathgama 1989Aliwatte 1988Seewaleepura 1987Madampitiya 1988Manning Town (Samanela) 1987Siridamma Mawatha 1987Malwatta 1987Chitra Lane 1988Maligawatte 1988Udyanapura 1988Welskumara Mawatha 1987Manning Town (Sahana) 1987Kirala−Kale 1987Mahawatta (Eksathgama) 1989Kirulapana (Kirule) 1988Punchi Borella (Eksath) 1990Mutwal (Sammanthranepura) 1987Nawagampura 1987Gothameepura 1990

1986

Source: Survey Data

During the five year period starting from 1986, about 21 urban societies have been set up within the ColomboCity limits. According to Table 3 below a majority of these societies have been formed during the years 1987and 1988, which has been the period in which urban TCCSs have been operating at their peak.

Since 1989, Urban TCCSs started encountering difficulties in relation to delivery as well as management ofloan funds. These shortfalls slowed down the process of opening up of new societies in the ensuing period.

Table 3. Growth of Urban Societies in Colombo

Year No. of. Societies Cumulative Societies1986 2 21987 7 91988 7 161989 3 191990 2 21

Source: Survey Data

Effects of Urban Thrift Societies on the Membership

Thrift societies that have been established during the past five year period have so far not been able to Makea substantial contribution to upgrade the lives of the members of these societies. Of the twenty one urbansocieties, about thirteen can be listed as weak societies which are on the verge of total collapse. Less thanthree societies can be rated as operationally sound, while the remaining five societies are still operational,despite certain inadequacies. This languid situation in the urban thrift society movement has made it verydifficult to render a favourable service to its membership.

This study revealed that amidst this situation urban societies have either directly or indirectly got involved inhelping the urban communities to an appreciable extent. The ways in which these services have been

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performed are manyfold. Urban Thrift societies in many places have been able to act as a harbinger in theprocess of mobilising self−help and co−operation among its members. A message concerning the benefits ofthrift and self reliance and the merits of democratic action has been conveyed to many of these members whohave still not rejected them, despite the inadequacies that prevail. It was also revealed that a majority of themembership of weak societies earnestly wanted to activate them, after rectifying their weaknesses.

Some of the more tangible benefits of the movement, according to a sample survey were as follows:

As an institution it helps the membership to obtain land allotments from NHDA. More than 37 percent of thetotal sample was able to obtain their assistance.

Many members were able to obtain housing loans which were in the range of Rs. 3,000 to Rs. 15,000. Thishas been the most important facility extended by these societies, and about 63 percent of the membershiphas been able to secure such loans (See table below for details).

Table 4. Thrift Societies and Housing Development

Category of Society Land Allotments Housing Loans Left Out %Strong 36 33 13 46

Average 21 18 11 29Weak 17 12 11 23Total 74 63 35 98

Source: Survey Data

During the first four years, most of the societies have been successful in providing much needed creditfacilities at reasonably low rates of interest.

Credit facilities thus given included “instant loans”, at a rate of 2.5 percent interest per month, “consumptionloans” and “term loans” for which the interest rates have been as low as 12 percent per year. These facilitiesshould be compared with those of the alternative credit facilities obtainable from money lenders who chargerates of interest ranging from 10 percent to 20 percent per month. The effects of some of these facilities havebeen quite visible as, quite a large number of members have been able to purchase consumer durablesparticularly after 1989.

Special projects have been launched to inculcate thrift habits among the membership. Apart from compulsorysavings, and ordinary savings, some societies have introduced “savings tills” to familiarise thrift habits evenamong school children. Similarly special projects have been introduced by some of the strong societies like“Mahawatta”, to help the female members in purchasing “Sewing Machines”. The beneficiaries of thesemachines used them to facilitate their family income levels by sewing garments for sale. In the meantime,individual members have also been able to utilise the already available facilities in order to enhance the smallbusiness ventures that they pursued.

The organisation of “mutual aid programmes” and “death donation societies” which are affiliated to TCCSshave also been found by the membership to be remarkably helpful in confronting sudden calamities. Theseprogrammes provide loans (recoverable in ten months) and also non−recoverable grants in helping them toovercome such tragedies. The listing of services as given above, amply demonstrates, the many ways inwhich urban societies were able to help their membership despite limitations arising from scarcity of funds andcredit recovery problems which are common to a majority of TCCSs. These positive features as revealed bythe membership prove that Urban TCCSs offer an effective institutional framework in servicing the needs ofurban communities.

B. Organisation and Management of Urban TCCSS: Evaluation of Performance

In examining the performance of these community−based development organisations, an evaluativeframework is developed with the help of relevant variables. These variables influence the degree ofperformance of urban Thrift Societies. From a broader perspective these variables can be sub−grouped intotwo major classes.

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Institutional variables and environmental variables

Institutional variables refer to those internal forces which influence the success of TCCSs as they continue totransform urban societies. The study revealed that the following institutional variables are relevant inunderstanding the internal capabilities of urban societies.

1. Mission and Philosophy2. Leadership3. Membership4. Strategies employed5. Internal structure6. Resource Base

Environmental Variables are the external forces that influence the nature and the extent of interactions thaturban societies maintain with the world outside. The following forces are considered very important in thissphere:

1. Urban Community2. Regulatory Framework3. Facilitators and Competitors

Mission and Philosophy

This study found that the mission of urban societies is to provide more humane solutions to human problemsfaced by the low income groups living in housing estates, slums and shanties. As seen in the case of urbansocieties, the overall deterioration of socio−economic conditions that result in deprivation, poverty and lowincome is the most central crisis encountered by these communities. Urban societies are expected to initiatecommunity action to reverse this process and upgrade living standards of their membership.

Table 5. Philosophy and Organisation

Principle Indicators Strong Average WeakDemocracy: No of meetings per year 13 12 6− 1990 Attendance 69% 64% 32%Thrift per capita deposits (Rs) 777 385 97Self−help Credit/Deposit ratio 223 65 158Cooperation Participation and Common activities 58% 76% 13%The philosophy of urban societies, is no different from the philosophy of the TCCS movement. The onlyexception would arise from the fact that the TCCS movement recognises itself as a force which positivelycontributes towards rural development, where as urban societies act as their urban counterpart focusingattention on the development needs of the urban poor.

In short, the broad philosophy of urban thrift societies promotes a democratic institutional set up based on theprinciples of thrift, self help, and co−operation among its membership.

The effects of the philosophy on the performance of urban societies are presented in Table shown above.Four principle aspects relating to the philosophy, and five indicators have been chosen to illustrate this point.Theoretically the degree of observance of these principal aspects should be intense in the case of strongsocieties than in the case of average and weak societies. Accordingly, more meetings of the general bodywith a higher level of participation has been recorded by the strong societies. This was followed by theaverage societies. Similarly per−capita deposit level is seen higher in the case of strong societies, than in thecase of average and weak societies. The degree of participation in various community development activitiesselected to depict co−operation also seems to be higher in strong and average societies than in weaksocieties. Only the principle of self help which is used to promote co−operation does not show compliance tothis general trend. Upon close scrutiny, it was found that data obtained to calculate credit deposit ratios havebeen distorted owing to the availability and utilisation of funds apart from deposits. They included NHDAhousing credit, deposits mobilised from children’s accounts (minors deposits) and funds obtained from othersources. On the whole the observance of principles that are embedded in the philosophy of thrift societies isseen to have a favourable impact on their performance.

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Leadership

In the context of urban societies policy making is generally carried out by a team of persons or an individualrepresenting the leadership. They also translate policy into concrete action by taking initiatives of bothstrategic and operational importance. Such actions are meant to facilitate organisational relationships byproviding direction and guidelines. Accordingly, philosophy, leadership and strategy are seen to be stronglyinterrelated.

The general pattern of leadership in urban societies indicate a heavy concentration of power, authority andfunctions on a single person. In this respect, the degree of charisma of the president determines the destiny ofthe society. For instance, the controversy surrounding the arrest and imprisonment of the President of“Seewaleepura” society gave rise to its decline in 1990.

Leadership comprises the president and his Committee who are elected once a year by the generalmembership. The size of the Committee does not exceed seven persons. Although President often appearsas the most influential person, there are instances, where “back seat driving” by a powerful Committeemember becomes more prominent than the actions of the President designate.

Functioning as a leader of an urban thrift society appears to be on extremely difficult task. When electing aleader the membership is often mindful of a variety of qualities like integrity, experience social status,boldness, ability to make decisions, and ultimately the ability to communicate and implement decisions madeby the leadership. The story of a powerful urban society is quite often a story of a powerful leader. This hasbeen adequately reflected in the Mahawatta Society. In contrast, both “Samanala”, and “Bandaranaikepura”Societies have become failures mainly due to the shortfalls of their leadership. In the case ofBandaranaikepura, the society has been established so that some members could obtain eligibility to beelected into the “Pradeshiya Sabha” which is a statutory body set up to assist the divisional administration ofthe country.

In a stable society although the leadership performs only an honorary job, it is also expected to execute avariety of other routine and innovative operations. Those routine operations include conducting meetings,maintenance of accounts and other records, safe custody of petty cash, evaluation of credit limits etc. Theinnovative operations include settlement of conflicts within membership, between leadership and membershipand between the society and outside institutions. Such operations also include formulation of projects like the“Sewing Machine Scheme” or the “Till system”. Such innovative tasks were undertaken by the “Mahawatte”society, which received appreciation of the entire membership. Leadership thus, becomes one of the mostimportant organisational variables of Urban Thrift Societies.

Membership

The general body or the membership is yet another important variable that influences the level of performanceof an urban thrift society. The research revealed that a majority of the members of the six societies surveyedare poverty stricken. This makes the membership more homogeneous in terms of their economic standing.Yet, there are many differences that arise from other sources such as ethnicity, religion, birth place and moreimportantly the attitudes and expectations concerning this movement. In−depth discussions carried out by theresearch team revealed that the attitudes of members towards weak societies have been distinctly differentfrom the attitudes held concerning strong societies. In the case of weak societies, the membership generallyperceived thrift societies merely as a short−cut to obtain eligibility for loans, which they consider asgovernment doles which are further interpreted as pre−election bonuses. The expectations as a result havebeen to use these societies merely to obtain this particular eligibility. On the other hand, the membership ofstrong societies view their own societies as the only effective mode to overcome their present plight arisingfrom poverty and indebtedness. These differences in attitudes and expectations among members have beencreated partly by the leadership of the societies, and partly by other outside forces, which make themembership of these societies quite heterogeneous. It was found that a number of the members who wereinterviewed later realised their inadequacies and were willing to change, and allow room for counselling andeducation.

Strategies Employed

Aspects of goal setting, selecting a course of action, and its implementation demand a considerable time andeffort of the leadership of thrift societies. It should also be noted that there is a conspicuous absence of formalstrategies and programmes of action in many of the urban societies. Yet, leaders of those strong and effectivesocieties have their own ways of formulating goals and designing mechanisms through which they could

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achieve results. For example, the goals of “Mahawatta” for the year 1990 had been to raise funds (deposits),expansion of membership and formulation of self−employment projects for unemployed youth and women.This society has been successful in expanding its membership to 273, thus opening 136 minors accounts.New Credit facilities have been implemented to finance self employment projects in the spheres of cottagelevel manufacturing of garments, and providing food preparations for the urban market. In contrast, strategyformulation is almost absent in societies where leadership has been ineffective.

Internal Structure

The internal structure of all the six societies have been similar in principle although differences exist when itcomes to their functioning. These differences that have a bearing on different categories of societies arise outof the degree of interactions that take place between the general body and the leadership. In more vibrantsocieties like “Mahawatta”, the general body is not only seemingly active but it also closely follows the stepstaken by the leadership. On the contrary, in the case of weak societies, the general body is very looselyformulated, resulting in limited interactions between the nominal leadership and its membership.

Resource Base

In general the resource base of urban societies includes not only the financial component (funds raisedthrough share capital, member and non member deposits, external assistance, profit reserves and fundscollected through other means) but also material and human components. Among these, the fixed capital(including buildings and equipment) and the quality and morale of the membership constitute a significantpart.

Financial set up of Thrift societies would mean its structure, (e.g. deposit mix giving interest rates and othercosts) composition, (e.g. how much of total funds are derived from share issues, deposits, and outsideassistance) and sources (from what sources these societies raise funds). These different aspects usuallyhave different outcomes pertaining to the effectiveness of societies. For instance, it is those combinations thatdetermine the volume of funds of the societies and also the extent of dependence on other organisations. Asociety that can manage on low operational costs and its own resources could be stronger and moreindependent in its operations than other societies without such ability.

Funds raised through membership shares constitute one of the most important sources of finance of newlyinstituted societies. This enables a society to have a share capital fund which is theoretically proportionate toits membership. In practice, members have the option of making the full share capital contribution of Rs.100/− at once, or in ten equal instalments. Consequently, at any given point of time, the share capital fundcould be equivalent to the sum of number of members into Rs. 100/− or less. From the point of view of themanagement of a society, this fund is an important source, though members consider it to be a deadinvestment. It is neither liquid (withdrawable at any time) nor interest bearing. In the history of the TCCSmovement, it is rarely that dividends have been paid to share holders even by the profitable societies.Consequently, many members perceive this fund to be an unrealistic source although it does serve a usefulpurpose.

The deposit mix of urban societies consists of three major types of deposits having different interest rates andmaturity patterns. They are (a) compulsory savings deposits (b) normal savings deposits and (c) specialsavings deposits. Of these, the compulsory savings deposit is an instrument designed to inculcate the thrifthabit as a regular and a consistent component of the lifestyle of its members. Each member is expected todeposit Rs. 5.00 per month and this makes the compulsory savings fund growing source of finance. This is aninterest bearing deposit which also makes the depositors eligible for credit facilities.

Normal savings deposits form the most important source of funds in the deposit mix of Urban TCCSs.Members can make contributions to this account at their own pace and by amounts convenient to them. Aswithdrawal of money from these deposits can be made on demand, the type is distinctly different fromcompulsory savings. These depositors are paid a comparatively high rate of interest. The final type which isknown as special deposit schemes consist of those innovative savings methods formulated by differentsocieties. Few examples would be the “till system”, and the children’s accounts etc. These accounts also bearinterest, although funds lying in these accounts are not withdrawable on demand.

The bulk of urban societies entertain non−member deposits for safe custody for which an interest is paid. Nonmembers can open ordinary savings account(s) or minors accounts, but they are not eligible for credit facilitiesfrom urban societies. Another major source of funds for Urban thrift societies is the assistance received fromoutside agencies. This can either be in the form of loans or in the form of grants. Some of the important

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sources of outside financing consist of NHDA loans, funds available under the inter−lending programme of theDTCCS of Colombo, and other specific assistance coming from different donor agencies. Of these, the formertwo types are loans, while the latter could either be by way of grants or loans.

The NHDA housing loan scheme is the single most important type of outside assistance that has beenavailable for Urban societies during their formative years. In fact, quite a large number of these societies wereformed by members specifically to become eligible for NHDA sponsored loans. Under this scheme eacheligible member becomes a recipient of a loan of Rs. 10,000 to Rs. 15,000. In as much as this fund becamethe main reason for the birth of the majority of urban societies, it also became the principal reason for theirpresent plight.

The inter−lending facility of DTCCS is available for those societies which can formulate projects acceptable tothem. They also should possess a sound financial record. In the meantime, only a few societies have beenable to obtain grants from foreign donors who were willing to help them by way of absorbing a part of thefinancial burdens. For instance, “Mahawatte” society has been able to obtain sponsorship to meet the cost ofconstruction of its office complex. Finally, whatever profit that is made by those active and strong societies aretransferred to the society fund under profit reserves, which are added to the share capital fund.

Table 6 presents a breakdown of funds mobilised by different categories of societies. It is interesting to notethe extremely high variations that exist between categories of societies. It should also be noted that thesocio−economic background of the membership of these societies do not have remarkable differences. Withinthis context, it is clear that it is the strength of leadership, strategies and approaches, that have contributed tothese differences. In other words, those strong societies (particularly “Mahawatte”) have been able to catalizethe institutional framework based on the philosophy of thrift, self−reliance and self−help to a very great extentand by doing so these societies have been able to mobilise sufficient funds to make them strong ventures.

Table 6. Breakdown of Funds Mobilised as Shares & Deposits

Indicator* Strong Average WeakAverage Membership 238 132 107Share Capital (Rs) 18435 11480 1860Compulsory Savings (Rs) 17061 18624 1170Ordinary Savings (Rs) 67004 13033 8450Minors Accnts (Rs) 29892 1747 NoneMember Deposits (Rs) 133376 43884 11480Total

* Averages have been worked out using data for 31 December 1970Source: DTCCS Colombo

Environmental Variables

One of the most important external forces that has a bearing on the organisational behaviour of urban thriftsocieties has been the community within which it operates. This refers to the neighbourhood its socio−politicaland cultural relations, the complementary organisations involved in community work, and rival forces thatcompete with the same societies. It is this aspect of the external environment that creates value systems andlow perceptions on the urban societies. The perceptions could both be favourable as well as unfavourable fortheir growth. For instance, a community that is highly politicised, tends to accept community organisations ofthis nature only if they could be utilised to achieve the political goals of the party that is in power. A case inpoint could be the so−called arrest of the President of the Seewaleepura Society on the instructions of thepolitical leadership of the area, because he did not succumb to the pressure put on him by those with vestedpolitical interests. Similarly, the established perceptions and value systems of the potential membership andothers living in the neighbourhood could sometimes make community development work extremely difficult.For instance, the widely believed notion that the State should provide all community requirements, free ofcharge, often negate the very spirit of a system which advocates self−reliance and self−help.

The presence of rival organisations within the vicinity can sometimes be harmful, while, on the other hand thepresence of complementary organisations can reinforce the strength of urban societies. This was foundparticularly true in the case of religious institutions which promote mutual aid, death donation facilities etc.

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Accordingly, the community within which a society operates could become an important force in the processof legitimising the activities of urban societies. In many occasions, favourable constitution of internal variables(institutional variables) help urban societies to overcome negative effects arising out of such conflicting forces.

Regulatory Framework

The regulatory framework governing the urban societies include the Department of Co−operativeDevelopment (DCD), and its district office in Colombo, the NHDA and its urban housing programme, theFTCCS and its district office, the “Gramodaya Mandalayas” (which is a local development authority), and theState Banks. These institutions determine the extent of the use of “checks and balances” to make urbansocieties both statutorily acceptable and effective in their operations. Thus it is the regulatory framework thatpaves the way for urban societies to function as legally constituted bodies. Table 7 presents some informationpertaining to the manner in which these linkages operate and influence the activities of urban societies.Accordingly, the major thrust of these institutions depends on the relevance of their assistance extended byway of counselling, instructions, conflict resolution, provision of funds, and also by functioning as repositoriesfor surplus funds. The leadership of the majority of societies surveyed does not perceive the involvement ofthe DCD as a positive feature. Quite often members continue to level criticism against the DCD and theDTCCS mainly due to the contradictory nature of instructions and advice offered by them. For instance, itrevealed that certain instructions issued by the DTCCS to urban societies had been rejected outright by theofficials representing the DCD. This contributed towards growing disillusion and frustration among themembership.

The effectiveness of linkages with regulatory agencies appear to be closely associated with the acceptabilityof the leadership of a particular society to those who represent the State or to the voluntary organisations.Consequently, it is seen that the strength and effectiveness of the institutional variables like leadership havestrong implications on the nature of relations that those societies should maintain within the regulatoryframework.

Table 7. Regulatory Framework of Urban Society

Category Source FunctionsGuidance Cheap Funds Repository

Strong DCD Office * − −DTCCS * * *NHDA * − −

Average DCD Office * − −DTCCS * * *NHDA * * −

Weak DCD Office * − −DTCCS * * *NHDA * * −

Source: Survey Data

It is interesting to note that all in all, both leaders and members alike, prefer to be free of externalinterferences originating from those who govern regulatory institutions. They are of the view that suchinterference could also contribute in a large measure towards weakening the concepts of democracy andindependence within urban societies.

Facilitators and Competitors

Facilitators and competitors constitute the third important environmental variable influencing the organisationand management of thrift societies. While Facilitators provide a supporting function, the Competitors render aservice by making the societies become more alert and attuned to the social needs and realities of theenvironment. A donor who provides a concessionary loan or an outright grant is an example which makesclear the functions of a Facilitator. On the whole, such donations may in theory be theoretically contradictoryto the principles of self−help and self−reliance. But in practice, they strengthen the new societies whosepotentialities are constrained by inadequacy of capital. For instance in 1989 SEDEC (Social and EconomicDevelopment Agency) provided an outright grant of Rs. 189,000 (US$ 5000) to implement the building

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programme of the “Mahawatte” society, and the grant was utilised to construct an office space/meeting placefor the members of the society. Similarly, the Community Development Centre and its attendant supportservice system of “Praja Sahayakes” sponsored by the UNCHS (Habitat) enabled urban societies like“Gothameepura”, “Sahana” and “Lankamathapura” to re−organise themselves and make their activities moreviable.

The institutional forces that compete with urban TCCSs include Co−operative Rural Banks (CRBs), CreditAgents of Commercial Banks (Praja Naya Niyamakas), State Banks and other community−basedorganisations upholding similar interests. Of them, CRBs and State Banks perform a traditional role inservicing a fraction of those deprived urban and rural groups within the system. Yet, the responsiveness ofthese two institutional sources to the specific needs of the urban poor has not been very encouraging. Theinherent high risk and prohibitive administrative costs in servicing a large number of small borrowersdiscourages this organised system of banking, which enables them to become recipients of small borrowercredit. The recently established credit agent system, for instance, offers a useful service in providing a part ofthe credit needs of the urban small borrowers, although at a high interest rate of 30% per annum. In thissetting, the urban societies do not find a real competitor who could successfully grant credit and othercommunity needs of this peculiar market segment. The experiences gathered and lessons learnt withhardships by the TCCS system are of great significance, as they enable urban societies to fulfil the urgentcredit needs of the slum and shanty dwellers.

The aspects discussed in the foregoing sections have by now revealed that TCCSs enjoy a set of advantagesthat are either internal or environmental. These characteristics are seldom or never possessed by similarinstitutions. This makes them comparatively better placed in addressing the overall community needs of urbansocieties in general and credit requirements in particular. It is apparent that among the variables discussedabove, philosophy, leadership and resource base are more important than the other variables in developingthe Urban Societies Movement in Sri Lanka.

Training Provided for Members of TCCSs

Table 8. Training available to the Members of Urban Societies

Components Method Examples Availability FrequencyAwareness Creation Lectures Issues of poverty Strong At regular intervals

Discussions Merits of thrift AverageSkill Development Demonstrations Public speaking Strong

Imitation Leadership AveragePractice Thrift Weak regularly

Attitudes Codes of Ethics Punctuality Strong regularlyDemonstration Credit discipline Average

Source: Survey Data

Regarding the educational levels of the membership of urban societies, it was revealed that a majority of themembership has had more than six years of learning (primary school education), which makes themadequately literate and numerate to understand various written notices and other communications of theMovement. This makes training and education of TCCS membership relatively easy, specially whencompared with their counterparts in other developing countries. As a result, training needs for TCCSmembership in the urban areas have to be considered from a broader perspective within which the followingfactors are important.

(a) creation of general awareness on development issues affecting urban groups.

(b) development of specific skills concerning thrift and credit operations.

(c) creation of progressive perceptions and attitudes among the membership.

This makes training programmes designed for urban TCCS membership less formal and more practical. Theycould be adequately informative though not academic.

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Table 8 presents the nature of training provided by the TCCSs to their membership. The bulk of this training isprovided by the societies themselves, without depending on external assistance. The DTCCS, and theFederation (FTCCS) have their own programmes which are available and accessible to the membership ofurban societies. However, only a handful of members from “Mahawatte”, Seewaleepura and Gotamipura werefortunate to take part in these programmes. It was revealed that the urban societies have been providinguseful training components, in terms of knowledge acquisition, awareness creation and skill development.Although this is not a very frequent feature of the societies, the membership has been quite satisfied with whatthey have been able to learn. This has been achieved in spite of the absence of sophisticated formal trainingmechanisms that enhance training.

The educational standards of the leadership of urban societies were found to be somewhat lower whencompared with the general educational standards of the leadership of rural societies. It was revealed that inrural societies, the leadership is usually in the hands of a stratum of village communities consisting of schoolteachers, head masters, priests and government officials holding important positions. On the contrary, inurban areas this stratum is adequately serviced by the formal banking system, which is widespread in terms ofoutlets and arrangements. Only those who do not have access to this sophisticated and formal bankingsystem are interested in promoting urban thrift societies. The composition of leadership of urban societies hasan effect on its capacity and willingness to train the general membership. As a result, there is an increasinglyfelt need specifically to identify the training requirements and possible alternative methods of providing them.At present the approach to training is confined to talks (lectures open to the entire membership),demonstrations and general discussions. For instance, talks by outstanding co−operative activists areincluded in the agenda of some of the strong societies. The topics of such talks are generally centred onaspects such as poverty, malnutrition, indebtedness etc. and the merits of both collective and co−operativeaction in order to overcome them. General discussions that take place in some of the meetings expose issuesthat are of much relevance to the membership and efforts are taken to find ways of solving them. Some of theissues raised in these discussions include garbage disposal, mosquitoes and alcoholism and their effects onsocial well being etc. Discussion of these community based issues have far−reaching implications on thecreation of awareness, and infusion of correct attitudes etc. In general, is found to be an essential componentof successful community development work where voluntary action is emphasised. Deficiencies in trainingtend to inculcate both false awareness and expectations among the membership of urban societies. Forinstance, the membership of some of the weak societies still believe that urban TCCSs were formed purely toobtain eligibility for NHDA housing loans which are interpreted by some as “election bonuses”. These types offalse interpretations could be corrected to a great extent by providing systematic training and education to themembership.

C. Community Participation in Banking and Social Development Through Thrift Societies

Community Participation

The process of institutionalisation in fostering banking functions in Sri Lanka witnessed a rapid growth duringthe past three decades. This is evident when examining the achievements of the banking sector during thisperiod quantitatively. The expansion of credit outlets together with registered growth in the volume of depositand credit (loan) accounts and the number of deposits that have been mobilised contributed towards thisgrowth. For instance, as far back as 1986, there was a bank office − commercial and rural − for every 8000persons living in Sri Lanka. In spite of these impressive achievements the banking system has failed toprovide access to credit for the underprivileged sections of the Sri Lankan society − both rural and urban.

Consequently, the introduction of new institutional alternatives, and restructuring of existing institutions toorganise the credit operations have become equally important imperatives in making the credit policy of thiscountry more successful. The organisational effectiveness of such institutions, depends to a great extent ontheir capacity to administer the delivery mechanisms on the one hand and their strength to organise thereceiving mechanisms on the other. This necessitates the improvement of the delivery mechanisms, inserving the small borrowers at a minimum transaction cost to them, and thereby establishing a feeling ofsatisfaction that the alternative arrangements in question are truly beneficial. In the meantime, by organisingthe receiving mechanisms, much of the administrative costs and default risks could be reduced. Table 9 belowpresents some of the considerations that make traditional approaches in granting credit to small borrowersincreasingly unproductive.

The transaction cost is an aspect which is often underrated by many policy makers. This has made creditarrangements for small borrowers and the lenders an utterly unproductive exercise. Transaction cost to

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lenders is usually high because they do not enjoy access to reliable information on the creditworthiness ofclients. This makes credit evaluation, administration, and supervision of small loans disproportionately high asgiven in the table. On the other hand, borrowers also are forced to incur additional procedural costs, such asstamp duty, insurance, collateral, and above everything else a longer waiting time and additional visits whichmake the real cost of borrowed funds much higher than what is reflected in the rate of interest.

Table 9. Credit Relations of Traditional Institutions vis−a−vis Small Borrowers

Side ofEquation

Example Costs Breakdown of costs Roughestimates of

real costsLender State Banks Financial

TransactionCost of borrowed funds 13%

Cost of admin. 4%Cost of default 10%

Borrower Slum dweller wanting loanof Rs. 1000/−

FinancialTransaction

Interest rate 18%

1. Procedural costs like stampfees etc.

30%

2. Cost of travelling, cost ofwaiting time, etc.

12%

Source: Survey Data and in−depth discussions with borrowers and bankers

Thrift societies both urban and rural have been better placed in servicing the needs of small borrowers due tocertain advantages that are special to them. As community organisations, they are in a position to correctlyassess the integrity of the borrowers together with their credit needs and their creditworthiness. In themeantime, increased credit discipline arising from collective responsibility for recovery of credit, reduces therate of loan delinquency. This way, both cost of administration of loans and the cost of default can be keptminimal by inculcating credit discipline. This gives rise to a reasonably low transaction cost to the TCCSs andin contrast, the simplified loan procedures and minimal loan processing delays make the transaction cost tothe borrowers also relatively low.

The cumulative effects of these improvements have been that TCCSs, in general, are in a position to serviceits loan schemes with an on lending margin of 4%, and still make a reasonable profit. The interest ratesapplicable to TCCS loans are usually in the range of 12 − 16 percent per annum with the exception of thosedaily loans, where the rate is 30 percent per annum. On top of this, TCCSs have been able to finance creditneeds of more than half a million of the population, at a level satisfactory to its clientele. In terms of borrowersatisfaction, their performance is reported to have been much better than those of their competitors.

Socio−economic Improvements

One of the salient objectives of Thrift Societies has been the improvement of the socio−economic standardsof their membership. Previous sections of this report reveals some of the mechanisms employed by thriftsocieties to help the urban low income groups, and some of the visible outcomes of those mechanisms. Theyamply demonstrate the potential of these societies to mobilise material and human resources that remaineduntapped for years. It should be noted that these achievements have been realised in spite of the relativelylanguid performance of the majority of societies.

The measurement of socio−economic effects of urban societies is not an easy task. Although these societieshave been in existence only for a relatively short period, all what the members could easily recollect was thatthese societies have been very productive for them. Table 10 presents some key aspects pertaining toimprovements in socio−economic conditions of TCCS membership in urban areas. A set of crude indiceshave been employed to measure the extent of improvement of economic conditions. They include theimprovements in income stocks and income flows which are material gains and aspects of humandevelopment which are more intangible. It should however be noted that what is important in this regard is notthe exact values assigned with respect to different indices, but rather the general pattern of improvement. It isimportant to note that the stock of real estates owned by the membership has shown a considerable increase,as about 31 percent of the membership interviewed have received 2 perch plots of land. These allotmentswere granted by the NHDA without any involvement of the urban societies. Nevertheless, it should be noted

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that the very existence and involvement of Thrift Societies have expedited the process of land allotment anddevelopment. The NHDA on the other hand finds it easy to administer the delivery of these plots throughthem, as the Urban Thrift Societies bring together all those who aspire to obtain land. It was also revealed thatabout 75% of the membership interviewed have received credit facilities to improve the conditions of theirhouses. The bulk of these loans have been from thrift society funds (loans up to Rs. 3000/−) and the balancecoming from the NHDA housing loan fund which was channelled through thrift societies.

Table 10. Socio−Economic Improvements

Improvements Indicators AchievementsIncome Stocks Stock of real estate: Stock of consumer durables 37% received land plots Stocks tripled

(see tbl 11)Income Flows Employment Generation Incomes Generation 26% received production related loansHumanDevelopment

Re−activation of community effort. Minimiseextent of indebtedness

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Source: Survey Data

The effects of TCCS loans on urban borrowers could be seen from the sharp increase in the number ofconsumer durables recorded specifically after 1989. The types of consumer durables so purchased includeradios, cassette recorders, televisions, and drawingroom sets, all of which could be rated as essentialcommodities of urban societies. The augmentation of income levels of urban families, have been recorded inplaces where credit facilities made available by thrift societies have been used either to create newemployment opportunities, or to expand income generation capacities of existing ventures. On the other hand,relatively easy access to different types of credit facilities extended by Thrift societies has eased thecomparably intense role of informal sources of which some lend at very exorbitant rates. Does this mean thatUrban TCCSs have completed their mission of assisting the urban low income groups? Have they been ableto fulfil the expectations of the existing as well as the potential membership? As it is, it is indicated that urbanthrift societies still have a more substantial role to play in the development of urban societies. The realmagnitude of this role depends on the strength of urban societies themselves.

Links to Housing and Improved Living Conditions

Housing is one of the priority areas of the advance mix of thrift societies (TCCSs) in Sri Lanka. It is the singlemost important source of advances, receiving 35 per cent of the market share of the TCCS movement. Thisrelative importance of housing and related activities in the credit profile of TCCSs has been consistent since1979. At present, TCCS credit to the housing sector originates from two distinctly different sources. It hasbeen the practice of the TCCS movement to channel a fair proportion of its own funds to the housing sector asit constituted one of the easiest sectors to finance. Thus, in the year 1979, about 10 million of TCCS ownfunds had been channelled to the housing sector. This figure rose to Rs. 49 million by the year 1989. Since1985, with the advent of the one million houses programme, thrift societies joined the housing credit scheme.By the end of 1989, the total value of loans granted to the housing sector from NHDA funds alone amountedto another 220 million.

Housing loans granted from TCCS own funds have been released in accordance with the accepted creditcriteria decided by the general body in accordance with its bylaws and regulations. Under this facility creditwas made available for the construction of houses and for repairs and improvements as well. The repaymentperiod varied from one year to five years. As the loans were issued on the guarantee of two members, thisfacility became one of the easiest available. In general, recovery performance has been exceptionally goodand had not gone below 80 percent.

Under the One Million Houses Programme, loan funds were granted either as direct loans to the recipients, oras loans channelled through TCCSs. When the TCCS movement joined this scheme as a partner of the creditdisbursement process, the primary societies were expected to examine individual requests and requirementsof their membership. They were also expected to submit a schedule consisting of the requirements to aHousing Committee instituted in the same area. The Housing Committee which was headed by the Chairmanof the ‘Gramodaya Mandalaya’ consisted of two other representatives from NHDA and Primary Societies. ThisCommittee which is considered as the ultimate authority governing NHDA loans was empowered to introducechanges to priority schedules submitted by the primary societies. As a result, the independence andautonomy of societies and the powers so far enjoyed by the general bodies of PTCCSs had to be surrenderedto an ad−hoc housing committee. Once the final list is approved by the Housing Committee, the primary

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societies enter into an agreement with the DTCCS which retains a security deposit to the value of 10% offunds received under the housing loans programme. The delivery process thus constitutes three stages i.e.NHDA, District Union of TCCS and Primary Society. In the case of the six urban societies studied, it wasfound that only “Gothameepura” Society has taken part in this loan disbursement process, thus borrowing anamount to the tune of Rs. 640,000 from the DTCCS, Colombo. While most of the other societies were keen toget involved in the process, legal and procedural constraints prevented them from doing so. For instance,societies like “Seewaleepura” did not want to surrender its right in deciding on credit needs and priorities.Other societies like, “Samanala”, “Sahana”, “Bandaranaikapura” could not obtain registration for their societiesfrom the DCD. Consequently, members of “Sahana” and “Samanala” approached the NHDA and obtainedNHD loan facilities under the direct lending programme.

The possibility of obtaining NHDA credit as direct loans and also the role of Housing Committees as theultimate decision makers have had a degenerating effect on the morale of the members of urban societieswhose main attraction to the TCCSs was the housing loan scheme. About 75 percent of the TCCS memberssurveyed for this study was found to have owned a house with a plot of land which on the average was 1.2perches in extent. The average size of dwellings was 446 sq. ft. As much as 64% of the membershipinterviewed have obtained housing loans that were within the range of Rs. 3000 to Rs. 15,000. The bulk of thesmall loans of around Rs. 3000/− belongs to the category of loans issued from the resources of TCCSs.Funds raised through this facility were used either to introduce extensions to housing structures (additionalrooms etc.) or to improve existing structures (roofs, walls, floors etc.) utilising better building material. Ashousing improvements are mostly done in stages, small loans can be of immense value in helping membersto replace wooden plank walls with bricks, or thatch roofs with asbestos sheets. Resources available withinmember households such as limited savings, family labour etc. make this process relatively cost effective.

Although the provision of credit is an all important task undertaken by urban societies, there have been manyinstances where these societies have been involved in the process of education, motivation and provision ofother facilities to stimulate interest concerning this system. An example would be the discussions and talksorganised by urban societies, on sanitation and issues pertaining to community development etc. Often theselectures and talks inspire members to translate messages based on theory into direct action. The study alsorevealed that societies like “Seewaleepura” have been involved in the construction of public wells, publictoilets, and sewerage lines. Because of the problems related to the maintenance of public toilets, thesesocieties also promoted the creation of private toilets, which could be constructed at a lower cost (each toilethaving its own cesspit), and can be cleaned and maintained easily without creating unfavourable effects ongeneral health and sanitation. Another innovative idea that has been translated into action was bulkpurchasing of building materials and then transferring the price margins to the membership once goods aredelivered. For instance, it was revealed that when cement was in short supply, one society organisedwholesale purchasing of cement and then delivered them to the membership at a much cheaper rate.

D. Lessons learnt: Some Recommendations

Thrift Societies are basically rural in character. This rich rural base has generated a reservoir of lessons andexperiences for both its membership and leadership. The very fact that the movement sustained despite veryserious problems created by the State has made TCCSs a strong institution capable of assisting low incomerural communities. Given the short history, the urban societies are still at an infant stage. While lessons learntby the rural thrift societies could be relevant and useful, many urban societies have found these problems,lessons and experiences quite unique in many ways.

During the past five year period (1986 − 1990) urban societies reported to have encountered a variety ofproblems. While some societies have been successful in tackling them, others succumbed to the veryproblems they faced. This background resulted in a very few “strong” societies, an equal number of averagesocieties with the rest becoming defunct.

Problems encountered by urban societies are manyfold, and they include (a) membership related problems(b) leadership related problems (c) organisational problems (d) management problems (e) problemsassociated with managing regulatory mechanisms and other linkages.

Membership Related Problems

Unlike rural communities which are relatively homogeneous, urban communities consist of diverse groups ofpeople. This diversity that stems from economic, social, cultural and political differences, makes creation of

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cohesive groups somewhat difficult. It is much more difficult, when missions, objectives and philosophies ofcommunity groups are not succinctly spelt out, and also when community groups become, relatively large interms of numbers. There have been many instances where conflicting interests as well as expectations ofmembership have given rise to virtual breakdown of societies. Due to these incompatibilities, when a sectionof the membership attempts to promote principles based on unity and co−operation etc. another sectionstrives to convert the same societies into delivery points for state assistance. This situation suggests that atleast at primary society levels, the membership criteria for individual societies should contain not only theimportance of shares and deposits, but also the importance of group interests and expectations. Secondly,restricting the membership to a manageable number may also be more practical than having a larger numberof less interested persons. As the majority of urban societies do not have their own resources to conductmeetings of the general body, to maintain books, records, and even to carry out routine activities, a numbernot exceeding 200 is suggested optimal by the membership surveyed.

This could be waived once a society is converted into a limited liability society having a permanent qualifiedstaff to attend to day to day affairs. It should also be noted that, majority of strong and average societies, havea membership which exceeds 200 persons. Yet many of them do not take an active interest in the affairs ofthese societies. Therefore, it may be advantageous to have a small number of active members who sharesimilar sentiments and expectations.

Leadership related problems

Another important category of problems faced by the urban societies are known as leadership relatedproblems. Within this broad category, there have been a few specific issues that were raised by themembership. Amongst them are the misappropriation of funds and evidence of malpractices, highconcentration of responsibilities and authority in the hands of individuals, absence of training programmes,politicisation of activities and inactiveness. Almost all the problems stated above could be adequatelyaddressed by establishing a comprehensive body of membership inspired by strong leadership. When themembership becomes limited as well as alert, leaders may not be able to engage in misappropriation or othermalpractices. An educated and an alert membership would further strengthen the framework of democracy,thus paving the way for a new generation of leaders altogether. This also could prevent societies frombecoming dependent on a few individuals. Similarly, proper training could also make those languid leadersbecome increasingly active and effective.

Other Organisational Problems

The study also revealed that both leaders and members alike of many urban societies are vague about theiractual mission and objectives. Different interests, as well as conflicting interpretations pertaining to objectiveshave originated from the Executive Committee members of some societies. The implications arising out ofabsence of clarity at the highest levels of urban societies, are reflected in the answers given by the membersregarding their own individual expectations from the societies concerned.

These ambiguities become more profound when monthly meetings of the general body are not held, becausethey are expected to form the filtering processes within the democratic framework of urban societies. Thecumulative results are seen by the presence of intense communication breakdowns, lowering of memberinitiatives, together with decreasing levels of trust and confidence. When the institutions are internally weak,external forces and pressure groups gain ground, thus affecting the organisational capabilities and potential ofurban societies. For instance, ad − hoc decisions taken by Housing Committees have resulted in creditdelinquency with repaying members gradually becoming defaulters within the system. In addition to decliningstandards pertaining to credit discipline and overall member discipline, degradation of standards becameevident as reflected by poor attendance absence of punctuality etc. Sticking to co−operative principles bydeclaring that meetings of the general body are mandatory, and also the acceptance of supremacy of thegeneral body as a guiding force appears to have provided reasonable answers to many of these problems.The “strong” societies have been so far successful because of their strengths in this case.

Management Related Problems

The operation of an urban society at its infant stage is the responsibility of a few voluntary leaders who attendto every aspect of organisation and management. However, once the institution is established and becomesvibrant, the work load that should be borne by them increases proportionately, making it difficult for thevolunteers to continue on a part−time basis. The employment of full−time management staff to handle the dayto day work becomes imperative at this stage. This conversion is linked with the graduation of an unlimitedliability society to a limited liability society, which is not an automatic transformation. In spite of the

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tremendous increases in the volume of membership, accounts, deposits, and advances, all the urbansocieties still continue to be unlimited liability societies, making the work−load extremely heavy for those whowork as volunteers. In an urban set−up, this is practically impossible as no member could afford to forego hisown occupation and earnings in the interest of the society, and as a result, society work tends to suffer. Thisnecessitates to convert viable and strong societies into limited liability societies which eventually become amotivating factor for average societies. At present volunteers appear to discourage further expansion andinnovations because it means an increase in the volume of work, thus affecting their personal commitments.

The employment of full−time staff together with a system of fixed working hours, within a fixed location hasclear advantages. It relieves the leadership from routine functions like record making, form filling andcalculation of interest etc. and this way the time saved could be used for more important innovativeorganisational tasks. Secondly, those appointed staff could be entrusted specialised functions likebook−keeping which is at present very unsystematically maintained. These changes are sure to uplift theposition of urban societies.

Managing Regulatory Mechanisms and Other Linkages

The regulatory mechanisms and linkages of urban societies discussed under this section include DCC, theDTCCS, FTCCS, and other institutions like the HDA, and the banking system. Of them, the DCD which comesunder an Assistant Commissioner of Co−operative Development (ACCD) and the Federation of TCCS,regulated by District Office (DTCCS) are the most important.

The ACCDs involvements in the affairs of urban societies are imperative because it is the ACCD through itsCo−operative Inspectors who conduct the annual audit, as well as other checks and balances. They alsoprovide counselling on matters of interest pertaining to development and growth of Thrift societies. However,the present machinery possessed by the ACCD office was found to be inadequate both quantitatively andqualitatively to handle these responsibilities. It was found that the ratio of Co−operative Inspectors to societiesin the Colombo District is very large, making it physically impossible for the inspectors to keep track of what ishappening at the primary societies level. On the other hand, there has been many allegations that instructionsgiven by the Co−operative Inspectors are inconsistent, thus creating confusion within the leadership.Inconsistencies arising out of instructions given by FTCCS and ACCD representatives have also contributedtowards this crisis. It was also reported that the registration of new societies have been delayed partlybecause of the incompatibilities found in book keeping methods, which have been in accordance with theadvice given by different sources.

An important landmark of the TCCS movement has been its agreement to take part in the One Million HousesProgramme. Unfortunately, this agreement was reached without properly examining its merits and demerits,thus culminating in a weak programme of action. Conflicting interests also had a negative impact on theactivities relating to this programme. The understanding of the NHDA in this regard was to use urban societies(rural societies as well) as a harbinger and a conduit in granting housing loans. The NHDA accordinglyinitiated action arbitrarily to set up urban societies and to make its members eligible for housing loans. Thecherished principles and processes unique to the TCCS movement were not observed in setting up these newsocieties, and as a result the membership viewed urban societies as a mechanism to disburse pre−electionbonuses to urban voters.

The Housing Authority on the other hand had its own ambitious targets of delivering the full quota of loanmoney before the end of the stipulated period.

Another problem that was evident was the contravention of TCCS principles at the level of credit delivery i.e.housing committee and society levels. For instance allegations against housing committee members forentertaining bribes and for engaging in malpractices also came to be revealed during the survey. The violationof the TCCS philosophy and its accepted principles resulted in deterioration of member discipline and alsoaffected credit recovery and participation processes in community work. With these shortcomings urbansocieties also came to be viewed as a replica of the old MPCSs. Further to this, the involvement ofunscrupulous elements as officials, leaders and borrowers, also created unfavourable impressionsundermining the morale of members, who are disciplined.

The TCCS movement learnt an important lesson through its participation in the housing loan programme. Thatis the lesson of taking part in State sponsored as well as outside programmes as an unequal partner for thefuture. Participation in programmes for which resources are provided by other sources, also contravened thevery concept of self−reliance.

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As a community based organisation, urban societies cannot separate themselves from contemporary issuesand needs of society. However, the involvement in broad issues should be carefully studied before action istaken if urban societies are to play a positive role in the future.

Lessons Learnt

Despite the pitfalls discussed in the preceding sections, TCCSs have proved their worth as an institutionalmechanism capable of providing a meaningful service to both low income rural and urban communities whoare not catered adequately by State sponsored mechanisms. Five main lessons can be learnt from the TCCsmovement.

(a). As a mobilizes of community groups, principles and methodologies employed by TCCSs are quiteattractive. They are also equipped as facilitators of development inputs. Whilst the former aspect promotesco−operative action based on self reliance, the latter advocates thrift and self help. It was found that thecomparably unsophisticated systems and techniques adopted by urban societies minimise the cost of lendingto urban small borrowers (as administrative, overhead, and default costs are minimal) because as aninstitutional model, it has been able to organise more down to earth recipient mechanisms. In the meantime,TCCSs have also been able to keep the cost of borrowing at bay by adopting simple credit criteria, (i.e. alower lending margin of 4 percent on deposit rates, while minimising additional costs emanating frominsurance, travelling and opportunity cost of waiting). All in all, urban societies if properly organised can beused as a viable alternative to solve much of the banking problems relating to urban small borrowers who areincapable of satisfying sophisticated conditions imposed by formal systems.

(b). The TCCS movement in general and urban societies in particular have shown the necessity to organisecohesive groups that are manageable in terms of numbers, attributes and interests. Absence of cohesionoften makes communication and consensus increasingly difficult. In effect this leads to misconceptions andmisunderstanding among the membership.

(c). The difficulties that are faced by the urban societies at present could partly be attributed to the absence ofproper member and leader education programmes. Although the membership of urban societies are totallyliterate and numerate, the importance of the role played by training in moulding perceptions and attitudescannot be underrated. At present, whatever training available is limited and lopsided, creating the necessityfor a comprehensive training package.

(d). The study also reveals the cost of foregoing independence and autonomy by urban societies as a result ofallowing unconditional outside intervention to influence and control their affairs. The partnership between theNHDA and the TCCS movement can be regarded as a pitfall which results in disadvantages.

(e). The study revealed that timely action is needed to uplift the organisational and management capabilitiesof urban societies if they are to perform a useful service. The present regulatory mechanisms consisting of theorganisations and the FTCCS are incapable of handling this important function within an open and anempathetic mental framework. From the part of urban societies, they need to be recognised, registered,upgraded, and guided by carefully studying their performance and achievements. Yet, the present regulatorymechanisms lack staff and expertise to handle this responsibility, particularly in the face of rapid proliferationof societies and outlets. The study also pointed out the need to have a comprehensive mechanism to monitorand evaluate the work of urban societies. Apart from the annual audit, which is the only system available toassess the work of TCCSs, no systematic evaluation or monitoring of TCCS data on a regular basis exists. Ifthe FTCCS could undertake this job of monitoring and evaluation, timely action could be taken to avert themagnitude of disasters arising out of housing loans sponsored by NHDA. The virtual collapse of“Gotameepura” society which borrowed Rs. 640,000 from the NHDA to channel housing funds substantiatesthis posit.

Conclusion

Urban societies in their attempt to cater to the socio−political and economic needs of the low−income groupsin Sri Lanka have provided an invaluable service.

In a free economy where market forces determine the priorities of both the State and the private sector it isessential to admit that these deprived communities would be further isolated in society, if organisations suchas TCCSs are not adequately mobilised and equipped to address their demands.

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These societies have their own inherent comparative advantages to operate at a minimal cost and are alsocapable of providing a service to the ultimate satisfaction of their beneficiaries. This makes urban societiesmuch more qualified and competent to work as community based organisations promoting thrift, self−help andself reliance and thereby address the wider socio−economic needs of urban communities.

However, in achieving this, the present flaws and pitfalls of the movement that are discussed in the earliersections need to be rectified. The following measures are needed to make Thrift societies strong and viable.

Guidelines and Recommendations

In the process of mobilising development efforts of the people living in urban slums, of Colombo, ThriftSocieties play an indispensable role. During the years, state machinery has miserably failed to reach themadequately. Hence the birth of urban thrift societies. Attempts aimed at strengthening thrift societies andsimilar community organisations should therefore be considered vital and inevitable.

TCCSs are constituted on a set of principles upholding self−help, co−operation, thrift and also self motivatedand voluntary action. These principles are integral parts of the philosophy of TCCSs and therefore theeffectiveness of the operations of Urban societies are associated with the degree of observance of thesesame principles. If the TCCSs are to continue their services in the future, the membership and the leadershipalike should be adequately conversant with these principles.

The functioning of TCCSs are based on democratic principles in which the general body (membership) isconsidered supreme. This supremacy of the general body is non−negotiable when dealing with outsideagencies such as organisations, NHDA or the formal banking system which function as legitimisers andfacilitators. Consequently, the role of the outside bodies should be limited to counselling and guidance ratherthan direction and arbitration.

The FTCCS has a legitimate role in providing advise, and urgent training requirements for both members andleaders of Thrift Societies. A convenient way out would be to train the leadership who could be trainers for themembership of the movement. This training has to be made as comprehensive as possible by includingaspects such as of awareness creation, skill development and formation of positive attitudes. At present, thereis an urgent need to provide broad−based education on the principles of co − operation, group behaviour,leadership, and motivation etc., which are needed in mobilising resources and people in ghetto areas.

The regulatory mechanisms consisting of the DCD should be strengthened in terms of expertise andpersonnel. The present inconsistent flow of information, advise and assistance (registration, conversions etc.)need to be made consistent and regular if the urban/rural societies are to perform a better service. In the lightof the steady growth of the movement during the past decade, the should be revitalised to meet the newchallenges.

A system of monitoring and evaluation of urban/rural TCCSs should be set up by the FTCCS in consultationwith the DCD. Key indicators could be evolved and employed to perform such monitoring functions. This studydiscovered that the following indicators are important in monitoring the performance of Thrift societies: (i) sizeof membership; (ii) value of total savings; (iii) value of total shares; (iv) total advances to total deposits; (v)advances to the priority sectors as a percentage to the total advances; (vi) recovery ratios (vii) frequency andattendance at general meetings; (viii) amount of funds invested in other banks; (ix) funds received from otherorganisations; (x) average cost of funds.

Urban societies could be advised to furnish data relating to these 10 indices on a quarterly basis, which couldbe analyzed by a micro computer listing out problem areas.

The findings of such a monitoring exercise could be used to provide relatively instantaneous solutions thuspreventing problems to get out of control after some time. Similarly, they could be employed to formulate amerit based grading system which will be a morale booster to those societies genuinely interested in theirservices.

The FTCCS cannot evade the responsibility of rehabilitating those defunct and weak urban societies. Sincethe FTCCS does not have adequate resources, both financial and personnel, external assistance may beobtained in implementing such rehabilitation functions. Those voluntary organisations like the CommunityDevelopment Centre of Seewaleepura, which is now involved in an informal rehabilitation exercise couldprovide some insights into these aspects. The FTCCS should also obtain professional assistance fromwhatever source available in implementing work of this nature. This should be so at least at the stage of

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developing suitable methodologies.

Thrift Societies both rural and urban cannot afford to function in their same old fashion if they are to face thestark realities of sweeping socio−economic changes taking place in Sri Lanka. The open economynecessitates the augmentation of efficiency and competitive spirit of all institutional alternatives, whether theybe co−operatives or other collective bodies. Hence, urban societies also need to enhance its competitivenessfor which management and marketing skills will be very important. The conversion of those strong societiesinto limited liability societies will provide the much required legal framework to employ such skills. Suchconversions will also help the leaders of strong societies to hand over the routine work to the appointed staff,so that they will be able to concentrate on long term needs of the same societies.

Housing as it is conceived by Urban communities is a continuous process. Thrift societies are capable ofproviding a valuable service to their membership, not only as conveyors and purveyors of credit, but also asagents providing information, material, labour and other inputs without which housing cannot be made arealistic exercise.

III. PUNERVAAS HABITAT AND LIVELIHOOD MOVEMENT, DELHI, INDIA

A. Background

Punervaas:8 A Habitat Movement

Punervaas is a habitat movement which endeavours to bring together slum authorities, NGOs and financialinstitutions and other development authorities with the basic objective that the urban poor would helpthemselves improve their living conditions. It was registered as a non−profit society in June 1991. Theproponents of the movement want it to act as catalyst in the process of formation of multi−purposecooperatives with the help of NGOs. It would help improve upon the economic condition and habitat of slumdwellers by facilitating access to credit through the cooperatives. Further, it proposes to help the cooperativeto draw up its plans for housing and income generation in order to enable members to build their own shelterand increase their incomes. Attempts will also be made to ensure that the maintenance of the so formedcooperative habitat is carried out by the cooperatives themselves. Education in terms of knowledge ofcooperatives, social hygiene and health, etc., will also be provided with the help of NGOs, cooperative trainingInstitutes and concerned developmental agencies of the Government. Technical education for developingcertain skills could also be imparted through the cooperatives.

At the National Policy level in India, the policy has now shifted from slum eradication to slum − improvement.When slum improvement is not feasible, shifting to an alternative site into plot size of at least 30 sq. mtr. isrequired (with built−up accommodation on not less than 10 sq. mtrs.). The Urban Basic Service (UBS)programme, which has a Central budget allotment to covering 200 towns includes the EnvironmentalImprovement of Slums (EIS) scheme. The UBS involves participative role and, as pointed out by the Report ofthe Urban Commission a National Programme cannot be mounted unless “an institutional framework, broadand strong enough to bring citizens and serving agencies together to pool their resources and work incooperation is created for achievement of what are essentially common goods”. Punervaas is one suchattempt. In addition, “the New Deal for the Poor” as recommended by the report of the National Commissionon Urbanisation (NCU) it provides for a thirteen points package for intervention which includes (i) income andemployment, (ii) basic services, (iii) shelter, (iv) public distribution, (v) social security and (vi) NGO Sector. Itrecommends an investment of Rs. 10,750 crore over 5 years and includes a sum of Rs. 6,000 crore to beadvanced through re−lending priorities of the Financial Institutions. Punervaas attempts to offer a practicaland viable solution to the issue of lending to the poor & and recovering.9

Evolving the Model

One of the issues that needs to be stressed is that Punervaas as a strategy or model emerged out ofextensive discussions held with NGO’s, government authorities, slum dwellers, financial institutions as well aspractising politicians. While the aims of Punervaas were lofty, it changed its strategy and philosophy at everystage depending upon the current situation. For example, while Punervaas was in favour of in−situdevelopment, it was Chief Secretary of Delhi who convinced the Punervaas members after discussions thatexisting squatters settlements on government land should be categorised in 3 categories i.e. first, lands where

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in−situ development is possible as the land is not required for any urgent public work. Second, land which isrequired for urgent public purpose like school, hospital etc. where the squatters will have to be shifted andfinally, some areas of land which would be required for public purpose in the near future and therefore, in−situdevelopment should not be encouraged. For the New Delhi Municipal Committee area slum clusters havealready been identified into two categories; those which are to be shifted and those where upgrading can bedone.

B. The Case Study

Structure of the Model:

In the Punervaas model the interface between the formal sector institutions, and the low income households iseffected through a link institution called Punervaas. This interface is achieved in two stages, both operatingsimultaneously. In the first stage of the interface, a selected NGO works with the target community of lowincome households.10 The underlying objective is to motivate households about the significance of quality oflife through appropriate training programmes. In these programmes various functionaries of formal sectorinstitutions, NGOs and representatives of target group communities participate. The aim is to provide a forumfor greater appreciation of the problems and constraints and to evolve mutually accepted strategies forimproving access to housing funds from the formal sector.

A key element of the Punvervaas model consists in mobilising the target groups into multi−purposecooperatives with women as the main member with male members as joint owners. This is done on theassumption that women are generally better at repayment of loans and are not easily tempted to sell off theirdwellings.11 To expedite the process of cooperation, the Link Institution may also consider it prudent toprepare model bye−laws acceptable to Registrar of Cooperative Societies. The task of educating andmobilising the community into a cooperative and its subsequent registration will in general be assigned toselected NGOs. The key role assigned to cooperatives in this model arises from the fact that because themembers do not have tenurial or occupancy rights on the land they are the occupying the formation ofcooperatives may help in obtaining temporary occupancy rights from the concerned agencies on theunderstanding that the land would be vacated when alternative satisfactory site has been provided.

Operational Details

The NGOs are assigned the task of mobilising the households into multi−purpose cooperatives. For this, theNGO’s would carry out the necessary extension work of educating the low−income households of theadvantages of working through groups and cooperatives.

For efficient functioning of cooperatives, the model seeks to provide adequate representation to the NGOsand officials management of the cooperatives by drafting special model bye−laws in consultations withexperts on cooperation and representation of the Cooperative Department.12 The chosen NGOs aresimultaneously inter−acting with the target group and with Punervaas, the Link Institution. A major purpose ofproviding interface between the NGOs and the Link Institution is to use the experience of NGOs for appraisingPunervaas or the Link Institution about various problems experienced by the low income households inobtaining loans from formal sector institutions. In turn the Link Institution will use its network and good officesto encourage the formal financial sector to advance loans to low income households.

It may be emphasised that the role of the Punervaas Link Institution is essentially that of a facilitator, bridgingthe information gaps that may exist between the formal sector institutions and the low income households.The role of NGOs and the Link Institution consists of laying down broad strategies and norms to dealeffectively with problems concerned with collateral, down payment, repayment schedule, approval of buildingplans, registration of land title etc., which usually act as deterrents to providing formal loans to the low incomehouseholds.

Assumptions of the Model

The proposed model is based on the following assumptions: The target group has the saving potential forhome ownership/upgrading. In situations where this potential is not existing currently, the model envisagesraising saving potential through skill upgrading and other economic programmes for gainful employment.

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Availability of housing loans is not a major constraint. However, the Link Institution has to help in persuadingfinancing institution to accept weak collateral.

The voluntary agencies, the Link Institutions or the NGOs have the necessary capacity personnel, credibilityand status to play an effective role expected of it.

The target group comprises of persons who do not have acceptable shelter and access to housing finance.The target group in our scheme need not necessarily have to be strictly covered by the official definition oflow−income households, as some of the slum dwellers who are above these official income limits, needassistance for home ownership/upgrading.

Last but not the least, The government and its various agencies have the commitment and concern for thewelfare of the poor and willingness to initiate such policy changes/modifications as may be required toimplement the programme.

Features of the Model

Unlike the Grameen Bank of Bangladesh which operates on high administrative subsidy through grants, themodel is a low cost option with little or no subsidy.

The model also proposes an internal Maintenance Fund, Thrift Fund, Bad−Debt/Overdues Fund and anInsurance cover against natural calamities and personal accident. Further, a monthly collection charge wouldbe fixed by each cooperative for these purposes. Penalty would be charged for late payment which will accrueto the cooperative.

The flexibility of the model is to mop up additional savings from low income households through innovativenon−conventional saving instruments, including the practice of undertaking door to door collection of savingsof very small amounts on a daily/weekly basis.

The insistence on collateral for housing loans to be replaced by group guarantees through the instrument of acooperative.

Women, to the extent possible, as members of cooperative with the male members as second signatories.

The model shall have certain non−financial features as family planning, health care, education, etc.

Punervaas seeks to register NGOs and multi−purpose cooperatives promoted by it as its member. As apermanent society it becomes a Think Tank or a Brains Trust on this issue.

Economics of Shelter Upgrading

Discussions with representative group of slum dwellers of Ekta Vihar in Delhi have shown that the houses(Jhuggi−Jhonpari or Shanty) in which they lived required a fairly costly annual maintenance. Table 11 givesthe minimum breakdown

Table 11. Maintenance Cost of Jhuggi (annual) in Delhi (July 1991)

Item Cost (annual)Purchase of new Polyethylene sheet Rs. 500Bamboo Rs. 200Cardboard required under the plastic roof Rs. 100Total Rs. 800This is the minimum expense for maintenance of a shanty or Jhuggi. In addition, the mud walls require regularmaintenance and special care during rains. The wall is a especially dangerous aspect of a Jhuggi as it isunstable and can fall down during rains. However, maintenance of wall requires only family labour if mud isavailable freely. Sometimes mud has to be brought from a distance. An expense of at least Rs. 67/− permonth can, therefore, be kept aside for maintenance of a Jhuggi which becomes a saving in the case of pukkahouse.

Table 12 gives the breakdown of construction cost of a new 10” × 12” room of brick walls and CG sheet roof.It may be seen from the table that labour accounts for 17.3% of the total cost. This is due to the fact that many

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slum dwellers prefer masons for brick laying rather than to seek help from unskilled neighbours. In additionthe owner puts in and his family’s his own labour and mutual help also takes place between neighbours andrelatives in procurement of materials and in tasks which do not require skilled labour. In fact, it is because ofthis informal assistance in various forms that cost of construction comes to only about Rs. 120/− per sq. ft.when the market rate for normal construction is generally the double.

Table 12. Cost of Construction of a 10” × 12” Pucca Room by Self−Help

Items Cost (Rs) %Labour contract charges (Mason + Helper) 2500 17.3Cement (30 bags) 3300 22.9Bricks 3 loads 3000 20.8Badarpur mud 1100 7.6Sand for plaster 550 3.8C.G. Sheet for roof (10 sheets) 2500 17.4Angles for Kitchen Slab 400 2.78Stone Slab for Kitchen 200 1.4Pebbles (Rohri) for flooring 500 3.47Cement for flooring 300 2.3Total 14380 99.75So far no new innovative techniques have been introduced to cut down the cost of construction or improvequality.

Economics of Stability: Social Security Net

The provision of pucca housing and security of tenure creates basic conditions for improving the quality of life.

One of the initiatives in this respect, is the insurance package offered to members of cooperatives jointly orindividually by a private insurance company. The insurance scheme is summarized in Table 13 below.

Each cooperative society pays the premium to the National Cooperative Housing Federation on an annualbasis. While the responsibility of making claims will rest on the National Cooperative Housing Federation. As aresult, the Insurance company will not have the problem of dealing with individual cases directly with theindividuals or the various cooperative societies. This will reduce their administrative overheads very much inmanaging such small cases. The premium worked out on a monthly basis comes to Re. 1 per family. SinceRs. 30/− per family is being collected for maintenance and thrift fund, the cooperative could meet this out of itsfund.

Table 13. Package−scheme for slum dwellers of the multi−purpose cooperative societies with the facility ofpucca dwelling unit

Risk SumInsurance

Premiump.a.

Fire, Lighting, Riots and Strikes, Flood, Natural Hazards, Earthquake, Fire and/orShock, Subsidence and Landslide (including Rockslides), Damage Flood,Inundation, Storm, Tempest, Typhoon, Hurricane, Tornado or Cyclone

10000 4.80

Personal Accident:Death Member 8000Death Jt. Member 8000 7.20General Disability: Loss of two eyes/two LimbsMember 8000Jt. Member 8000Loss of one eye/one Limb:Member 4000Jt. Member 4000Total 12

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While the Punervaas model was discussed in various fora like the Delhi Administration, Ministry of UrbanDevelopment was considered to be most suitable to be made responsible for the pilot project.

The Punervaas Option Formation of the Co−operative

In 1988, the Punervaas group selected Ekta Vihar Slum in R.K Puran, New Delhi as the site for the pilotproject.

Sardar Patel Ekta Vihar slum cluster is located on about 3,2 acres of Government land in South Delhi. Thesquatter settlement started in 1977 and by 1980 about 50% of the squatters had already settled. The balanceof the settlers moved in during the following five years.

The Commissioner Slum Wing D.D.A. who was also a member of Punervaas agreed to organise a SlumUpgrading Programme jointly with the Community & ASHA. The land issue, however, proved to be a problemsince it belonged to Land and Development Office. Ultimately the Delhi Administration was persuaded to allowthe 475 families to settle there on a temporary occupancy basis for a period of 10−15 years without anytenancy or ownership of land.

Since the resale of allotted plots is a common phenomenon amongst the beneficiaries, it was decided that aHousing Cooperative be formed for the overall management of the community. It took repeated meetings withcommunity members and authorities to explain and understand all its implications. Once the concept of thecooperative formation was explained and the hope of having a semi−permanent allotment of land wasinstilled, the initial collection of the share money of Rs. 100/− was started by the NGO. Collection of the sharemoney did not prove to be a problem and the full amount was collected and deposited in the bank.

The process of upgrading started in May 1989: A layout plan for the 475 families was prepared by the D.D.A.Slum Wing. At this point the community faced a major problem in getting residents engaged in wastemanagement to vacate large chunks of land. The community members persuaded these people to move, sothat the entire community may get regular plots. The residents were allotted plots of 12.5 square meters familyin clusters of 2, 3 and 5.13 The allocation of plots was done jointly by ASHA, D.D.A. Slum Wing and thesociety, so that the residents could choose their own neighbours. Once all the families had occupied theirplots, Slum Wing, D.D.A. constructed the other facilities including paths, street lighting, drainage and aplayground. In accordance with the general layout of the area provided by D.D.A. Slum Wing the residentsconstructed their own brick houses using mutual help for easier tasks and hiring skilled labour for professionaltasks. The cost of house was estimated to be Rs. 12,000.00. Subsequently a loan was arranged by thesociety for Rs. 5000.00 each towards Shelter improvement at the low rate of interest of 4% per annum by theOriental Bank of Commerce under their existing scheme for housing for schedule Castes and Tribes.

On the issue of housing loan it may be stated that so far only a small amount of loan has been provided.However, with proper land allotment, it is proposed that the cooperative society will arrange a larger loanthrough a Bank or Housing Finance Institutions, depending upon individual repayment capacity. Thecollection/recovery of the loan will be done by the society as it is already collecting the maintenance charge. Asmall fee will be charged as service charge and in addition a Bad−Debt/Over − Dues fund will be alsomaintained by the society to ensure that over dues up to 25% do not stop regular repayment of housing loaninstalments by the society. The details of such a fund are provided in the annexure I. It may also be pointedout that interest rate for loans is not very important as these people borrow from money lenders currently at50%−60% per annum. The Slum has since been thus transformed into a composite association and has beenrenamed named EKTA which means unity.

Ekta Vihar Multi−Purpose Cooperative Society Ltd.

The Ekta Vihar Multipurpose Co−operative Society Ltd., with 70% members as women, was formallyregistered in August 1990 with 460 members drawn from the community.14 Besides the project’s manypraiseworthy achievements of community participation, the most noteworthy phenomenon is that 70% of themembers of the cooperative are women with their husbands as joint members and it is the women whoreceived the occupancy right of the plot and not the men. While it was felt that the women play the moreresponsible role of running households, and are better in repayments as well as in holding on to the plot, thisidea met with much opposition from within the community. It was discussed in many meetings anddiscussions of Punervaas and finally found currency albeit tentatively. In fact men in Ekta Vihar were verymuch opposed to this concept initially but were persuaded by the NGO.

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The 7 member Managing Committee of the Co−operative consists of 4 nominated members and 3 electedmembers. The nomination is done by the Registrar, Cooperative Societies and represents both officials andNGO. It is proposed to include a representative officer of the Police Dept. and of the financing institution indue course.

The Ekta Vihar Co−operative employs 9 workers from within the community.

Table 14. Direct Employment Provided by Ekta Vihar Multi−purpose Co−op. Society

Type of employment Monthly Pay. Total5 Safari Karamacharis (Cleaners) 700 35001 Caretaker of the Jan Suvidha 700 700Public Utilities Complex: 2 Cleaners for Jan Suvidha 700 1400Toilet Complex: 1 Social worker to collect revenues and dues etc plus Rs. 2 per receipt 200 200Total 5800Direct employment in Ekta Vihar is likely to go up as ASHA hands over the functions of accounting to locallytrained young persons. A creche is also coming up and a creche teacher will also be employed. Partialpayment from government under UBS will be received.

Each member of this Co−operative contributes Rs. 30.00 per month towards co−operative dues which takecare of maintenance of the cluster as well as the thrift fund. With monthly collection of about Rs. 14.000/− andpayments of about Rs. 6000/− the balance goes into the Thrift Fund. The accounts and administrativeassistance is provided by ASHA workers until local people get trained.

Membership

Before the formation of the cooperative society an enumeration of the slum dwellers was carried out by thestaff of ASHA.15 After confirmation of the list by the Slum Wing of the Delhi Development Authority no newmember could join Ekta Vihar. ASHA then motivated the slum families into forming a cooperative society. Thewhole process of enumeration to registration of the cooperative Ekta Vihar took about 2 years for the followingreasons:

While the Slum Wing had identified the cluster for formation of the cooperative, the NGO had problems inidentifying the bonafide residents. About a dozen families had moved into the cluster after the cut−off datefixed by the Slum Wing. This date was decided by the Slum Wing to ensure that by the announcement offormation of the cooperative and in−situ development, no new squatters should start squatting or move into aready made shanty through an informal purchase. The reason for delay in registration was that since no newmiddle class co−operative was being registered, it was not considered desirable to register this one unlessapproval of the highest authority, the Lt. Governor of Delhi was obtained.

One of the experiences of the Punervaas model, is that the sale off plots should be avoided. The reasons arethe following:

The site has been allocated to members of the slum dwellers cooperative, because of their long occupation.Since prime land is beyond their capacity to purchase, they have been permitted to continue their occupationfor a period of 10−15 years during which they should find an alternate plot. However, they cannot capitalise itby sale as it is not their asset.

Operational Problems and Possible Solutions

Introduction of bold initiatives for slum dwellers like the Punervaas Scheme creates many problems. Theseproblems could be best categorised into three specific types: bureaucratic, political and internal. Troubleshooting for each has to take place at different levels by different people. Further, these problems take placeprior, during and after registration of the society. The experience of EKTA VIHAR can be most beneficial as itprovides an insight into all these aspects and therefore, preventive steps can be taken to ensure that they donot re−occur.

During the pre−registration phase the NGOs’ task is really tremendous. This is so because the NGO has toprepare a list of the genuine residents and ensure that no bogus names are on the list. Often duringinvestigation it is found that a couple of smart squatters tend to keep a few extra names of bogus relative to

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ensure they get more plots some of which they can sell later. Further, there is also a tendency by would−besquatters and others to put up fresh jhuggis to ensure that they also get included in the list. For this purpose,the slum Department usually gives a cut off date after which those who have put up Jhuggis do not qualify.One of the implication of the step is to ensure that fresh squatters are not permitted to enlist in the society.The list so prepared by the NGO is authenticated by the slum Dept. and then becomes the official ‘freeze’ listof residents. No other names are permitted to be added ordinarily. The impact of this is two−fold. First, itensures that the ‘freeze’ list, which becomes the list of members of the cooperative, does not allow freshsquatting in that area as the cooperative develops a vested interest in not entertaining new people thusadding to congestion and that with the crucial role of NGO in making the list, the NGO gains greater power,respectability and clout.

The period of preparation of freeze list and subsequently documentation for the cooperative is a very timeconsuming involvement for the NGOs. However, during the period they get the maximum cooperation as theslum dwellers are very keen to get their name included and get the society registered. Non−inclusion of somenames causes problems and repeated requests from those affected. In the case of Ekta Vihar, for example,many jhuggis were found locked or abandoned. While neighbours gave names of the owners, the ownerswere not around. This creates doubt as there is incident of slum lords putting up jhuggis for rent. About 20such jhuggis were discovered without anybody living in them. Subsequently after registration some of thepersons turned up to claim the jhuggi stating that they had gone to their village for a few months and are back.Their cases are still going on. Non−inclusion of names brings with it political interference. It has been noticedthat aggrieved parties tend to go to local politicians who feel neglected in this process of cooperativisation andwant to get involved. As a result tension can come up between NGOs and the local politicians. In Ekta Viharthe NGO had to face the wrath of the politician, who had to be pacified and convinced that no wrong is beingdone in not including these names.

The second stage is the stage at which the NGO has maximum interaction with the bureaucracy. This is thestage of registration of documents for formation of a cooperative society. The Cooperative Societies Act &Rules are a maze which requires careful scrutiny. There is also a general indifference by the lower and middlebureaucracy to slum−upgrading. Corrupt practices often make the task even more difficult. NGOs tend to findthis interaction most tedious and recourse to Punervaas group becomes necessary. Many hurdles are createdand need intervention. In the case of Ekta Vihar the delay was unduly long as this was the first such society.The promoters’ list which is submitted for registration should not have blood relations. This list was foundfaulty in the case of Ekta Vihar and took many months rectify. Affidavits are required to be taken on stamppaper. Relaxation for this was obtained. The delay in registration and the number of trips to the office ofRegistrar can be considered a major bottleneck. For Ekta Vihar it took about 1 year to get the registration as aCooperative Society.

The last stage of trouble−shooting is the one of post registration. Now the Society has come into being andthe working arrangements are determined. One serious flaw that comes up is that relaxation at this stageleads to lax administration. In Ekta Vihar collection of monthly maintenance charge became irregular and thenumber of defaulters increased. In addition, reported stories that some plots have been surreptitiously soldwithout informing the society started coming in. While the issue of poor recoveries was discussed in theManaging Committee meetings, and a provision of fine was kept, some members remained persistentdefaulters. On the other hand, some persons who it was believed, had surreptitiously purchased plots insistedon payment of the monthly maintenance fee, which was refused. Meanwhile a list of 20 names was preparedand sent to the Commissioner (Slums) where it was suspected that these members had sold of the plots. TheCommissioner was requested to take necessary action. The Commissioner decided to paste notice on thedoors for sealing each such unit and sent a team of officials for the purpose. Further, the question of paymentof monthly maintenance fee also got unnecessarily linked with electric connection inside the houses. Thisresulted in a fight within the Ekta Vihar Community in which the person making the collection/recoveries wasbeaten and officers of Slum Wing were not permitted to paste notices. Some ‘collection money’ and a receiptbook was also stolen. Personal requests were made to the Police by the Chairman to conduct an earlyinvestigation. As a result, a few ring leaders were picked up and taken to the Police Station. This resulted infrantic requests by them to call off the Police. The Chairman then requested the Police to call off, but thisunfortunately again led to a minor scuffle. It was then decided to request the Commissioner of Police, Delhi tosuggest a name of a police officer who could be nominated on to The Managing Committee as this wouldbring in a salutary effect and a deterrent to repetition of such activities. A formal request from the societyinviting him to suggest a name which could then be taken up with the Registrar Cooperative Societies wasalso written and his affirmative reply received. It was decided that door to door collection will be suspendedand members will have to report to the local office for making payment. Cases of persistent defaulters will bereported to the Registrar Cooperative Societies for arbitration and attachment of property. In each of the threestages of the development of the cooperative, the role of the NGO is vital. In the initial stage the cooperation

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received from slum dwellers is the maximum and then it tapers off. During the process of registration theinter−action of the NGO with red tape associated bureaucracy is generally frustrating. Post registration NGOhas to maintain a rigid discipline to bring a system of order to the society, especially in the case of collection ofdues and recovery of loans. The role of Punervaas becomes critical at various stages when NGO’s effortsappear to fail. The position of the Chairman of the Society, who is an official, is also critical as he has to usehis personal linkages to expedite matters.

C. Lessons Learnt

There are certain lessons which are worth mentioning at this stage. First, the success of the model is largelydependent on the commitment, experience and capability of NGOs. Without their firm commitment andsustained interest in the community, the model is not likely to achieve the desired success. Thus the selectionof the NGOs should be done with utmost care.

Secondly, the Link Institution should have as its members persons with necessary expertise, vision, andleadership qualities to inspire confidence not merely amongst the target groups and NGOs but also amongstvarious formal sector institutions, both financial and non−financial. Furthermore, authorities dealing withhousing policies should have a positive attitude to wards effecting policy changes that would encouragehousing finance institutions to provide housing funds to low income households. It may be worth emphasisingthat the model provides only a broad framework and would need continuous updating to suit the specifictarget communities.

The contribution of this model basically lies in assigning a key role to the Link Institution which, being close toboth formal and informal sectors, helps housing finance institutions to devise saving and lending instrumentsappropriate to the specific economic circumstances of low income households. It also plays a major role inhelping remove many of the obstacles preventing provision of funds by the HFIs.

A word of caution. The poor are likely to be disillusioned by any undue delays in project implementation onceit is taken up. Therefore, much advance preparation is necessary before the project is actually taken up forimplementation in the field. In addition, success in one area may raise high expectations amongst similarlyplaced communities, and hence continuous dialogue with various official and non−official agencies at allstages is necessary.

It is important to underline the need for an integrated approach to housing. Merely providing shelter serveslittle purpose unless supplemented by efforts to raise income levels through creating job opportunities. Giventhe limited size of loans, community−based housing finance system has a clear edge over other systemsespecially in the context of loan recovery. However, the need for devising flexible lending instruments to suitthe specific circumstances should be kept high on the list of priorities. The emphasis should be more onensuring the fullest recovery even if this implies high collection costs. Writing off loans or amnesties of anysort will clearly have demoralising influence on the honest borrowers.

Finally, in the context of the poor, loans for upgrading of housing are important, and any system of housingfinance should encourage such loans. Bridge loans should also be provided to the poor to save them fromliquidating their assets at a price less than the fair market value. This is particularly crucial in the case ofmigrants who, in order to own a house, would not hesitate to liquidate their assets back at home in rural areasat a price lower than what they can fetch in a normal situation.

It may be added that there is no need to set up a new Housing Finance agency for the low income householdsas has been suggested sometimes since the existing HFIs will in due course build up expertise to servelow−income households. Instead, it is recommended that various financial institutions interested inlow−income would pool their resources, and evolve a common strategy. In this pool, contributions in the formof levies on housing loans from the affluent could also form an important integral part. This can partly provideguarantees against defaults.

The experience so far gained from the experiment in Ekta Vihar cooperative is that the strategy proposed byPunervaas is definitely replicable for the following reasons:

(i) There is no special subsidy involved. The members of the cooperative contribute towardsmaintenance as well as running of the cooperative.

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(ii) A mix of officials, NGOs and members in the managing committee provides the muchneed interface at various levels.

(iii) The strategy is flexible and does not insist on in−situ development.

(iv) The society takes up the initiative of asking various government departments to provideassistance and monitors it. It forces the lower level bureaucracy to provide the service whichis otherwise missing.

(v) The members participation is very high.

(vi) Further illegal encroachment by squatters get checked as the cooperative does not enrolnew members.

Some recommendations

To attract HFIs to participate in financing the housing requirements of Low Income Households, we propose tohedge some of the risks by building up of a Risk and Bad Debt Fund by loading the basic lending rate with thefollowing additional charges in respect of group−life insurance, contingencies of delays, and non−payment ofdues and administrative costs.

As an illustration Delhi Cooperative Housing Society, an Apex Cooperative Society, is selected todemonstrate the working of the proposed scheme. It is assumed that DCHFS will get funds at 7 per cent perannum and will repay it in 88 Equated Quarterly Instalments (EQI) to the agency from which it has borrowedthe funds for its loan operations.

The other charges and provisions are as follows:

(i) At the time of borrowing the loaner society will subscribe to the Share Capital @ 8.5 percent of the Loan Amount. This will attract annual Dividend, which at the present is @ 8 percent on the Share Capital. It is proposed to place all sums arising on these accounts to theBad Debt Fund.

(ii) The individual members will join the existing Group Insurance Scheme and pay GIPremium, for which the current rate is 0.6 per cent payable annually, in advance, on theOutstanding Principal.

(iii) The individual members will also join the Property & Personal Insurance PackageScheme and pay Rs. 1 per month, per household (irrespective of the loan amount), inadvance.

(iv) It will be reasonable to suggest that the individual member contributes @ 0.5 per cent perannum of the Outstanding Principal to (partially) meet the management expenses of thePrimary Society.

(v) DCHFS will recover the loan from a loaner Society by 261 Equated Monthly Instalmentscalculated @ 9 per cent per annum, following the payment of interest only over the first threemonths. The break−up of the 2 per cent margin over the borrowing rate of 7 per cent is asunder 0.5 per cent to cover the administrative expenses of DCHFS, 1.5 per cent to be put intothe Risk and Bad Debt Fund to cover the contingencies of delays and non−payment of dues.

The Risk and Bad debt fund

The simulation study suggests the retention of following in the Risk and Bad Debt Fund:

(a) Loading of 1.5 per cent in the interest.(b) Share Money subscribed at the time of borrowing(c) Annual Dividend on the Share Capital.

DCHFS will be able to earn interest @ 12 per cent on this Fund. The proceeds of this Fund will be utilised tomeet the incidence of delays and the ultimate defaults to the extent of 25 per cent of all the sums becomingdue for payment to DCHFS.

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DCHFS will, through its Cooperative Education Programmes envisage to improve the presently anticipatedlevel of delays and ultimate defaults. It is proposed to develop an Experience Rating Scheme to suitablyreward the ‘goodies’ and reduce their cost of borrowing.

Economics of the scheme

(i) The monthly instalment (of interest and principal) for a loan amount of Rs. 15,000 will beRs. 131.16.

(ii) The premium for insurance will keep reducing.

(iii) The charge for the management expenses will also reduce with the ageing of the loan.

(iv) With a return of the proceeds of the Risk and Bad Debt Fund the effective rate of interestpaid by the loaner will be a little over 7.77 per cent per annum.

(v) The ‘net’ rate realisable (in respect of a single loan) by DCHFS will be about 8 per cent perannum.

Merits of the fund

The provision of various contributions to the Risk and Bad Debt Fund will render the following benefits:

(i) The proposed fund will render the Scheme economically viable without externalguarantee/underwriting. The envisaged Experience Rating Scheme will mitigate the additionalburden of ‘loadings’ in respect of the ‘goodies’, in due course of time.

(ii) Provision of insurance will relieve the borrower from the disastrous affects of mishaps.Thus, in case of early death, the Outstanding Principal will be paid by the LIC, providing thebereaved family the solace of having a roof on the head when the ‘major’ bread earner isgone.

(iii) The trifling amounts of (extra) loading and dividend (if passed on to the individual by theprimary society) will get lost in the daily expenditure of the family. Under the proposedscheme however, these will keep accumulating and earn interest @ 12 per cent. Knowledgeof this fact will induce the habit of saving. The sizeable refund of the proceeds of the Risk andBad Debt Fund in case of timely payment of dues will prove a boon to the borrower whobelongs to the EWS. In case all payments are made in time the proceeds will amount to Rs.29,800 per−member the end of the 20 year repayment period. This amount could be returnedto the society.

IV. MUTUAL AID COOPERATIVE MOVEMENT IN URUGUAY

A. Mutual Housing Cooperatives: What They Are and How They Work

Solidarity, Organisation, Self−Management

First of all, the cooperative is an enterprise. Its initial objective is the construction of housing units for itsmembers, but it hardly ever finishes there.

The required resources come from two main sources: from credits the cooperative is granted according to the“Ley de Viviendas” (Housing Act); and from the contribution of labour from the members of the group. Theresources are managed by the members who receive technical advice from non−profit inter−disciplinaryprofessional teams. Thus, there is no profit−raising intermediary.

A second condition is the contribution of the beneficiaries, their labour, mutual−aid and tasks related to themanagement of the cooperative. Labour is hired only when it is strictly necessary because of organization orspecialization. The contribution of mutual aid is controlled by bylaws approved in a meeting of the cooperative.

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The contribution is generally from 20 to 25 hours per week per family unit, including a percentage which mustbe carried out by its adult male members.

Another important factor for achieving the cooperative’s economic objectives relates to self−management andits relationships with the technical advisory team. The cooperative is advised on technical matters by theprofessional teams, but ultimately, the final decision on each subject shall belong to the cooperative itself.

A Mutual Aid Cooperative: How it works

According to the “Ley Nacional de Viviendas”, the cooperatives have five directive and control bodies: theGeneral Meeting, the Board of Directors, the Promotion Committee, the Treasury Committee and the ElectoralCommittee.

The General Meeting, where each member family has a vote, is the highest body, trustee of the group’ssovereignty. It is responsible for considering and approving the Annual Report establishing the integration ofthe share capital and of the special funds modifying the number of members of the directive bodies andelecting their members as well as being in charge of introducing progress of works; modifying the bylaws,dissolving the cooperative and deciding about its merger with other cooperatives or its integration withsecond−grade federations.

The Meeting can be summoned by the Board of Directors, by the Treasury Committee or by the cooperativemembers, in this case with 10 per cent of the signatories agreeing. The Board of Directors is the executivebody of the cooperative. It is generally composed of five or seven members, elected by the meeting, whoassign among themselves the functions of President, Secretary and Treasurer, as well as other related tasks.During the building stage, the Board of Directors takes decisions related to the management of the works,informing the General Meeting about actions taken by monthly reports.

The decisions include use of financial resources (loan from the Banco Hipotecario del Uruguay), purchaseand control of materials, equipment and tools, hiring and control of labour, etc. In this work the Board ofDirectors is supported by of two subcommittees Labour and Works. The latter committee includes a foremanand a manager (employees paid by the cooperative) and an architect, director of Works, who is a member ofthe Institute of Technical Assistance. This subcommittee is responsible for the organization and execution ofthe works, while the Labour subcommittee is in charge of organizing and controlling the of mutual aid by itsmembers.

The Promotion Committee is the cooperative body in charge of information dissemination, communication andintegration of members and their families into groups, as well as of the relationship between the cooperativeand the community. The Treasury Committee is the control body of the cooperative. It’s functions relate to thefinancial and administrative aspects, as well as to the execution of the cooperative’s objectives. The ElectoralCommittee, finally, is in charge the election of authorities of the cooperative.

The Institutes of Technical Assistance

According to “Ley de Viviendas”, the Institutes of Technical Assistance are “destined to provide the legal,cooperative education, financial, economical and social services at the lowest cost, being able to include alsothe technical services of project and direction of works”; all of them provided non−profit according to law.

The Act and its regulations control the scope of advice which should be provided for, as well as the highestremuneration; the non−observance of these provisions leads to the loss of legal status of the Institute and itsdisqualification. The advice covers diverse aspects: legal (obtaining of legal status, bylaws, land deeds,contracts, proceedings, legal and regulatory interpretations, etc); management (cooperative organization,accountancy, administration); financial (investment policy, use of resources); building (development andhousing projects, budget and technical direction of works); social (training of management teams, practice ofself−management, living together and community participation).

The Institutes of Technical Assistance were eliminated by Act No. 14.666 June 1977, which eliminated alsothe Housing National Office and the National Institute of Low Cost Housing Building (INVE), and centred theresponsibility for the execution of the Uruguayan housing policy in the Banco Hipotecario (mortgage bank).

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B. Advantages of cooperatives

Should construction be undertaken by private investors, the state, or by cooperatives? This question may nothave a single answer. As a matter of fact, it would be wrong to argue that cooperatives are the only way tobuild housing. However, based on experience of more than 15 years of the Mutual Aid Housing CooperativeMovement in Uruguay, it appeals that this system should play an important role in the solution of housingproblems. The reasons for this statement are based on the following comparative advantages of thecooperative movement, demonstrated throughout this period.

From the Social Point of View

Mutual Aid Housing Cooperatives’ are based on self−management and community participation. Combiningthese principles with the main cooperative principles tends to strengthen solidarity, democracy and mutualrespect as opposed to individualism and competition, prevailing presently in our society. Mutual aid, implyingthe joint effort by every beneficent family, and not only by those acting as group leaders, is a fundamentalfactor in consolidating the above mentioned values. Thus, even when mutual aid is not necessary for reducingconstruction costs, it is important to practice it to reach the aforementioned objectives.

On the other hand, by working and living together the members gain capacities which they can use to acquireother community facilities or family necessities. Thus cooperatives have contributed to the solution of a widevariety of problems by their own action or by promoting state intervention and community action.

Cooperatives have contributed to the provision of numerous essential services: infrastructure (water, sewage,electricity, garbage collection, transportation); social and cultural services (kindergartens, day−care centres,primary schools, physical education, libraries); health facilities, (clinics, preventive care, dental care), foodsecurity (meals, consumer cooperatives), etc. They have also aided families with economic or socialdifficulties (unemployed, under−employed persecuted and political prisoners).

The functioning of the cooperative as a social and economic enterprise requires from its members apermanent effort in training and self−education. The training and integration of knowledge and experiencesacts as a school of systematic education, the effects of which are transferred beyond the cooperative to thefamily and the surrounding community.

From the Point of View of Using Available Resources

In the first place, self−management and community control enables the achievement of a significant level ofefficiency without resorting to mechanisms the capitalist mechanisms.

Construction and administration of dwellings by the cooperative eliminates intermediaries and decreasesduties of public administration thus relieving the latter of the difficult tasks related to the execution and controlof the programmes.

With regard to costs these are considerably lower in the Mutual Aid Cooperatives than in other systemsbecause of several reasons. Intermediaries are eliminated and with that their profits: those of the contractor(15 per cent of construction costs) and to a certain extent, those of the sub−contractor; those of privatepromoters, who normally obtain 25 per cent profit above the programme’s total cost. Savings also include thecost of the real estate agencies in charge of the housing units’ sale, which is 3 per cent of the housing unitcost, an amount which must otherwise be paid by the buyer.

It is important to point out that, in spite of the fact private enterprises or public authorities can obtain betterrelative costs because of economies of scale those economies are not translated into a lower final cost, sincethe benefits of the acting enterprises absorb them.

Likewise, maintenance costs are reduced because having participated in the construction phase, themembers are in the best position to carry out maintenance work. Maintenance is also provided to thesubsequent extensions, both of the housing units, community facilities and the infrastructure.

From the Point of View of Design

One advantage of the self−management approach is a design that meets beneficiaries’ needs as the usershave the possibility of choosing the plot, the house type and the complementary services to be built.Moreover, because that the cooperative group is formed first and the project is translated afterwards

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according to the group’s needs, the system can be adapted both to large cities and as well as small towns ofthe provinces. The system works in places where governmental programmes of “social interest” are seldombuilt, and where private investors are not active because rents are low.

In an incremental way the users of the housing projects have been building community spaces − paths,streets, squares. Their contribution for complementing the urban equipment, added to the work done on theprivately used frontal areas, are establishing distinct urban spaces and landmarks thus enriching the urbanimage of the housing projects. Care for these spaces is much better, than in spontaneously formedneighbourhoods where the housing programmes are implemented.

From the Technological Point of View

As the construction is based on mutual aid labour, simplified and adapted building systems must be used.This enables the best output to be obtained from of non−specialized labour.

The “traditional” rationalized construction system is combined with the use of prefabricated elements such assmall stone slabs for roofs and mezzanines, and simplified finishes. Prefabrication of some building elementsis important task, because it permits:

− tasks to be simplified and carried out by non−specialized labour, including females;− tasks to be carried out independently from the work done by hired personnel;− a better quality control by concentrating tasks in one place.

C. Conditions and replicability

Participation of Beneficiaries’ Organizations

In this scheme, the beneficiaries’ organizations, (neighbourhoods, cooperatives) are participants in the projectformulation programme management, construction and organization and management of the communities. Ona second level, the beneficiaries’ organizations, as part of coordinating bodies or federations, participate in theformulation of policies and plans.

Public and private sector participation

The state participates in establishing guidelines on urban and territorial development and planning; and at theprogramme level, in controlling and supervising, providing financial resources and services. The state mayalso participate directly in the production of houses as an inspector or completing it whenever necessary. Inthese circumstances, the private sector’s role is limited to production of building materials ensuring an accessto them by all sectors of the population.

Technicians’ Role

The technicians’ role is integrated within the state apparatus in its own structures. The technicians contributedirectly to the self−managed organizations by providing training, information and technical supervision. It isworth emphasizing that technicians, who must form interdisciplinary teams to carry out those functions, arenot independent actors. On the contrary, subordinated to the needs of the self−managed group, they mustrespect the principles of self−management. Although this may be theoretically accepted, sometimes theintellectual paternalism of technicians makes self−management more formal than real.

Reproduction of the model − a Latin American Alternative

As mentioned, Uruguayan Mutual Aid Cooperatives have taken up a number of traditions which they haverevived in order to give them new forms and contents; including the cooperative approach self−help buildersand popular movements from which their members derive their organization and experiences. Thesetraditions, and personal experiences made people to get together and create what is at present the mutual aidcooperative movement: a method for building low−income housing, which subsequently becomes andorganization and a concept of society guided by ‘justice, fraternity and solidarity.

The result must inevitably be influence by the characteristics of the society that produced it. This model doesnot necessarily suit other realities − not even in Latin America, not withstanding the many common features

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related in particular to the origin of the problems. The basic idea, however, that of popular self−management,appears to be linked to all efforts intended to help solve the housing and habitat problems of the great majorityof our population. That is the reason why the experience of Mutual Aid Cooperatives is a good reference forother attempts made in Latin American countries.

V. THE HISTORY OF THE GROUP CREDIT COMPANY: CAPE TOWN, SOUTH AFRICA

The GCC has gone through five distinct phases in the last six years. Each of these phases has beenaccompanied by differing principles, strategic thinking, preconditions for success and therefore also differentresults. The five phases are:

research and feasibility study; pilot; first expansion (one region); second expansion (multipleregions); and finally, the current strategic thrust.

These phases will be discussed below in terms of the particular objectives and achievements of the phase.

A. Phase I − Research and Feasibility

Background

The original research was undertaken in the Urban Foundation’s Housing Policy Unit in 1987/88 as part of thestrategic thrust to develop access to housing finance for all but the indigent in S.A.

The focus was exclusively housing. Housing was the end, finance the means. This narrowed the focus in theresearch to exclude e.g. finance or banking services for low−income people as the desired result of whichhousing finance would be one product. This critical emphasis structured the parameters of the research.

The objectives were therefore to “obtain an understanding of the key characteristics of the housing financeindustry, to identify options for a small loans company, to identify how the options could be structured andrefined and to identify the options which would make the selected option viable”.16

The primary sources for the information gathering were banks, building societies, consumer credit companies,local authorities, specialised housing institutions and the informal sector in terms of its lending or its facilitationof the housing process.

The scale of the housing demand justified the belief that the appropriate solution would or should be closelyaligned to the formal banks, by for example offering back to back guarantees for any lending done in thismarket by banks.

It was only due to the repeatedly expressed lack of interest “at this stage” by the formal banks that theresearch turned to informal options. The key parameter of the research i.e. housing, narrowed the options forexploration and the researchers found a “paucity of publicly available research in this area”. The researchshowed that an informal option might be feasible but that the circumstances and structure which could resultin success “would need to be created by managerial action during implementation” due to the lack of researchinformation.

The consequent conclusion was clear − to offer housing finance through existing informal infrastructure(stockvels). Modifications would be required of the stockvels, namely;

• to persuade savings associations to manage external finance. However, the existinginfrastructure only had mechanisms to handle member savings and rotational draws on thepool of member savings.

• to persuade stockvels that housing needed to be a distinct focus of activity.

• to extend the period which the stockvels normally used as a cycle i.e. 10 months to onewhich could encompass 5 year cycles.

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• to persuade stockvels to take security from members.

• members would be required to participate in a managed housing scheme

• members would be obliged to run bank accounts.

Evaluation

The research identified some key issues which with hindsight were worthy of a lot more exploration:

• the decision to look at informal tending institutions was correct as international experienceshows that formal banks that have traditionally lent more upmarket do not succeed in lendingon scale into this market unless they establish an entirely separate division.

• the mechanisms that stockvels use to manage their own finance offered the key to alreadyproven international successes.

However, the primary focus − housing − precluded discovering the preexisting international industry whichoperates not under a housing label but under either finance (micro−credit) or micro−enterprise label.

Hindsight too taught the GCC an important lesson on the establishment of the principles of the operation i.e.“it is easier to change a system than an existing industry or market. In other words, never attempt to change amarket to suit a product. It is easier to change the product to suit the market unless you are a mega−industry”.

Many of the later problems which occurred in the GCC were as a direct result of having attempted to changethe time tested methods of stokvel operations to something which suited the financial product we wished tosell.

Transition to Pilot

The conclusion of the research was that it remained desirable for the formal banks to eventually be the keyactors but that both product and method needed to be well tested before they would consider introducing suchmethods into the formal banking system.

B. Phase II − Pilot

Objectives

The pilot started in mid 1989 while an agreement was being finalised with Development Bank of SouthernAfrica (DBSA) to provide loan finance at the then prime interest rate to fund the GCC’s debtors book. Theagreement was for R1.5m, which was the amount identified in the feasibility study as the minimum amountrequired to test both product and procedures. The Urban Foundation agreed to provide a loan of R600,000worth of interest free working capital to support the pilot.

The pilot was to run for three years and then be evaluated. The mission, long and short−term objectives forthe pilot phase were as follows:

Long term objectives:

• to stimulate the supply and upgrading of low income housing stock on scale, through theextending of small, short−term loans to savings associations at market related interest rates.

• to offer appropriate housing finance to low−income households

• to establish an apex organisation to interface with informal savings associations.

• to offer a finance facility to the informal savings associations who in turn would on−lend totheir members.

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• to raise money from the capital market either directly or indirectly for the purpose ofon−lending.

Short−term objectives:

• to test under operating conditions the principles of on−lending to associations via an apexorganisation.

• to test whether savings associations can maintain pressure on group members.

• to test the financial viability of these principles

• to test and develop the systems and structures required for such a financial institution.

• to test the acceptability of this form of finance to informal savings associations.

• to test under operating conditions the critical variables which influence the viability of thecompany.

• to evaluate under operating conditions legal constraints which hamper the operations of theGCC.

• to evaluate the acceptability and viability of the proposed staff structure to interface withsavings associations and maintain group pressure.

Progress

The GCC started advancing loans in November 1989. By October of 1990 it had 57 groups (919 individuals)who were performing well. R1.78 million had been advanced.

Demand for loans continued and it was considered appropriate to raise an additional sum of money tocontinue lending so as not to create a negative effect in the community through a sudden stop to the systemas it was becoming established. Pressures from a range of housing actors and general community demandprovoked an alteration to the initial concept of the pilot.

The performance of the debtors was most encouraging at this early stage, consequently a bolder approach tothe experiment was considered desirable.

Evaluation

Several positive lessons were learnt during this phase in relation to:

• methods of marketing at grassroots level

• procedures for advancing money

• games that will be played in order to access resources

• kindergarten administrative procedures

• the difficulty of operating in an environment which states “we are entitled to what wedemand” which is compounded by the resonance that such a statement finds with staff

• the difficulty of teaching potential credit officers the difference between real affordability of aclient and expressed affordability by a client

Potential Problems for Expansion

The GCC faced a catch 22 situation in considering expansion as:

• the product though performing well was not a year old in the field and had not entered itsrisky period. There were three such periods perceived in the cycle of this loan. The first was

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when the full money was advanced to the group i.e. after the third advance in month ten ofthe cycle and the incentive to keep paying in order to access more money was no longeravailable. The second was potentially when a sum of money equivalent to the capital hadbeen repaid and the issue of paying interest had to be faced. The third was when the possiblebenefits derived from the application of the loan were no longer perceivable and therefore nolonger worth paying for.

• the formal banks represented on our Board of Directors indicated that the scale of the pilotwas too small to be able to derive definite results. The pilot might thus still run its full courseand end up with inconclusive results as a different scale might fundamentally alter thefindings of the pilot.

• the sudden halt of any resource in a resource scarce environment normally creates anegative response which makes it more difficult to reintroduce the product in the samecommunity. Furthermore, loan recipients themselves stop paying as the only reason forrepaying i.e. further loans, is withdrawn. A pilot programme therefore needed to be anongoing programme at a certain scale to firstly create the perception of continuity andsecondly to be at a scale where it is not possible to “over−manage” the portfolio i.e. manage itin a sustainable manner.

C. Phase III − Expansion: One Region

Background

The decision was to expand the pilot to the level of one viable regional operation capable of financial viability.Two problems had to be resolved before implementation.

• from whom to raise the money and under what conditions it could be raised.

• from whom to raise some “reserves” in order to off−set the wider risks involved.

The position was compounded by the inability to estimate the level of risk involved as the following excerptfrom a motivation document produced in October 1990 illustrates.

“The inability to estimate risk on the basis of an adequate track record forces the Company to allow for a highlevel of default (25%). This level of risk provision on the one hand combined with the total lack of reserveswithin the Company on the other means that the Company can neither make financial provision for this levelof risk as earnings do not allow for it nor raise the loan capital to allow for this expansion.”

“The acquisition of a reserve fund for The Group Credit Company would allow the Company to sustain growthover the next six years. This could be achieved while simultaneously generating a track record whichhopefully will no longer require excessive provisions for bad debt. It would also allow the Company toestablish a real risk profile for this form of operation and no longer operate from the basis of assumed andperceived risk.

A reserve fund would allow the Company to make a 15% provision for bad debt A further 10% provisionalready exists in the form of a 10% deposit that groups are required to pledge to the Company.

This fund will be able to sustain this provision for the next six years whereafter the Company can make areasonable provision from its own earnings. Earnings on the fund at this later stage would be put back into thefund”.

The GCC was therefore in the market looking for both money for reserves for risk i.e. R6 million while alsolooking for collateral.

The four financial institutions represented on the Board of Directors were approached to ascertain if theywould be prepared to jointly lend the required cash to the GCC. A positive response from all four had as aprecondition for lending an eighty percent collateral requirement in the form of either cash deposits oracceptable guarantees.

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The establishment of the Independent Development Trust (mid 1990) opened up a possible source forcollateral and reserves. A proposal was put to the Independent Development Trust requesting support.

Progress

• In late November 1990 the Independent Development Trust gave GCC a grant to facilitatethe expansion while DBSA and the GCC embarked on negotiations concerning guarantees.

• A R20 million facility was raised from the four represented financial institutions.

• An additional four loan officers were employed in January 1991 for the expansion andunderwent a three month training programme which was funded by the British OverseasDevelopment Administration (ODA). The total staff at that stage was 8 people. The totalnumber of anticipated and budgeted staff was 18 people for this programme.

• The new loan officers started negotiating with clients in April and advancing loans a coupleof months later by which stage the strategy for the GCC had changed again.

• The performance of the loans remained adequate − though arrears existed, theyouthfulness of the loans (maximum age of debtors 18 months with most debtors well under12 months) combined with the continual advancing kept the profile satisfactory. Arrears werealso primarily in current or 30 days.

• GCC received the funds from Independent Development Trust in two trenches betweenFebruary and June. As the GCC had not yet successfully negotiated donations tax exemptionit was agreed that the grant be initially structured as a long−term subordinated loan until theGCC received its exemption.

Changes in the environment

While the GCC tentatively embarked on its first expansion plan the overall housing credit environment waschanging in particular due to the introduction of the Independent Development Trust. Two particular eventssparked the change:

• the Independent Development Trust in wishing to introduce its capital subsidy scheme forhousing was concerned with the adequacy of resources and resource institutions to facilitateconsolidation once site and service schemes had been introduced at scale. Credit remains animportant component of consolidation.

• similarly, the proposal from the GCC evoked concern that such an approach was notsustainable at scale because of the level of collateral required from the financial institutions.

The GCC was then requested by Independent Development Trust to develop a plan for an ambitiousexpansion of the GCC into a national operation highlighting what was required to facilitate such an action.

D. Phase IV − Multiple Regions

Background

A national expansion plan was developed with three pre−conditions before implementation was possible.

• firstly, an outside institution had to carry the full risk of the debtors book

• secondly, access to funding was required with limited collateral requirements

• thirdly, the GCC required a “growth fund” namely a revolving fund which would pay for allthe expansion costs in terms of working capital. As one unit of expansion repaid its workingcapital the next would be started. The money would therefore revolve between an additionalfive branch operation in the period of six years.

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Progress

• By June 1991 an additional 6 loan officers were employed into Cape Town to expand theexisting operation.

• By end of August 1991, fourteen staff members had been employed to start the PortElizabeth (P.E.) office.

• By October 1991 the GCC had advanced R8.2 million to 183 groups of 2848 individuals inthe Western Cape Province.

• The GCC located 80% of the required “Growth Fund” by August 1992 from USAID, HarmsSeidel Foundation and the Independent Development Trust.

• By June 1992 P.E. started advancing loans to clients.

• By June 1992 the expansion plan was halted due to the developing arrear problems and thestrategy of the company again changed.

Evaluation

• By October 1991, as the oldest debtor reached the 24 month mark, there were sufficientother debtors to show a definite trend of a strong increase in arrears at 16 months mark i.e. 6months after the last advance.

• Due to the level of advances undertaken during 1992, the trend was obscured in the overallfigures and it was several months before the Directors agreed that a trend was clear and thatit would be prudent to shorten the term to 36 months i.e. a maximum effective term of 46months.

Hindsight shows that this was not prudent enough but the initial analysis was on the group of debtors that hada much higher level of interaction as the earlier scale of the operation had allowed for a more intensive level ofmanagement.

By October 1992 the GCC had four particular problems occurring simultaneously:

• product failure.

• the change of scale in the organisation and the failure of some principles to operate at adifferent scale.

• the rapid expansion of staff none of whom had experience in this form of credit elsewhereand too few staff who had any depth of experience in the GCC. This was compounded by thefact that many staff had a limited educational background with limited numeracy and writingskills and consequent productivity problems.

• the scale induced lower level of supervision and the difficulty of acquiring good supervisionskills or promoting from within to supervisor level became (and remains) a key problem.

Product Failure

The experience within the GCC over the last four years allowed us to assess the sensitivity of key factors andthe advisability of having manipulated international experience in relation to these parameters.

In order of sensitivity the following factors resulted in the development of arrears:

Term

The major sensitivity has been the term of the loans:

• The GCC has already proved that group loans with a 12 month or less term have a verygood recovery rate. 24% of the group loans (65 groups) were restricted to a 12 month term.

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Of these 35% have already completely paid the full loans. A further 31% of the groups arepredictably fully recoverable as the group deposit is larger than the remaining capital balanceon the loan. In other words 66% of the number of loans advanced will definitely be recoveredin full. A further 22% of the group loans in that term bracket are still performing well while 12%are in arrears and the outstanding capital balance on the loan exceeds the savings.

The GCC’s risk exposure at this point is limited to 12% of the number of loans in that definedsection of the book.

• The position changes markedly with any increase in the term. For loans with a term of 24months the arrears treble (32%) while 10% have paid up with 60% of loans still performing.The important element is, however, that the real risk exposure has increased from 12% to32% by the addition of a further 12 months to the term.

• By the time the term increases to 60 months the arrears increase to 69% of the number of 5year loans with only 1% fully covered.

Size of Loan

Trust as a basis of assessing potential repayment for sums of money which fall within daily personal cashflows works exceedingly well (the normal basis of group assessment). However, the difference of working withinstalments which might require a full month’s salary of one member of a family was not recognised bygroups.

The group method of assessing members’ ability to borrow small sums of money was directly applied to thelarge sums i.e. “I trust you will repay R200 because you have borrowed it in the past from aneighbour/friend/relative and I know you repaid it” became “I trust you to borrow R5000 because I know youhave borrowed and repaid R200”.

The consequence of utilising the informal method of assessing members was the invariable over extension ofa person’s affordability.

Affordability

The group mechanism of assessing an individual member’s ability to pay is only effective for short−term loansinvolving relatively small sums of money. As the sums of money moved beyond commonly used limits, thebasis of assessing affordability became “need” and not “ability to pay”. Affordability over the medium term inour experience is also not easy to assess for even an experienced credit officer as one is dealing with a sectorof the population that is characterised by irregular income, cyclical employment and differing monthly prioritiesfor use of disposable income.

Offering large loans with a large instalment cancelled out the benefits of utilising group principles to facilitateaffordability namely:

• the ability to assess each other for creditworthiness;

• the ability for the collective membership to bridge a member who is having to face otherpriorities in any given month

Peer Pressure

People only exert pressure if they are not disadvantaged personally by such action.

Continued pressure over a 60 month term operates to the disadvantage of the good payers as they:

• directly bear the transport costs of contacting the other members;

• are subjected to personal abuse and threats by the people who are unwilling to pay;

• soon perceive that they will lose any money that they personally put into the kitty to bridgeshort payments.

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• recognise that the performance of some members will permanently prejudice their ownrecord and that they personally do not have the means or methods to rectify the situation.

Such pressure is possible and feasible in the short term but is not sustainable as a principle to ensurerepayment over the medium term. The perception of groups once they have experienced significanttong−term problems is that the system of joint and several responsibility is intrinsically unfair and inequitableand consequently it is more to their advantage to join the ranks of the non−payers.

Interest Implications

The GCC in charging interest on daily balance compounded the disincentives once a group or individual wentinto arrears. For example, if an individual was retrenched but found a two day job and continued paying R50of a R125 instalment, the person’s balance continued to rise each month. The person perceived himself to bepowerless to repay the debt. The interest bill kept rising and the person could not measure the total interestbill given his personal circumstances.

The perception is that the goodwill that the person is indicating through paying at least something is not beingmet by a corresponding gesture on the part of the GCC but by a statement like “We will take more and moreand more from you until infinity”.

The positive effect of a payment no matter how small is a very important part of ensuring ongoing payments.

Simplicity

The GCC’s experience is that complexity and sophistication increases costs as it results in firstly the need fornumerous higher skilled people to field the multitude of queries on product, procedures and statements andsecondly increases the costs of managing clients’ as loan officers need to do a multitude of trips to a client tosolve queries.

The simplicity required is one that allows for all product information and management details to be on the backof a couple of matchboxes. If loan officers don’t feel that they can confidently handle all clients queries theycease to be an interface and client officer but become an interpreter to some other person who then becomesthe client officer. The real client officer then avoids contact with the clients or concentrates on those withmaximum queries to the detriment of the remainder of the portfolio.

Housing

Experience has shown that the essential issue for low−income communities is that credit per se should beavailable. The recipient should have the prerogative of selecting the use for which the credit is appliedaccording to immediate priorities, if he/she does not, the use of the loan will always be manipulated.

Conclusions Regarding Group Loans

If GCC had restricted its product to a maximum term of one year the group product applied to housing wouldhave been successful. It has proved the success of a group loan of 12 months and it has also clearlydemonstrated the failure of group loans where the loan exceeds 12 months.

In the Target market, collectibility depends on:

• ensuring affordability (which is heavily influenced by short−term environmental problemswhether due to family problems or economic downturns);

• contactibility − one collects more through a personal collection system than through animpersonal hands−off mechanism;

• rigorous regular contact with clients who do not have a stop order payment system;

• relatively small repayments − large instalments are only maintainable in the short−term.

In terms of product design simply:

• Term (as short as possible)

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and

• Size (as small as possible)

Impact of Results of Pilot on existing Book

The GCC recognising that it had delivered a poor product to its longer term clients then needed to select thepotential good customers from the remainder. As good clients needed the opportunity to maintain andenhance their credit record the decision was taken to allow clients to convert their loans from group loans toindividual loans if they so wished. In converting groups we could consolidate the portfolio of good clients. It isinteresting to note that:

• of the 65 groups whose term did not exceed 12 months only 5 groups (7.7%) chose toconvert.

• of the 32 groups with a term of 24 months 22 (69%) decided to convert.

• of the 184 groups with a five year term, 11 (60%) groups convened, but increasingly smallerproportions of the group actually converted.

As at 1st June 1993, the GCC had moved 2018 individuals from groups to having an individual account. Thisis 42% of all clients who were acquired as group clients.

Table 15. Repayment Performance of “Converted Clients”

Size R2908Term 31 monthsInstalment R159 per monthDeposit R587Deposit as % of loan 20%The repayment performance of these 2018 individual clients was analyzed in order to streamline themanagement of these debtors and are classified as follows

Table 16. Debtors Analysis

Always pays 528 26%Usually pays 288 14%Pays only when collected 477 24%Seldom pays (never pays a full instalment (2 months running 209 10%Never pays (pays less than 1 instal. In 6 mths) 488 24%Unclassified 28 2%Total 2018 100%People were not weeded out in the conversion process on the basis of performance as the GCC hoped that itcould potentially still get garnishee orders against poor payers.

Unfortunately, only 18.4% of clients have signed a new AOD for a term of 12 months or less. However, thevalue of the loans only constitutes 9.11% of the converted book while 57.7% of the value of the book are inloans where the new AOD’s are for terms in excess of 30 months. The conversion process will therefore nothave overcome problems with the clients but will merely provide opportunities for good clients.

Scale related problems

The development of new staff from a small core of experienced staff with good product and procedures ispossible with the marrying of one new person to one good person for the ‘apprenticeship period’. In ourexperience this is the best way of inducting new staff. The rate of growth is then always determined by thenumber of good staff with sufficient experience that an organisation has. Growth therefore becomesexponential.

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The GCC when it started training the second round of Cape Town loan officers had neither secure product,therefore no time tested procedures nor sufficiently experienced staff who could transfer skills on anapprenticeship basis. Staff were still busy trying to discover the dimensions of their own job when theyacquired a trainee.

Trainees outnumbered staff and frequently intimidated them on critical ‘unpopular’ issues involved in thelending of money. Staff who ‘should know better’ wisely held their tongues in areas that were critical to theGCC but unpopular outside of the GCC.

There is unfortunately no adequate short−cut in institutional development where only limited compatibleexperience exists in a country. Staff have to be given the time to develop experience.

If the GCC were to have 100 experienced staff members with one tried and tested product, it can easily trainanother 100 but with 3 experienced and 4 newly trained it tried to process an additional 18 people.

This took its toll on people’s confidence at a stage when creative energies had to be applied to growingarrears in an untested product, in other words, in developing new procedures to manage a new area ofrequired expertise in the company. Furthermore, the original client to staff ratios of 60 groups (900 people)was not a feasible ratio and had to be drastically adjusted downwards. The attempt to have one loan officermanage such large portfolios resulted in inadequate aftercare and therefore aggravated arrears at a stagewhen we could least afford it.

E. Phase V − Current Strategy

New Products

Because of the failure of the long−term group product combined with:

a need for products with a lower risk profile;

non−housing products to satisfy demand;

individual products in response to demand; and

short−term products for unsecured lending,

the GCC changed its products during 1993 to:

• a largely unsecured community based short−term product for either individuals or groupswhich does not have a defined use.

• an employer based product either for housing or non−housing which is essentially payrolldriven with the larger housing loans fully covered by Provident Fund guarantees.

The GCC therefore again enters another experimental phase with one proven product and two experimentalproducts. These products have a very different earning profile and procedural requirements which in turn havenecessitated a restructure of the company and a renegotiation with staff in terms of function.

Change in organisational structure

The company is therefore changing from a decentralised two region approach with most functions duplicatedin the regions to a centralised servicing structure coupled with decentralised operational units and a marketingdepartment.

The structure once fully developed will be:

The operations section will be made up of small operational units (a minimum of 4 and a maximum of 10people) who will manage all functions directly required at the interface with the client. The unit structure will bebased on the following key positions.

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The principles behind the unit structure are:

• to develop a modular system which allows for easier re−plication and on−site training.

• to have clear career and training paths which provide both motivation as well as a structurewhich does not require that staff perform uniform functions at a relatively super−performerlevel. It should allow people to learn at their own pace before being confronted by additionalperformance requirements.

• to have operational units which never exceed the size where all in the unit can be aware ofthe full unit’s performance and be in a position to personally contribute and impact on thatperformance.

• to therefore be able to structure an incentive package for staff which is geared to bothindividual performance as well as the unit’s performance. Hopefully, this would encourageboth better team performance as well as individual performance.

• to have a minimum size where all administrative as well as operational requirements foreffective client servicing can be met without delay. Delays are a concomitant of a separateoperations and administration structure.

• to reduce risk through limiting the exposure in any particular area by setting the maximumsize of a group before a further group is established.

Change in remuneration structure

A major problem for the GCC has been the range in productivity between staff. For example, if the GCCpriced for a productivity value of 10, it has only achieved a range of 1 to 5.

The reason for this problem is that the GCC expected to pressure−cook staff in terms of training anddeveloping work experience at a much faster rate than has turned out to be either practical or feasible. Thenecessity of swinging the company onto a performance based system has become an imperative to allow forthe range of performance achieved and to avoid a system whereby the average performer is not a liability tothe company but can continue to be employed at a lower level of performance. Investment in each staffmember has been enormous and is not easily discarded. Furthermore, experience has shown that some ofthe medium term “strugglers” can become good performers given more experience andsupportive/educational management.

Structure to facilitate ongoing testing and experimentation

The GCC must, in order to ensure tong−term success, develop a “department” that on an ongoing basisdevelops and tests new ideas. Before the failure of the long−term group product, the GCC followed the “alleggs in one basket” approach to its detriment. Any modification to the company’s structure or product whichare exceedingly time consuming and not always constructive.

The ongoing testing with limited risk must be part and parcel of the company’s operations so that it canconstantly be involved in finding products with a better chance of success without requiring the company to hitthe major lows and, equally negatively, to carry major external expectations of any or every new idea.

VI. THE DANISH MODEL

This short chapter describes how a community−based housing finance system, started by some visionaryindividuals in Copenhagen over one hundred years ago, evolved into a very sophisticated institution whichnow belongs solidly in the formal sector with all its characteristics of scale, efficiency and anonymity whilehaving retained the old principle of mutuality.

At the time of the first “Mortgage Societies” conditions in Denmark were similar to those prevailing in manydeveloping countries: narrow capital base, unfamiliarity with financial institutions which in any case werelimited to those dealing with simple banking business and their fear of long−term loans to poor people. On theother hand, economic times were favourable and the capital city of Copenhagen was experiencing the effects

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of a strong rural−urban migration. Habitable space was at a premium − as was all kinds of shelter for shops,offices, factories and storage. In fact, the first groups of people to form for the purpose of raising long−termfinance were businessmen who found lending from the banks too expensive.

The principle of mutuality was the same as today, but the motive was somewhat different, namely that theypledged as security already existing property in order to raise funds for expansion of their business. Havingpooled their physical assets they “securitised” them and sold “bonds” to individual and institutional investors.But nothing succeeds like success, so very soon groups formed for the purpose of raising funds in the sameway for housing. The result was that very soon mortgage societies formed all over. But these societies tendedto form around purposes of the loans rather than around a common bond between the members. Thus,people seeking loans for commercial buildings joined a different society than those wanting to acquire houses.Societies eventually formed around such diverse objects as farms, ships, industrial plants, etc.

Several factors were responsible for the rapid growth of these societies. There was a high degree of trust inthe initiators of the early societies, the economy was growing without inflation and the bonds which wereissued in small denominations carried a competitive rate of interest to attract small investors. The interestdifferential was set at a level where reserve funds could be created as an added attraction for institutionalinvestors. Moreover, a lottery was introduced so that by regular draws certain bonds were redeemedprematurely at a premium. This feature appealed to many individuals and carried no negative effect onborrowers because it did not affect their regular repayments.

As the movement continued to spread and it assets grew by leaps and bounds, the confidence in this type ofhousing finance prevailed to the point that it now caters to all but a small fraction of property finance inDenmark. The situation is similar in the other Scandinavian countries, albeit with small variations. Themortgage society bonds are held by individuals, insurance companies, pension funds and other institutionalinvestors plus commercial banks. The Central Bank is the prime operator in this market in order to regulatemoney supply and control the interest rate.

Computerised administration of the system is now highly efficient and cost effective. For instance, it takes buta week to process a loan, and − just as significantly − the interest rate differential has been reduced to lessthan one percent. This means e.g. that the mortgage societies are cheaper to borrow from than commercialbanks and Building Societies. A more recent cost−saving feature of the system is that the “bonds” no longerexist in a physical form. They have become numbers in a computer and neither the institutions nor the“coupon cutters” need to handle bulky documents. Interest payments (quarterly) are automatically transferredto the investors bank account just as borrowers’ accounts are automatically debited for the repayments.

Backing up the administrative system is a set of clear−cut legislation and directives which eliminates a lot oflitigation and makes repossessions very fast. After falling into arrears of three months, notices are sent out. Ifthe property is not sold within another month it will be auctioned by the courts. Likewise, the transfer of loansat the time of sale to a new owner is automatic and at no extra cost. There is no age limit on borrowers: Thehouse is the security. And because of the large reserves, no collective security claims have been raised evenin times of depression.

The fact that loans are securitised means that interest rates are fixed at the time of taking up the loan. This isa popular feature among borrowers and investors alike. There is also a choice between “fixed annuity” and“simple” loans just as graduated repayments is an option through (consumer price) “index” loans. Bonds aretraded every day on the stock exchange and they are liquid to the point where most banks will buy and sellthem over the counter at “spot” prices. This facility has made these bonds attractive to foreign investors aswell. The larger the market the more funds can be mobilised. This is the stage many community−basedfinance institutions have an ambition to reach in order to make a real impact on the housing situation in theircountries.

The Danish system has not been without its problems. As societies proliferated they began to compete witheach other for members. Being small they were not cost effective, so a period of consolidation and mergersbrought a concentration into 4−5 large amalgamation with a loss of “democracy” as a consequence. In factsome of them are now organised as companies. In their quest for more members many societies did not askloan applicants about their income (after all, the house was the security, repossession was simple and costswere recovered). This worked well in times of expansion and inflation, but it brought too many personaltragedies during recessions. More recently, during relatively high inflation, some societies wereover−generous with their evaluation of properties to be financed. This lead to severe losses when inflationceased and most properties actually fell in price. Still, the system has flourished helped along by favourabletax concessions, particularly in the case of co−operative housing societies of which there are many in

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Denmark. In contrast to many groups with similar names in other countries which build houses for members toown, the Danish Cooperative Housing Societies own the houses they build and members are tenants.

In conclusion, suffice it to point out that the Danish system has evolved over a very long time. But because itstarted on a solid basis and built up large reserves, its credit−worthiness was recognised by institutionalinvestors including commercial banks and the central bank, so much so that large foreign investors now alsobuy Danish mortgage bonds. Two of the major institutions have established branches in other Europeancountries. DANIDA, the Danish International Development Agency, entertain applications for free expertise oncooperative finance at all levels of the operation − from training in community participation to cooperativebanks and national apex organisations.

VII. CONCLUSIONS

Conventional thinking has for long considered shelter to be a basic human need which could not be equatedwith other consumption goods whose prices are left to market forces of demand and supply. As aconsequence housing for the poor were to be provided at subsidised prices. Unfortunately, subsidies alwaysran out before all those eligible were housed, and those who benefited were not always the most deserving. Inshort, the reliance on subsidies to house the poor has failed. But what other options are there?

In many developing countries it appears that the poor have been left to their own devices. The four casestudies which are representative of many other cases around the world show that community−basedapproach has been a workable alternative to the failed state−sponsored welfare system. This conclusion isnot surprising because the responsibility for welfare of the poor by the community is an age old concept whichis operative at many levels and in many spheres of life, not just in housing.

Another unfortunate result of looking at housing as being purely a social good is that it should not be subjectto “profit” or indeed to create income. This view is responsible for much poverty−creation. Instead of housingbeing considered only as shelter and not also as an income−generating asset, poor people in particular havebeen kept out of one of the most profitable areas of investment in any society. In fact, housing is one of themost potent instruments in alleviating poverty and should be used as such. But how is this done? The first andmost important problem is to raise finance because few − least of all the poor − have access to financialresources. There are many reasons for this. The most quoted one is that poor people are high risks. There isno proof of this paradigm, if anything the opposite is more likely to be true, provided the investment for whichthey need to borrow is economically viable. Housing is one of them.

The four case studies show unequivocally that investing in housing is indeed so viable in both social andeconomic terms that it brings people together for the sole purpose of raising investable funds which are notavailable to them through the formal sector institutions. They are building on their ability to harness atraditional community responsibility for each other and on their awareness of the viability of appropriateshelter. In so doing they not only house themselves, they also enhance their income and the income of allthose involved in the housing process. And income enhancement is what poverty alleviation is all about.

Conclusions

These four case studies and many others point to a number of preliminary conclusions:

Community−based financial institutions offer a viable alternative to those who cannot obtain credit from formalsector institutions.

There is a long tradition and a wealth of experience in community participation of all kinds in developingcountries. This fact has manifested itself in a multitude of small, informal savings and credit associations.

Some of these community groups have evolved into housing finance cooperatives, albeit with a number ofproblems associated with making the transition from small, short−term loans to larger, long−term ones.

The most significant problems they encounter are in the areas of security, liquidity and public sectorinterference. The two former problems can normally be tackled by the members themselves by peer pressureand by aligning with formal sector institutions respectively.

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Public sector authorities are almost by definition sceptical, if not defensive, against community groups exertingpower over their affairs such as land, physical planning, infrastructure and housing. Various approaches havebeen tried, some with more success than others. But much more needs to be done to improve the interfacebetween community − based and public sector management.

In addition to the above, much more can and should be done to support community−based groups indeveloping countries in their quest for housing and housing finance. But even in societies where public sectorfinancial institutions are highly developed there is a need to protect the poor from the exploitation by privatesector institutions and from public sector inefficiencies.

The public sector can itself do much to support housing finance and other cooperatives:

• by providing a conducive legal framework for cooperatives

• by promoting the local capital markets and facilitating the access to them by financialcooperatives by managing the macro−aspects of the economy to make it advantageous forsmall investors to place their funds in housing.

• by requesting assistance for the above tasks from agencies specialised in this field.

SELECTED BIBLIOGRAPHY

Bakhoum, Ibrahima and others. 1989: “Banking the Unbankable”. London, Panos Publishers Ltd.

Berger, Marguerite, 1989: “Giving Women Credit: The Strengths and Limitations of Credit as a Tool forAlleviating Poverty”. World Development. Vol. 17 No 7.

Boleat, M., “Housing Finance institutions”, in Rodwin, L (ed) Shelter, settlement and Development. Boston,Allen and Unwin, 1987.

Christian, James “Escalating payment mortgages for low and moderate income families in developingcountries”, IUBSSA Newsletter No. 61, London, April 1976

Co−operative Housing (2nd. rev. ed.) International Cooperative Alliance, Geneva 1987

Fuglesang, A and D Chandler “Participation as a Process: What can be learned from Grameen Bank,Bangladesh” NORAD, Oslo 1986

Hammam, Sonia “Informal Financial Circuits in West Africa”, Office of Housing and Urban Programs, USAID,Washington DC, 1984.

Jackelin, R.H. and Elizabeth Ryne 1991. “Towards a Market−oriented Approach and Savings for the Poor”,Small Enterprise Development, an International Journal, Vol. 2 No. 4.

Kropp, E. et al. “Linking Self−Help Groups and Banks in Developing countries”, Asian and Pacific regionalAgricultural Credit Association (APRACA) and Technical Cooperation, Federal Republic of Germany(Eschborn. 1989)

Lewin, A. C. “Housing Cooperatives in Developing Countries”, John Wiley & Sons, London 1981

Lukhele, A. Khela “Stockvels in South Africa” Informal Savings Schemes by Blacks for the Black Community,Johannesburg 1990

Sanderatne, N. “Informal lenders in Sri Lanka: Linking formal and informal markets”. Paper No. 10, (Colombo,Institute of Policy Studies, 1989), (mimeo).

Seibel, H.D. “Finance with the poor, by the poor, for the poor: Financial technologies for the informal sectorwith case studies from Indonesia”, Social Strategies, Vol. 3, No. 2 (Basel, Switzerland Universitat Basel, 1989)

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Seibel, H. “Linking informal sector and formal financial institutions in Africa and Asia” in Levitsky, J. (ed.)Micro−enterprises in developing countries (London, Intermediate technology Publications, 1989)

Sundaram, P.S.A. “Socio−economic profile of informal sector households”, in V.D. Lall (ed.) Resourcemobilisation: International experiences of the informal sector, (New Delhi, Society for Development Studies,1989)

United Nations:. Non−conventional Financing of Housing for Low−Income Households. 1978. Sales no.E.78.IV.12. New York.

United Nations Centre for Human Settlements. Community−Based Finance Institutions. 1984. HS/44/84.UNCHS (Habitat). Nairobi

United Nations Centre for Human Settlements. Community Credit Mechanisms. 1989. HS/150/89. UNCHS(Habitat) Nairobi.

United Nations Centre for Human Settlements: Mobilization of Financial resources for Low−income Groups.1989. HS/167/89. UNCHS (Habitat). Nairobi.

United Nations Centre for Human Settlements: Case Studies of Innovative Housing Finance Institutions. 1993.UNCHS (Habitat). Nairobi.

ENDNOTES

1. Boleat, M., “Housing finance institutions” in Rodwin, L (ed.) Shelter, Settlement and Development (Boston,Allen and Unwin, 1987).

2. UNCHS Habitat “Case Studies of Innovative Housing Finance Institutions” Nairobi 1994

3. UNCHS Habitat “Formal and Informal Financing in a Sites−and−Services Project in Kenya”, Nairobi, 1983.

4. UNCHS Habitat “Community−based Finance Institutions” Nairobi 1984

5. UNCHS Habitat “Community Credit Mechanisms − a training module” is a practical guide on the subject oftraining

6. N.O. Jorgensen’s “Progressive Annuity Tables” are available from Shelter Afrique, P.O. Box 41479, Nairobi,Kenya.

7. In Jamaica the Co−operative Credit Union Leage had interest rates of 7% and 11% in 1984 for savings andloans respectively.

8. Punervaas is an Indian word implying upgrading/reconstruction/rehabilitation.

9. Report of the High Level Group on the proposal to set up a National Housing Bank and other Allied Issues,Reserve Bank of India, February 1987.

10. An NGO may already be operating with a particular community adopted by Punervaas for shelterupgrading, etc. NGOs usually work with such community in the areas of health hygiene and literacy.

11. This is not always possible. The endeavour is however to have as many women members as possible.One way of enforcing this is to give priority of LIH communities agreeing to accepting the principle of womenas first signatories. The inspiration to make women as the main member has come from the experience of theGrameen Bank, Bangladesh and SEWA, India.

12. The model bye−laws have been prepared by Punervaas for registration of multi−purpose cooperatives.The bye−laws have been passed in consultation with the Cooperative Department and have the approval ofDelhi Administration. The bye−laws provided for nomination of 4 members to the managing committee withPresident, Vice−President and Secretary being nominated.

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13. DDA finds cluster approach generally better received than straight line approach. However it is too early togive proper findings on this subject.

14. For a detailed discussion on the subject see “Improved Sanitation Environmental Health Conditions” byEdger F. Ribeiro, Chief Planner, Town & Country Planning Organisation, Ministry of Urban Development.

15. According to Razia S. Ahmed “Even the Grameen Bank Project” (GBP) which is said to be a “remarkablesuccess” and claims 100% recovery is far from perfect on the repayment issue. The loan disbursement andrepayment procedure of GBP are somewhat misleading. The instalments that are overdue are not reportedproperly. Financing the Rural Poor−Obstacles and Rality, Razie S. Ahmed.

16. Deloitte’s Management Consultants coordinated and undertook most of the background work. All quotesin this section are from their summary document.

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