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					An Assessment of the Micro Credit Situation in Rural Bhutan
                               (and its Relevance to Helvetas-Bhutan)




                                   Dominique Bastien




April 2009
CONTENTS


Acknowledgements ............................................................................................................... 3
Acronyms .............................................................................................................................. 4

Executive Summary .............................................................................................................. 5

Introduction ........................................................................................................................... 6

1. Country background .......................................................................................................... 6
   1.     Geographical environment ................................................................................................................ 6
   2.     Administrative organization ............................................................................................................... 6
   3.     Socio economic background ............................................................................................................. 7
   4.     Importance of agriculture for the Bhutanese economy ...................................................................... 7

2. Challenges in rural microfinance in developing countries ................................................ 10
3. Microfinance in Bhutan: regulatory environment and formal microfinance institutions ..... 11
   1.     Financial institutions involved in microfinance................................................................................. 12
   2.     The Ministry of Agriculture (MoA).................................................................................................... 14
   3.     Non-governmental organisations involved in rural microfinance ..................................................... 14
   4.     Informal sources of microfinance .................................................................................................... 17

4. Review of interventions in group savings schemes in Zhemgang and Bumthang ........... 17

5. Proposed strategies and models to improve access of Bhutanese rural families ............ 36
   1. Selection of some existing models and proposals for the Bhutanese rural market .............................. 36
   2. Helvetas possible involvement in improving the efficiency of existing models. .................................... 42

Conclusion .......................................................................................................................... 44
ANNEXE: Questions and answers about microfinance ...................................................... 45




An Assessment of the Micro Credit Situation in Rural Bhutan and its Relevance to Helvetas Bhutan.                                                    2
Acknowledgements

I would like to express my special gratitude to Dr. Walter Roder, resident coordinator of Helvetas
in Bhutan for the confidence he entrusted me with this challenging but interesting work.


I want also thank sincerely all the experts and officers I met in Thimphu for their assistance and
sharing information, especially Mrs Tashi Pem (Chief Programme Officer at Helvetas Bhutan),
Mr Saamdu Chetri (adviser at the Prime Minister Office), Mr Dorji Dradhul (chief research officer,
CoRRB, MoA), Aum Chime P. Wangdi (secretary general of the Tarayana Foundation), Mr
Sudarshana Perera (UNDP), Mr David Stiedl (coordinator of SNV Bhutan).


I am very grateful to all the villagers, operating officers in Helvetas, district agriculture officers as
well as the managers of community groups who spared their time by answering my questions
and by providing their knowledge during my field-trips in Zhemgang and Bumthang; they are too
many to name here, but I would especially cite Chhimi Dorji (director of the Rural Development
Training Centre in Zhemgang), Ugyen Rinzin (chairman of the Shambayung Community Forest
Management Group, Ugyen Choling, Tang Valley), Tekbahadur Pulami (chairman of the
Beekeepers Association of Bumthang), Sonam Dorji (chairman of the Batpalathang milk
processing unit) and Fritz Maurer, in Jakar.


Finally, I would like to express my sincerest gratitude towards Dr Walter Roder and Mrs Tashi
Pem for their valuable suggestions and constructive proofreading.




An Assessment of the Micro Credit Situation in Rural Bhutan and its Relevance to Helvetas Bhutan.      3
Acronyms

BDFC                   Bhutan Development Finance Corporation
BEEKAB                 Beekeeper’s Association of Bhutan
CFMG                   Community Forest Management Group
CGI                    Corrugated Galvanised Iron (sheets used for roofing houses)
CGS                    Credit Guarantee Scheme
CMLF                   Community-Managed Loan Fund
CSO                    Civil Society Organization
DANIDA                 Danish International Development Agency
DoFS                   Department of Forestry Services
DYT                    Dzongkhag Yargye Tshogdu (District Development Committee)
ECR-ADP                East Central Region – Agriculture Development Project
EPC                    Entrepreneur Promotion Centre (MTI)
FAO                    Food and Agriculture Organization
FYP                    Five-Year Plan
GGLS                   Group Guarantee Lending and Saving Scheme
GYT                    Geog Yargye Tshogde (Block Development Committee)
Helvetas               Swiss Association for International Cooperation
IFAD                   International Fund for Agricultural Development
JICA                   Japanese International Cooperation Agency
MoA                    Ministry of Agriculture
NGO                    Non-Governmental Organization
NSB                    National Statistics Bureau
NWAB                   National Women’s Association of Bhutan
Nu                     Ngultrum (the Bhutanese currency)
                       average value : Nu 100 = CHF 2.33 = € 1.50
                                         CHF 1 = Nu 43 ; € 1 = Nu = 65
PAR                    Poverty Analysis Report
PaR ratio              Portolio at Risk ratio
PFMP                   Participatory Forest Management Project
PRSP                   Poverty Reduction Strategy Paper
RDT                    Rural Development Training (Helvetas)
REDP                   Rural Entreprise Development Programme (MoA)
RGoB                   Royal Government of Bhutan
RLP                    Rural Livelihood Project
RNR                    Renewable Natural Resources
SDC                    Swiss Agency for Development and Cooperation
SEDF                   South Asia Enterprise Development Facility
SNV                    Netherlands Development Organization
UNCDF                  United Nations Capital Development Fund
UNDP                   United Nations Development Programme
UNICEF                 United Nations Children's Emergency Fund
WB                     World Bank
WFP                    World Food Programme




An Assessment of the Micro Credit Situation in Rural Bhutan and its Relevance to Helvetas Bhutan.   4
Executive Summary

In Bhutanese rural households, credit is considered as one of the most effective interventions
(together with access to a motorable road) to improve their incomes. In most of the countries
where rural microcredit -that means small scale financial services to farmers who make their
living from agriculture activities but have no access to formal financial services- has been
provided, it has turned out to be risky. In the Bhutanese rural areas, where the majority of the
poor live with most of them being engaged in subsistence farming, it has proved to be even
more challenging because of some specific issues such as the scattered population, the rural-to-
urban migration of youth, small landholdings, drudgery of farm work, unproductive agriculture,
crop damages by wild animals and natural calamities, inadequate infrastructure in roads and
electricity, etc.

There are different models of microfinance used in developing countries, depending on the
different microfinance environments but the leading approaches include:
     • Programmes implemented by governments as a policy to alleviate poverty.
     • Partnership with a NGO in promoting microfinance within a community.
     • Direct microlending and savings provided by commercial banks and microfinance institutions.
     • Group lending where clusters of people organize themselves into groups, save and lend within
        the group.

Asian microfinance stands unrivaled in scale as far as professional profit-oriented microfinance
institutions are concerned. However, an increasing number of projects rely more and more on
group loans managed by the members themselves, often without the assistance of external
staff.

Some international microfinance institutions could be interested in the Bhutanese market.
However, these institutions would probably take a selective approach focusing first on
vulnerable non-poor to the moderate poor in urban and rural areas. Furthermore, it would
compete directly with BDFC. Consequently, we feel that in the short term, the most feasible,
effective, viable as well as adaptable microfinance model has to be based on the people
themselves. The numbers of community-managed groups that are organized for a specific
purpose, that lend to their members, and mobilize their savings (if any) have to be increased as
well as that of more informal women’ groups.

Civil society organizations (CSOs) have a key role to play in terms of financial and social
support because managing such groups is not easy for non professional and often illiterate
people. The CSO for instance, can: bring some capital in the form of a grant when people have
no savings at all or have shown their capability to manage their own funds; act as a guarantee;
provide technical and financial training to extension officers and farmers; encourage savings
habits; organize non financial training such as literacy and education about health (especially for
women).

Developing microcredit is an opportunity to reduce rural-to-urban migration through providing
activities generating income to the rural households in the medium term; and civil society
organizations can bring the expertise needed.




An Assessment of the Micro Credit Situation in Rural Bhutan and its Relevance to Helvetas Bhutan.   5
Introduction

The Royal Government of Bhutan has adressed a wide range of poverty issues since the
implementation of the First Five-Year Plan in 1961. The Tenth Five-Year Plan (2008-2013)
identifies poverty as the core development objective and has established a clear and ambitious
target of reducing national poverty to below 15%. The “Midway to the Millennium Development
Goals 2006-2015” report emphasizes the challenges still to address: “reduce spatial disparities,
raise agricultural production and productivity to help small holder farmers break out of the
subsistence trap, enhance access to roads and markets, effectively balance livelihood
opportunities and conservation priorities, promote off-farm employment to help alleviate
underemployment in the rural sector and contain rapidly rising youth unemployment”. Last but
not the least, equitable socio-economic development is one of the four pillars of the Gross
National Happiness policy promulgated by His Majesty the Fourth Druk Gyalpo.

This report intends to give an overview of the existing microfinance players in Bhutan; to review
some of the interventions in group saving schemes that have been funded by Helvetas in
Zhemgang and Bumthang; to propose a new possible approach -adapted from models that have
proved to be successful in some neighbouring countries- in order to improve the access of
Bhutanese rural households to credit on one hand and Helvetas involvement in improving the
efficiency of the model on the other.



1. Country background


   1. Geographical environment
   Bhutan is a land-locked kingdom bordered by the Indian States of Arunachal Pradesh (in the
   east), West Bengal and Assam (in the south), Sikkim (in the west) on one hand, and the
   Tibetan autonomous region of China to the north on the other.

   The total area of the country is 38,394 km². The terrain is mostly mountainous and the
   elevation varies from 100 meters above sea level in the south to more than 7,500 meters in
   the north, of which 55% only is below 3,000 meters. There are three distinct physiographic
   zones namely the southern foothills (from 200 to 2,000 meters), the inner Himalayas (2,000
   to 4,000 meters) and the great Himalayas (above 4,000 meters) that create a corresponding
   range of climatic conditions and agro-ecological zones: climatic conditions vary from wet
   sub-tropical (from150m to 600m), to humid sub-tropical (from 600m to 1,200m), and dry sub-
   tropical (from 1,200m to 1,800m) in the south hills to warm temperate zone (from 1,800 to
   2,600m) to cool temperate zone (from 2,600 to 3,600m) and cold and dry tundra conditions
   in the north.


   2. Administrative organization
   The country is divided into 20 Dzongkhags (districts) that are under the charge of a Dzongda
   (district administrator) who is appointed by the government; he is assisted by a Dzongrab
   (deputy district administrator) and other officials in charge of planning, development and civil
   administration at the local level.


An Assessment of the Micro Credit Situation in Rural Bhutan and its Relevance to Helvetas Bhutan.   6
       The Dzongkhags are sub-divided into 205 Geogs (counties or blocks) that are made up of
       groups of villages called Chiwogs; the Geog is the lowest level of administration and is
       headed by a Gup.
       There are local governments in each of the Dzongkhag- Dzongkhag Yargye Tshogdu (DYT,
       district development committee), the Geog Yargye Tshogde (GYT, block development
       committee) and the Thromde Yargye Tshogde (TYT, municipal development committee).
       These local government bodies have decision making powers in local planning and
       implementation,but no legislative functions. All the members of these three institutions are
       elected by the villagers.

       For a long time, people’s participation and mobilisation have been considered as key for
       improving their standards of living. From the beginning of the 1960’s, the successive Five-
       Year Plans have put in place and reinforced the administrative and political decentralized
       organization. The number of district sector staff and planning officers have been
       progressively increased and their capacities have been enhanced. The 9th Five-Year Plan
       confirmed the importance of the political, administrative, regulatory, fiscal / financial
       decentralization and put in place a new planning process that reinforced the importance of
       the GYT and DYT.



       3. Socio economic background
       The total population of Bhutan is estimated to be 672,425 inhabitants according to the 2005
       Population and Housing Census, “more than 60% of which are still small and subsistent
       farmers constrained with inadequate land holdings and remoteness”.

       The government has addressed a wide range of poverty issues. The 10th Five-Year Plan
       (2008-2013) identifies poverty as the core development objective and has established a
       clear and ambitious target of reducing national poverty to below 15%.
       The “Midway to the Millennium Development Goals 2006-2015” report 1 emphasizes the
       improvement in reducing poverty levels and inequality on the 2000-2007 period but also the
       challenges still to address, such as raising agricultural production and productivity,
       enhancing access, and promoting employment opportunities specifically for the youth. :
       Last but not the least, equitable socio-economic development is one of the four pillars of the
       Gross National Happiness philosophy 2 promulgated by His Majesty the Fourth Druk Gyalpo.



       4. Importance of agriculture for the Bhutanese economy
       Since the launching of the First Five-Year Plan in 1961, dramatic socio-economic
       improvements have occured, supported principally by hydroelectricity exports to India, the
       construction of roads and of some energy-intensive industries, as well as electricity and
       telecommunication infrastructures.

       Bhutan’s Gross Domestic Product (GDP) has grown at an average rate of 7.5% per
       annum from 2002 to 2006 3, underpinned by a very high growth in investments (gross


1
    Published by the Planning Commission and the UN System in Bhutan, November 2008
2
  The four pillars to GNH policy are: equitable and sustainable socio economic development, preservation and promotion of
culture, conservation of environment and good governance.
An Assessment of the Micro Credit Situation in Rural Bhutan and its Relevance to Helvetas Bhutan.                      7
       capital formation was in average 45% of GDP per year over the period) that can be
       explained by the intensive hydropower developments and by the costs of connecting a
       scattered population living in montainous areas.
       In 2007, GDP improved by 21.4% at constant prices thanks to a 52.8% growth in the
       secondary sector (+121% for the electricity sub-sector), while the growth in the primary
       sector was a poor 2.2% as compared to 3.1% in 2006.


       However, Bhutan remains an agrarian country. The growth of the Renewable Natural
       Resources sector (which consists of arable agriculture, horticulture, livestock and forestry)
       over the last few years has been weak in comparison to the growth of the other sectors of
       the economy (in average less than 3% growth per year). Nevertheless, agriculture still plays
       a vital role for rural livelihoods.

                 •   In 2000, it accounted for 27.7% of GDP (12.5% from agriculture proper, 8.7%
                     from livestock, 6.5% from forestry and logging) and employed 75% of the
                     population, the majority of them being totally dependant on subsistence
                     agriculture and livestock.

                 •   In 2007, it accounted for 17.2% of GDP (7.9% from agriculture proper, 5.4% from
                     livestock, 3.9% from forestry and logging) and still employed 55% / 60% of the
                     population so that the proportion of GDP generated by agriculture has declined
                     faster than the proportion of population depending on agriculture.


       Agricultural land constitutes less than 8% of the total land area (that means 311,098 ha); it is
       limited by the steep terrain, the altitude and the obligation to maintain the forest cover.
       Shifting cultivation is practised by almost half of the households and covers 27% of the total
       agricultural area. Landholdings are often highly fragmented, with small parcels of land in
       different locations; more than half of the households own less than 5 acres and practice
       subsistence farming.


       Agriculture faces many challenges: the rural-to-urban migration 4 of youth (so that those
       left for farm work are mostly women and elderly people), small landholdings, drudgery of
       farm work, marginal production environment, crop damages by wild animals and natural
       calamities, inadequate infrastructure in roads and electricity to market the products, etc. In
       the same time, thanks to its wide range of microclimatic conditions, Bhutan enjoys seasonal
       comparative advantage and produces temperate zone crops while its Indian and
       Bangladeshi neighbours are mainly tropical agricultural producers. For high-value products
       such as oranges, apples, potatoes, cardamom, ginger, chillies, etc. till now this advantage
       has overcome the high transport costs and the poor marketing policies.


       After more than four decades of planned development, the majority of Bhutanese
       people are still dependant on agriculture. Despite significant improvement in the standard
       of living (as shown in indicators related to life expectancy or enrolment rate at the primary
       level) the elimination of poverty remains a challenge mainly in rural areas.


3
 Royal Monetary Authority of Bhutan, annual report 2007/2008, January 2009. Fiscal year: July n/ June n+1 ; figures are at 2000
prices.
4
    According to a 2005 study carried out by the Ministry of Agriculture, 47% of rural households have migrants.
An Assessment of the Micro Credit Situation in Rural Bhutan and its Relevance to Helvetas Bhutan.                            8
    The Poverty Analysis Report 2007 5 that used living standard indicators covering both
    monetary and non-monetary dimensions of well-being (such as health, education, physical
    infrastructure), covered the 20 Dzongkhags and a sample of 9,798 households that
    represented a total extrapolated population of about 630,000 people.

    It identified:

              •    23.2% (± 1.5% margin of error) of “poor” people living below the total poverty
                   line 6, that means with a per capita real consumption of Nu 1096.94 / month.
              •    5.9% (± 1.5% margin of error) of “subsistence poor” (extremely poor) people
                   living below the food poverty line of Nu 688.96 / month.


    Poverty in Bhutan is mainly a rural phenomenon with 30.9% of the rural population falling
    below the total poverty line compared to 1.7% of the urban population: 98% of the poor
    persons live in rural areas (and 100% among the extremely poor).

    Estimates of poverty incidence and subsistence incidence for the population in the poorest
    Dzongkhags are as follows:

       Dzongkhag                                                       As a percentage of the population
                                                                Poverty incidence       Subsistence incidence
       Dagana                                                        31.1%                         9.7%
       Lhuntse                                                       43.0%                        11.2%
       Mongar                                                        44.4%                        10.2%
       Samdrupjonkar                                                 38.0%                        12.2%
       Samtse                                                        46.8%                        17.6%
       Zhemgang                                                      52.9%                        17.8%
       Total Bhutan (20 Dzongkhags)                                  23.2%                         5.9%



    Most of the poor people interviewed for the study said that:

              •    Health, education as well as suitable sanitation facilities, access to safe water
                   sources, road infrastructure, bridges, electrification, telephone, etc. should be the
                   priorities of the government.
              •    Electricity, roads, piped water and rural credit (from BDFC) were the four most
                   effective services for improving their living conditions 7.

    Improving accessibility, providing productive employment opportunities in rural areas,
    making work more rewarding for the labourers, improving the performance of the agricultural
    sector are keys to increase rural income and tackle poverty. Rural microcredit -a strong
    engine in enhancing the standard of living of the people- is challenging in any environment
    but due to the scattered rural population, providing micro credit in the Bhutanese rural
    areas has proved to be quite difficult up to now.


5
  PAR, published by the National Statistics Bureau, December 2007
6
  Total poverty line is the minimum acceptable standard (Nu 1096.94 per capita and per month); it adds the food poverty line
(cost of goods attaining the pre-determined minimum food energy requirement of 2,124Kcal /capita/ day) and some non-food
requirements.
7
  It should be kept in mind that only 15% of respondents had availed rural credit so that the rating can be skewed by the high
scores of the ones who got loans.
An Assessment of the Micro Credit Situation in Rural Bhutan and its Relevance to Helvetas Bhutan.                           9
2. Challenges in rural microfinance in developing countries8

75% of the 1.2 billion poor people worldwide live in rural areas. The majority of them are small
agricultural producers and non-farm entrepreneurs who have no access to formal financial
products and services (agriculture is considered more risky than industry or trade) and who have
to rely on costly informal sources of funds (moneylenders).

Decision making in agriculture is not an exact science, it depends on many variables that
change from a year to another and are, for most of them, beyond the technical and managerial
capability and control of the farmer.
Very often, small farmers are scattered across difficult-to-reach locations (they have to travel
long distances sometimes on foot to reach a village) and, even when literate, lack the
accounting skill that would allow them to have a good understanding of the business and cash
flow cycles of the household as well as an estimate of its reimbursement capacity. In addition
to a difficult context, rural customers face many external risks, among which:

                •    Climate risks: size and quality of the crops are highly linked to fluctuations in
                     climate and rainfall as well as to access to water sources.
                •    Production risks: pests and diseases that attack the products during the growth
                     cycle as well as crop damages by wild animals, natural calamities, or inadequate
                     conditions during harvest, processing, storage, transport, marketing.
                •    Market and price risks: many agricultural markets are imperfect, lacking
                     information and communication infrastructure; prices vary with levels of
                     production and demand at the time of sale and are also affected by access to
                     markets. Inelastic demand for many products results in large price swings: after a
                     specific crop got a good price one year, more farmers are prone to plant the
                     same one the following year, driving the price down. Last but not the least, the
                     international market conditions and local public policies can increase these risks
                     (creation or removal of custom duties, change in farming subsidies, entry of new
                     players).

In the same time, credit providers in rural areas are confronted with specific challenges:

                •    High transaction costs because these areas are often remote while
                     communication and transport infrastructure is not well developed; additional costs
                     sometimes occur for ensuring security of liquidity.
                •    Hiring and keeping well-trained employees who are willing to work in rural areas
                     is difficult and expensive.
                •    The poorly-educated customers find difficult to provide documents and
                     information to apply for a loan and to understand its conditions (risks and
                     requirements).

Consequently the credit institutions have to be quite efficient, physically close to their customers
and have loan disbursements and reimbursements schemes tailored to complex and long cycles
(from preparing the land to planting, fertilizing and harvesting), to irregular cash flows in terms of
amount as well as timing (the farmer can delay the selling of crop until better market conditions
occur).




8
    For general information concerning microfinance, see Annexe

An Assessment of the Micro Credit Situation in Rural Bhutan and its Relevance to Helvetas Bhutan.   10
Delivering microfinance usually involve microfinance institutions (MFIs) with professional staff
but over the years, an increasing minority of microfinance projects rely instead on community-
managed loan funds assisted by professional actors.



3. Microfinance in Bhutan: regulatory environment and formal
microfinance institutions

The Civil Society Organizations Act (CSOs Act) that has been established in order to
strengthen civil society by developing human qualities and rendering humanitarian services, has
been enacted by the National Assembly of Bhutan on June 20, 2007.

“Civil Society Organizations (CSOs) refer to associations, societies, foundations, charitable
trusts, not-for-profit organizations or other entities that are not part of Government and do not
distribute any income or profits to their members, founders, donors” (Article 3).
To promote social welfare and improve the conditions and quality of life for the people of
Bhutan, two types of CSOs have been distinguished:

           •   Public Benefit Organizations (PBOs), which are established in order to benefit a
               section or the society as a whole, and will serve to complement the efforts made
               by the Government in terms of economical and cultural development, alleviation
               of poverty, etc.
           •   Mutual Benefit Organizations (MBOs), which are established in order to advance
               the shared interests of their members (such as interests of people working in a
               particular profession or industry).

The Civil Society Organizations Authority has just been formed and is in charge (among others)
of approving the application for registration of any national CSO, accrediting any foreign CSO
registered as a non-governmental organization in a foreign country that intends to operate in
Bhutan, monitoring their activities, etc.

Civil society groups have been existing for a long time in Bhutan in the form of community based
self-help practices (such as collective labor, arrangements for footpath clearing and common
resource management) and formal non-governmental associations that have been formed for
purposes such as religion, protection of business community interest, welfare, etc. Several non-
governmental organizations have been created in the last three decades to address specific
issues (the National Women’s Association of Bhutan, the Royal Society for Protection of Nature,
the Youth Development Fund RENEW, the Royal Society for Protection and Care of Animals
RSPCA, and Tarayana Foundation) when no specific rules regulated NGOs; consequently some
of them are governed by Royal Charters, and others are registered with the Ministry of Home
and Cultural Affairs.

Up-to-now, three different kinds of institutions are involved in rural microfinance schemes:
financial institutions, ministries, and non-governmental organizations. However, there are no
foreign for-profit microfinance institutions (MFIs).




An Assessment of the Micro Credit Situation in Rural Bhutan and its Relevance to Helvetas Bhutan.   11
     1. Financial institutions involved in microfinance
    Only one financial institution among the four existing ones 9 in Bhutan is involved in
    microfinance, the Bhutan Development Finance Corporation BDFC.

    BDFC was established in 1988 when the Royal Government of Bhutan stopped its previous
    strategy based on subventions to the farmers. It was initially funded with soft loans 10 from the
    Asian Development Bank, Kuwait Fund for Arab Economic Development (KFAED), United
    Nations Development Programme (UNDP), and Netherlands Development Organization
    (SNV).
    BDFC has been mandated by the Royal Government of Bhutan to “primarily promote the
    industrial, agricultural and commercial development of the Bhutanese economy by providing
    financial and technical advices to enterprises”. Despite having a branch in each Dzongkhag, at
    the end of the 1990’s BDFC’s disbursements were strongly focused in the north-west districts
    where a large number of small & cottage industries, tourism operators and central government
    agencies are located. The bank faced serious problems in financing small & cottage industries
    and agriculture as it had insufficient expertise in microfinance and had long and difficult
    administrative procedures while the groups needed information and accounting training. At the
    beginning of the 2000’s, results were quite disappointing with a portfolio at risk ratio 11 of 29%.
    The main reason for these poor results was that the loans were perceived as grants (kidu) and
    consequently not reimbursed.

    Helped by the successive capacity building programmes of SNV and UNDP, BDFC developed
    new operating processes (organization, credit expansion, recovery procedures) that improved
    the figures. At the same time it launched a home lending product at commercial interest rates.

    The bank offers three loan products: the Group Guarantee Lending & Savings scheme
    GGLS, the Small Individual Loan SIL and the Commercial Agriculture Loan CAL; of the three,
    GGLS is the best adapted to rural needs.

    Main characteristics of the GGLS:

              •    From Nu 500 up to Nu 50,000.
              •    Interest rate 10% flat.
              •    Maturity of the loan: up to one year on the basis of cashflow forecasts.
              •    Groups of people who know each other, live in the same village and have the
                   same socio economic background.
               •   No collateral required, the group members acting as co guarantees.
               •   Compulsory savings (Nu 50 per month and per member) can be used as partial
                   collateral coverage for loans or offset arrears payments and default cases.
                   Savings are mobilized 2 or 3 months before delivering the loan in order to judge
                   the savings capacity and financial discipline of the potential borrower; women are
                   better savers than men. Savings are managed by the group treasurer and the
                   BFDC credit officer.


9
   The Bank of Bhutan (which introduced small loans to microenterprises at the end of the 1980’s but since has suspended this
activity) and the Bhutan National Bank are registered as banks; the Royal Insurance Corporation of Bhutan, and Bhutan
Development Finance Corporation are registered as financial institutions.
10
   A soft loan is a concessional loan.
11
   Portfolio at risk is defined as the value of all loans outstanding that have one or more installments of principal past-due more
than a certain number of days (usually 30 days). It includes the entire unpaid principal balance, past-due and future installments
but not accrued interest. PAR ratio formula is portfolio at risk (x days)/gross loan portfolio. A well-managed microfinance
institution has a PAR ratio well below 5%.

An Assessment of the Micro Credit Situation in Rural Bhutan and its Relevance to Helvetas Bhutan.                              12
              •   Compulsory attendance of each member of the group to the monthly meetings
                  with the credit officer (penalty if not).
              •   If the group fails to reimburse the loan (poor crop for instance), BDFC can defer
                  repayment or reschedule maturity but never refinance a loan.

     In order to implement the national decentralization policy and to reduce the high cost of
     delivering loans, BDFC -which has 3 regional offices and 22 branch offices- is expected to
     open one office (= one employee) in each Geog that will take decentralized decisions in terms
     of disbursement of loans. Accessibility and loan delivery will thus be significantly improved. Up
     to now, according to the amount of the loan, the approval has to be given by the chairperson
     of the center, of the regional office or even of the national office.

     The bank has recently developed mobile banking that brings many services to the field such
     as loan documentation, loan approval and disbursement, loan and savings collection, savings
     withdrawals, project supervision and monitoring. The BDCF field staff visits rural communities
     at pre-determined place, date and time of meeting on a regular monthly basis. But mobile
     banking is limited to Nu 5,000 so that above this amount the borrower has to travel to the
     branch office in the district headquarters.
     The expected creation of an “every service under one roof” public center in each Dzongkhag
     that will allow people in remote areas to resolve all their problems at one place would definitely
     be a great help for them and for the bank.


     Findings and analyses
     The concept of “welfare state” is still well established in the mindset of many Bhutanese
     people and the fact that some grants are still given by international organizations may
     reinforce this idea.


     Through the successive Five-Year Plans, the government has given BDFC a huge role to play
     in poverty reduction. Yet BDFC has had limited success in meeting the financial needs of the
     majority of poor rural people. It is assumed that this is because of its long and unfriendly
     procedures and its selective approach that seem to favour richer farmers, and because
     technical assistance given by SNV and UNDP 12 trained more head office managers than field
     staff so that loan distribution and recovery in rural areas are still not led in a professional and
     objective way. BDFC has not yet fully exploited its potential (on the 2005-2007 period, the non
     performing loans were 12 / 13% of total loan portfolio for the sector, but 16 / 20% in BDCF) to
     meet the government’s requirements to target the poor rural population, focusing on medium
     and large enterprises (today, 19% of its loan portfolio only is devoted to agriculture
     households). However, it must be admitted that the government,which is the main
     shareholder (it owns 87% of BDFC equity), could emphasize the need to better focus on poor
     rural persons, groups and communities..


     BDFC’s new plan to expand in rural areas is quite relevant but it could still be questioned if the
     microfinance needs in Bhutan could be met through this institution which has been given two
     antinomic goals: on one hand, it has to develop as a profitable financial institution, and on the
     other, it has to be a social financial institution devoted to the poor. Considering the
     organization and the source of its management since the beginning, BDFC works well as a


12
 The last microfinance programme financed by UNDP (2007-2009) includes a reformulated training programme of 100 branch
managers and outreach staff of BDFC that aims “to help develop better managerial and client-oriented skills and services”.

An Assessment of the Micro Credit Situation in Rural Bhutan and its Relevance to Helvetas Bhutan.                     13
     commercial profitable institution but lacks the culture, the organization and the expertise to
     function as a financial institution oriented towards the needs of poor rural people.

     A split of BDFC into two entities would clarify the roles:
                • a commercial profit-oriented bank, organized and managed just like the other
                  Bhutanese banks on one hand,
                • a social-oriented institution focused on poor rural people and managed as such
                  on the other hand. Success will be a long term process based on strong expertise
                  and training of the staff as well as of the customers.

     Another scheme, not following the BDFC’s assigment word for word, could be to deliberately
     leave schemes for poor rural people living in remote areas to NGOs and to focus on urban,
     semi-urban and “well-off” and easily reachable rural people.

     In its current structure, BDFC could have a tough time soon considering the opening of the
     Bhutanese financial sector to private investors. As a third player with a 12% market share,
     BDFC could be weakened by the probably more dynamic and professional private groups that
     are expected to enter the market soon.


       2. The Ministry of Agriculture (MoA)
     Along with development agencies, MoA has initiated the training of farmers’groups to produce
     and market agricultural, livestock and forestry products. At the end of 2008, there were more
     than 200 groups engaged in the production of potatoes, vegetables, chillies, medicinal plants,
     mushrooms, poultry, as well as in milk collection and processing, beekeeping, piggeries and
     fisheries, community forests, irrigation or farm machinery.

     Some of the existing groups have been engaged in microcredit schemes using the savings
     accumulated by the group but considering that “the legitimate expectations and aspirations of
     the poorest farmers and their families are not being fulfilled and that these disadvantaged
     groups are able to benefit more fully from the process of social and economic development,” 13
     MoA is anxious to expand rural microcredit with money lent by national financial institutions or
     donors.


     Findings and analyses
     Even assuming that funds from donors can be easily mobilized and that the programme will
     have only to breakeven, capacity building (for ministry officers as well as the clients) is still a
     challenge and a huge investment.


       3. Non-governmental organisations involved in rural microfinance

                 •    The National Women’s Association of Bhutan (NWAB)
                      The National Women’s Association of Bhutan was one of the first NGOs
                      established in Bhutan (April 1981) in order to promote the socio economic status
                      of rural Bhutanese women. In 1983, it received funds from UNICEF for
                      implementing its smokeless stove project (in order to reduce indoor air pollution,


13
     “Bhutan 2020: a vision for peace, prosperity and happiness” report ; Planning Commission, Part 1, 1999.

An Assessment of the Micro Credit Situation in Rural Bhutan and its Relevance to Helvetas Bhutan.              14
                   to reduce health hazards and pressure on the forest) that became a national
                   project in 1990.

                   NWAB received significant support from United Nations Capital Development
                   Fund (UNCDF), SNV and the International Fund for Agricultural Development
                   (IFAD) during the 1999-2002 period to lend group loan schemes and to develop
                   training (including group dynamism, bookkeeping, sanitation, HIV/AIDS. etc.).
                   However, 50% of the loans went bad because people considered them as “kidu”.

                   NWAB’s plan advocates for the promotion of economic opportunities for
                   disadvantaged women, among which:

                       o   Community development projects in eastern Bhutan (rural credit and
                           savings schemes to develop income generating activities such as cane
                           basket weaving, kitchen garden).
                       o   Self help groups for mushroom, ginger, gurgum, herbal medecine
                           cultivation in central and south east districts.
                       o   Promotion of weaving and vegetable dying process (national handloom
                           development project in Khaling) and training of young rural people
                           (weaving training center in Pemagatshel) to provide income generation.


                   Findings and analyses
                   For a long time, NWAB has been able to mobilize large funds from external
                   agencies like UNDP, Danish International Development Agency (DANIDA),
                   UNICEF, Australian High Commission, Food and Agriculture Organization (FAO),
                   South Asia Enterprise Development Facility (SEDF).

                   It seems that NWAB has been under pressure for some time that prompted it to
                   down size its activities and to reconsider its strategy: “With the Civil Society
                   Organizations Act being enacted and the Authority being established, NWAB is
                   going to be confronted with several new NGOs and associations that will share
                   similar objectives. NWAB, therefore, needs to refocus and sharpen its direction,
                   revisit its program and activities, reengineer its processes and restructure the
                   management systems and organization operations and systems; it intends to
                   strike alliances with others.” 14


               •   The Tarayana Foundation
                   The Tarayana Foundation is a non-profit organization established in 2003
                   by Her Majesty the Queen Ashi Dorji Wangmo Wangchuck.

                   Since then, the Foundation has been engaged in five programmes targeting
                   vulnerable people in the country: supporting vulnerable individuals,
                   sponsoring disadvantaged students, supporting needy patients to receive
                   medical care, promoting artisan skills and improving socio-economic
                   security of rural communities.
                   From May 2009, two programmes will be transfered to the Welfare Office of
                   His Majesty the King: the sponsorhip of disadvantaged students and the




 14
      Cf. NWAB web site: www.nwabbhutan.org.bt
An Assessment of the Micro Credit Situation in Rural Bhutan and its Relevance to Helvetas Bhutan.   15
                     support of destitute individuals. Consequently, Tarayana Foundation will
                     focus on rural development and community building programmes 15:

                     o        Promotion of artisan skills and crafts in order to generate
                              income in poor communities through training and organizing
                              self-help groups as well as facilitating the sale of crafts from
                              these communities in Tarayana craft centers.
                     o        Comprehensive community development through programmes
                              promoting economically viable activities.


                     The Foundation and Helvetas are in the second phase of a project (2005-
                     2007/July 2008 - June 2011) supported by a CHF 300,000 (phase 1) and
                     CHF 330,000 (phase 2) financial contribution of Helvetas.

                          o    From 2005 to 2007: the goal of phase 1 was “to contribute to help the
                               vulnerable and the disadvantaged help themselves”. It focused on
                               identifying and training self-help groups to enhance rural livelihoods of
                               poor and remoted communities through the promotion of economically
                               viable traditional activities, such as nettle processing in Trongsa.
                          o    From July 2008 to June 2011: the phase 2 targets two communities in
                               Zhemgang (Digala and Langdurbi) and possibly one in Sarpang with the
                               overall goals to increase the income of targeted households by at least
                               60% and to form at least six associations or groups in order to help the
                               communities in local decision making. The project collaborates closely
                               with the Rural Livelihood and the Participatory Forest Management
                               projects for income generation supported by Helvetas.

                               Although not directly linked to income generation, the reconstruction of
                               houses in 5 villages of Middle Kheng proved to be a turning point for the
                               villages as it strengthened community cohesion as shown a few years
                               earlier in a similar programme for Lhop communities 16 where some
                               dwellings were “nothing more than thatched huts put-up on bamboo stilt.”
                               Furthermore the construction of the houses in the villages provided skills
                               learning opportunities for the local population: 20 villagers both men and
                               women have been trained in masonry and carpentry.


                               Findings and analyses
                               The Tarayana Clubs are a key element of Tarayana expansion
                               throughout the country. Their 4,000 members (students and
                               teachers) are in charge of identifying target groups for
                               community based activities, that are then discussed with the
                               Gups of the respective Geogs.
                               When villages have been selected, through consultative local
                               meetings, Tarayana field staff, who are based within the
                               targeted rural community, help them to identify and prioritize
 15
      but operating costs will skyrocket accordingly.
16
   the project constructed three demonstration houses one each in the villages of Lotokuchu Jigme, Lotokuchu Singye and
Lotokuchu Wangchuck; it was supported by Save the Children Fund USA in the mid-2000’s.

An Assessment of the Micro Credit Situation in Rural Bhutan and its Relevance to Helvetas Bhutan.                  16
                       their needs according to the likely economically-viable
                       projects, train them and supervise the implementation of the
                       projects. During its first phase (2005-2007), Helvetas support
                       contributed towards supporting capacity development of 15
                       groups in 7 communities; Tayarana field staff provided them
                       with training in handling raw materials, in producing traditional
                       paper, cane and bamboo products, nettle processing weaving,
                       pottery, soaps and candles, etc. as well as in quality
                       standardization and even marketing strategies.

               Should the Foundation extend its areas of intervention (targeted communities as
               well as range of activities provided) in a sustainable way:

                   o   It would appear significantly understaffed with only 7 people based within
                       the target rural communities, while these in-field staffs are key in the
                       success of Tarayana projects.
                   o   It would have to improve fund raising in a fair and consistent way but
                       without soaring associated costs.


   4. Informal sources of microfinance
 It is estimated that microlenders cover 30% of the financial needs of the rural communities.
 The success of microlending -through individuals as well as monastic institutions- relies on
 very simple reasons: quick and easy access (in order to cover mainly emergency problems),
 simple and “friendly” procedures, adapted periods of lending (1 to 3 months in average but can
 be longer), small need of mortgage or collateral, informal, flexible and adaptable but subject to
 exorbitant interest rates (the shorter the period and the smaller the amount, the higher is the
 interest rate) with an average of 50% per year. If the borrower cannot pay, the case can be put
 up to the Gup or even to the Court as the agreement signed between the moneylender and
 the borrower is considered as legal.

 In very scattered villages, there are very poor people still not monetized and left out of reach
 by BDFC or non governmental organizations so that this informal source of microfinance has
 unquestionably a social role to play.



4. Review of interventions in group savings schemes in Zhemgang
and Bumthang

(IN THE FIELD VISITS, FEBRUARY 2009).


 This part of the report is based on two trips made to Zhemgang and Bumthang in February
 2009. The visits and interviews relied on a very focused questionnaire to understand the
 dynamics and the management of many of the groups.

 The majority of the initiatives to generate income in Zhemgang villages have been active for
 only a few years. Some have been provided with technical and financial supports from local
 NGOs and other development partners and others have been supported by relevant Ministries
 and their sector staff in the Dzongkhag. For Helvetas, the main projects that support such
An Assessment of the Micro Credit Situation in Rural Bhutan and its Relevance to Helvetas Bhutan.   17
     initiatives in Zhemgang are the Rural Livelihood and Participatory Forest Management
     Projects (training components supported through the RDT centre also in Zhemgang) .

                •    The Rural Livelihood Project (RLP) supports rural development in four districts
                     (Zhemgang, Trongsa, Sarpang and Bumthang) in partnership with the Ministry of
                     Agriculture. Helvetas contribution amounts to CHF 2,150 million for the July 2008-
                     December 2011 period.
                     Through rural economic schemes, the project aims to develop sustainable rural
                     income generation and to improve the capabilities of the farmers’ groups and
                     associations. The majority of the activities recounted below are part of the Rural
                     Livelihood Project or of Tarayana Foundation projects.

                •    The Participatory Forest Management Project (PFMP) started in 2002 in 7
                     Dzongkhags in partnership with the Department of Forest of the Ministry of
                     Agriculture. In its second nation-wide phase (June 2007- June 2012), the Swiss
                     contribution amounts to CHF 3,230 million.


                     The overall goal of the project is “to contribute to the improvement of rural
                     livelihoods and their natural environment by empowering local communities and
                     strengthening their capacity (and that of the staff of the Dzongkhags and of the
                     Department of Forestry Services) to manage forest resources on a sustainable
                     basis”. 300 community forests are to be established on the period compared to
                     more than 100 today.


     The main findings are :

                •    Working in a group is part of the Bhutanese culture. “Much of daily life is
                     governed by certain inherent norms and values such as inter-dependence within
                     the community” 17 so that there are many traditional activities that are done
                     together on a voluntary and free basis, such as farming and harvesting, support
                     in time of sickness or death, management of common resources. In Digala, the
                     reconstruction of the houses of the village has reinforced the community cohesion
                     but we think that only a successful implementation of the chosen activities will
                     confirm the strong commitment of the villagers, especially the women, on the long
                     term.
                     At the same time, having been told and having read at length that there were
                     structural household labor shortages in rural areas, the number of people ready
                     to develop new activities, some of them requiring training, was surprising.

                •    Groups membership seems very stable with very few people entering a group
                     already formed and very few dropping out. The most successful groups (corn
                     flakes production, poultry production, beekeeping) would like to have more
                     members but “nobody can bring enough money to take part to the accumulated
                     savings” while the members who would like to drop out are not keen to lose their
                     initial investment (according to the by-laws).

                •    Competition and overcapacity are not a concern for the groups. Bhutanese
                     people are inclined to develop same products or same businesses when
                     successful (for instance, after some farmers have registered a good price, they
17
     Understanding Civil Society in Bhutan, Lham Dorji & Tashi Choden, The Centre for Bhutan Studies, 2005.
An Assessment of the Micro Credit Situation in Rural Bhutan and its Relevance to Helvetas Bhutan.             18
                      plant more the following year and the neighbouring farmers plant the same one
                      too). Of course, there is no question today about chillies or medicinal plants
                      productions considering the very strong local demand, but the question could
                      arise with the eggs production: the number of henhouses has strongly increased
                      for a few years but as soon as sanitary conditions improve (no bird flu), imports
                      from India will recover and the price of eggs will drop significantly.

                      An agricultural database has just been launched 18, organized under national,
                      Dzongkhags and Geogs levels for agriculture, livestock and forestry sectors.
                      When comprehensive and up-to-date, this document will be very helpful to
                      organizations and extension officers who advise farmers to develop new
                      activities.

                 •    Marketing the products is not a concern because the demand is quite high for
                      many products (medicinal products, chillies, fish, pork, cornflakes, local cheese,
                      honey,etc.). However, some farmers or entrepreneurs have to be prepared for a
                      more difficult economic environment (eggs producers could be rapidly facing a
                      drop in selling prices due to an over supply while Swiss cheese producers could
                      be affected by the tourism crisis considering that foreigners are the main
                      consumers of this kind of cheese). Moreover, it was mentioned that marketing
                      cash crops such as oranges is becoming a concern for Indian and Bangladeshi
                      importers because some exporters try to cheat them and do not bother whether
                      their products reach their destination safely.

                 •    Many groups know the name of BDFC but they are unaware of its credit schemes
                      and systematically consider the BDFC interest rate (10% for a GGLS) much too
                      high (what is not true in real terms considering the structurally high inflation rate
                      in Bhutan). All the groups agree on a “reasonable” interest rate as being 5% (a
                      level that is unbearable for making profit or even reaching breakeven in the areas
                      we visited) and on the need of products adapted to their capabilities as far as
                      time and level repayments are concerned.

                      If they do not take a loan at BDFC, groups tend to open savings accounts in
                      BDFC, probably because its rural network is more developed than its
                      competitors’ one, as interest rate for savings account is the same for all.

                 •    The annual profits generated are rarely distributed to the members but:
                         o Systematically reinvested in the existing activity.
                         o Partly reinvested in the existing activity and partly saved in order to
                            develop another activity in the medium term.
                         o A part of the savings (when significant) is lent to villagers, group’s
                            members or not if no important investment is scheduled.
                         o Profits are parted within the group members when the activity cannot be
                            expanded (limited crop) and when the members have no more time
                            available to develop another one.

                     In a nutshell, improving livelihood has still to be seen in most of these
                     communities.



18
     www.rnrstat.bt ; this statistical framework has been supported by FAO Netherlands.

An Assessment of the Micro Credit Situation in Rural Bhutan and its Relevance to Helvetas Bhutan.       19
           •   The majority of the groups’ members are illiterate so that they rely on their leader
               to take major decisions and to run the business as well as the group.
               It has to be kept in mind that the answers of the members were probably not
               totally reflecting what really happens (in terms of cohesion of the group or
               decision taking for instance).
               Furthermore the figures (existing ones as well as forecasts) that have been given
               should not be applied strictly. (the Chairman of the Beekeepers Association was
               the only respondent to show us an income statement).

               Since all these groups are self-managed (except the Beekeepers Association), it
               is crucial for them to improve their capacity (for instance, use of new
               technologies, improvement of storage and processing facilities, development of
               market outlets and linkages with markets). The task is all the more difficult
               because few people in these groups have a long term perspective and plans for
               the development of their group businesses. .




An Assessment of the Micro Credit Situation in Rural Bhutan and its Relevance to Helvetas Bhutan.   20
DAKPAI
Zhemgang

Medicinal and aromatic plants production




Supporter / Type of support     Save the Children (beginning of the 2000’s in certain vocational
                                skills), NWAB since 2007. Now, technical assistance only and
                                marketing linkages.
Structure                       Group of 15 women (the village has 15 households), no formal
                                rules.

Training                        A study tour in Paro and Haa organized by NWAB : capacity
                                development and packaging + 1 week training.

Marketing                       Medicinal plants are packed and sold via traders to shops in
                                Thimphu and in the traditional hospital in Thimphu.

Financing                       NWAB funded only the initial investments.
                                The income of year n-1 (= savings) is deposited on a joint-account
                                (interest rate 4%). The group plans to give loans for any people
                                even not in the group, if reliable (interest rate 5%)
MT / LT expectations            MT : buy a truck to market directly the products of the village and of
                                the nearby villages to Thimphu,
                                LT : when savings reach Nu 1.4 million, will launch a poultry project
                                (about Nu 20,000) on a 50/50 cost sharing basis
Findings and analysis           Well-united group and strong leader with significant long term
                                self-financed projects ; high capability to adapt.




An Assessment of the Micro Credit Situation in Rural Bhutan and its Relevance to Helvetas Bhutan.        21
DIGALA
Zhemgang


Houses improvement




Supporter / Type of support     Helvetas / Tarayana Foundation.


Structure                       The whole village is involved in the skills development programme
                                (self help group).

Training                        A master carpenter helped by an assistant carpenter, manages,
                                trains and supervises the housing improvement operations.

Marketing                       --


Financing                       Nu 52,000 for buying CGI sheets and skilled labour (carpenter)
                                while the people in the village work together to build/rebuild the
                                house.
MT / LT expectations            --


Findings and analysis           The project has improved the living standard of the people and
                                promoted the sense of unity among the community, helping to
                                create farmers’ groups and associations with very committed
                                people.




An Assessment of the Micro Credit Situation in Rural Bhutan and its Relevance to Helvetas Bhutan.    22
DIGALA
Zhemgang


Chilli production




Supporter / Type of support     Tarayana Foundation, 2009.
                                Technical assistance if needed.

Structure                       Group of 23 disadvantaged women; no formal rules.


Training                        Technical assistance in order to grow organic products.


Marketing                       Sale of dried chillies in Thimphu; the production of two nearby
                                villages will be transported by horse to the nearest road/village (a
                                1.5 day walk from Digala) and then by truck to Thimphu.
Financing                       No need. The group uses seeds that the households own.


MT / LT expectations            The first crop is expected within the next few months; the expected
                                                      st
                                gross income in the 1 year is Nu 150,000; no medium plan today.

Findings and analysis           The reconstruction of the houses in the villages has improved
                                the community cohesion and increased the women
                                empowerment. Very committed women to succeed in this first
                                group’s production.




An Assessment of the Micro Credit Situation in Rural Bhutan and its Relevance to Helvetas Bhutan.      23
DIGALA
Zhemgang


Cotton plantation and weaving




Supporter / Type of support     Tarayana Foundation, 2009.
                                Financing still needed.

Structure                       Group of 37 women; no formal rules.


Training                        Technical assistance for cotton plantation, weaving (cotton weaving
                                practices have been lost), design (to suit market trends) and quality.

Marketing                       Sale of cotton-weaven ghos and kiras for students in the schools of
                                Zhemgang Dzongkhag as well as cotton for student bedding and
                                pillows.
Financing                       A loan is needed to buy cotton seeds from outside Bhutan, to buy
                                farming tools, irrigation pipes and cans as well as labour saving
                                devices (spinning, cotton cleaning).
MT / LT expectations            Extend the sale of ghos and kiras outside the district and develop
                                skills to weave designed materials.

Findings and analysis           Another project resulting from the houses reconstruction that
                                contributed further to community joint work. The project to
                                revive cotton plantation and weaving industry is strongly
                                supported by the Dzongda (Kunzang N. Tshering) in order to
                                generate income in one of the poorest villages of his district.
                                Very committed group of women.




An Assessment of the Micro Credit Situation in Rural Bhutan and its Relevance to Helvetas Bhutan.        24
DIGALA
Zhemgang


Wool weaving




Supporter / Type of support     Tarayana Foundation, 2009.
                                Group loan + technical assistance to revive the industry (weaving
                                practices have been lost).
Structure                       Group of 22 disadvantaged women + a committee to supervise the
                                weaving (5 volunteers).

Training                        One or two coordinators (women of the village): adapt the
                                traditional thick material and weaving styles (designs) to produce
                                kiras.
Marketing                       Sale of these expensive wool kiras in Thimphu and other towns of
                                Bhutan.

Financing                       Amount of the group loan needed: Nu 10,000 for buying wool and a
                                spinning wheel from India. Interest rate 5%.

MT / LT expectations            Loan principal and interest will be reimbursed one year after the
                                beginning of the activity.

Findings and analysis           Another project resulting from the reconstruction of the
                                houses in the village: community joint work increased. The
                                project to revive wool weaving is strongly supported by the
                                Dzongda (Kunzang N. Tshering) in order to generate income in
                                one of the poorest villages of his district. Very committed
                                group of women.




An Assessment of the Micro Credit Situation in Rural Bhutan and its Relevance to Helvetas Bhutan.    25
ZURPHEY
Zhemgang


Wood turning




Supporter / Type of support     Tarayana Foundation, February 2009.
                                Group loan expected to buy new machines and adequate wood
                                from the community forest group.

Structure                       Group of 13 young people from Zurphey.


Training                        Two or three young men from Zurphey have been formed by a
                                wood turner in the east of Bhutan. They intend to train local girls
                                and boys to increase the business as soon as possible.
Marketing                       The team has got an order from a shop in Gelephu to produce
                                1,000 chillies mortars and pestles for making “azay” and has asked
                                for the marketing officer of the Tarayana Foundation to support
                                them to market the products (there is already demand from
                                Zhemgang and Sarpang cities).
Financing                       A Nu 150,000 loan.


MT / LT expectations            The group expects to quickly broaden the range of its products
                                (wooden masks, tokey, dapa, cups, plates, bowls, etc.). Helped by
                                a master carpenter and two assistant carpenters they have just built
                                a workshed/shop near the road and near the path for trekkers for
                                direct sales.
Findings and analysis           The 1st group we met that has been formed by young people
                                (who were trained at the Zorig Chusum Institute in
                                Tashiyangtse) as a means for self employment. Very good
                                project based on the sale of quality items for daily use, that
                                had never been made locally up to now in the area.
An Assessment of the Micro Credit Situation in Rural Bhutan and its Relevance to Helvetas Bhutan.      26
CHUZAGANG
Sarpang


Production of corn flakes




Supporter / Type of support     Helvetas, 2004.


Structure                       Group of 11 people (5 women, 6 men) who grow rice and maize.
                                The group was formed by an external officer; three-member
                                committe and monthly meetings of the group.
Training                        No.


Marketing                       The group processes 30% of its harvest (twice a year) and sells
                                corn flakes to traders but expects to get a loan (from Nu 200,000 to
                                300,000) to open a store to sell it directly.
Financing                       Every month each member puts Nu 100 on the bank group savings
                                account (total amount: Nu 65,000) but has to pay Nu 300 to the
                                land owner; would like to have new members (pb of financing the
                                part of savings) and later become a cooperative.
MT / LT expectations            Processing of maize brings a total of Nu 40,000, that is 30% of the
                                households income during the 4 production months.

Findings and analysis           A well-managed group; however its future expansion seems to
                                be curbed as business is limited by production (maize crops)
                                and as the entry of new members in the group, while welcome,
                                is costly.




An Assessment of the Micro Credit Situation in Rural Bhutan and its Relevance to Helvetas Bhutan.      27
CHUZAGANG
Sarpang



Fish pond and piggery




Supporter / Type of support     BDFC in 2003 through a group loan.; the Livestock Extension Office
                                gave the idea to develop these two activities. Helvetas supported
                                through the ECR-ADP project.

Structure                       Group of 10 farmers (4 women, 6 men) who grow also rice and
                                maize on their own lands. In the area, 4 groups exist: 1 for piggery
                                alone and 3 for piggery and fish pond.
Training                        No.


Marketing                       Fish pond operates only 6 months / year (rain water only) with small
                                fish bought in an office in Gelephu. The group sells fish on the local
                                market and also to Sarpang and Gelephu and sells pork in Gelephu
                                only.
                                A shop/office will open soon to store the production of all the groups
                                of farmers of Chuzagang (eggs, fish and pork) and to sell it to local
                                customers + one trader to sell in other places = a less costly
                                solution.
Financing                       Group loan Nu 300,000; no idea of interest rate (10%?) or
                                repayment schedule.

MT / LT expectations            Gross income of Nu 34,000 for fish (when operating) and Nu
                                24,000 for pork, net income quite low at respectively Nu 3,000 and
                                Nu 1,300 (a piglet cost Nu 1,000).
Findings and analysis           Two very difficult, risky, labour-intensive and not very
                                profitable businesses but demand is strong in the area for fish
                                (fresh, dried or smoked) as well as for pork.

An Assessment of the Micro Credit Situation in Rural Bhutan and its Relevance to Helvetas Bhutan.        28
CHUZAGANG
Sarpang


Chicken farm




Supporter / Type of support     Helvetas (a Rural Livelihood Project RLP).
                                Supply of inputs and building materials; regular and consistant
                                monitoring by proactive extension agents (prevention of bird flu).
Structure                       Group of 16 members coming from the merger of 2 groups in 2004.
                                Would like to become a cooperative.

Training                        One of the group members attended a 15-day training in RDTC in
                                Zhemgang.

Marketing                       The group sells eggs in Chuzagang (600 to 700 households)
                                Gelephu and Thimphu.
                                A shop/office will open soon to store the production of all the groups
                                of farmers of Chuzagang (eggs, fish and pork) and to sell it to local
                                customers + one trader to sell in other places = a less costly
                                solution.
Financing


MT / LT expectations            Very high income (more than Nu 150,000); because of the ban of
                                Indian hens and eggs, local prices have rocketed to Nu 12-15 per
                                piece from Nu 3 previously ( from Nu 6, activity is profitable).
Findings and analysis           The farmers do not imagine a reversal trend (that will
                                inevitably happen) conjugated with an increased competition
                                (many henhouses have been built) that will need a more
                                proactive marketing (new outlets to find).

An Assessment of the Micro Credit Situation in Rural Bhutan and its Relevance to Helvetas Bhutan.        29
SATARA
Sarpang Dzonghkag


Private industrial chicken farm and feed plant




Supporter / Type of support     Loan from Helvetas and private funds.


Structure                       Private enterprise.


Training                        The enterprise is also providing training for people who want to
                                create their own chicken farm.

Marketing                       The unit sells eggs mainly in Thimphu. The feed plant sells
                                “organic” feed for chicken and livestock based on maize bought
                                from the local farmers and other ingredients from India. The price of
                                cattle feed is higher that the one sold in Jakar (Nu 530 per 50
                                kilogram bag compared to Nu 415).
Financing                       n.a.


MT / LT expectations            n.a.


Findings and analysis           Very high income coming from the eggs production (because
                                of the ban of Indian hens and eggs, local prices have rocketed
                                to Nu 12-15 per piece / Nu 3 previously). Prices paid to farmers
                                to supply the feed plan are correct but it has to be proven that
                                the chicken and livestock products that are manufactured here
                                are really organic.


An Assessment of the Micro Credit Situation in Rural Bhutan and its Relevance to Helvetas Bhutan.       30
SHAMBAYUNG
Bumthang


Community forest (2 areas : Braja and Yumgang Samyung),
Ugyen Choling




Supporter / Type of support     Department of Forest, Bumthang Dzongkhag Forestry Sector,
                                Thrumshing National Park, RNR center in Jakar, Participatory
                                Forest Management project
Structure                       Community Forest Management Group CFMG created in 2003 in
                                order to protect the drinking water source of the village first; the CF
                                (46ha) is too small for the 23 households of the village.
Training                        Training to the CFMG : prepare the management plan, manage the
                                forest.

Marketing                       Up to now, the CFMG has not got the authorization to sell timber
                                outside the community that would generate income for the
                                Community Fund (CF).

Financing                       The CF includes the membership fees (Nu 50 per member), and
                                the permit fees paid by the households for their yearly harvest (from
                                Nu 5 to Nu 100 according to the tree types), fines, donations...total
                                Nu 70,000 in a saving bank that can be lent to villagers (up to Nu
                                10,000 for one year, interest rate 10% or interest free if exceptional
                                events such as death.
MT / LT expectations            The CFMG expects an extension of the community forest (legally
                                from 2013), and a close authorization to sell timber outside the
                                community.
Findings and analysis           Strong involvment of the U/Ch villagers in the CFMG creation
                                when they realised that the forest will become degraded by
                                people from nearby villages harvesting timber from their area
                                and that their drinking water source could be disturbed. Very
                                good management but limited income because the community
                                forest is very small, the sale of timber outside the community
                                is still not allowed and permit fees are very low (very poor
                                households, no savings).


An Assessment of the Micro Credit Situation in Rural Bhutan and its Relevance to Helvetas Bhutan.         31
JAKAR
Bumthang


Beekeeping




Supporter / Type of support     Helvetas.
                                The Beekeepers Association of Bhutan BEEKAB was created in
                                1998 with equipment, grant and training from Helvetas (strong
                                involvment of Fritz Maurer).
Structure                       40 members of which 3 are executive members quite involved in
                                the business. The association buys the honey from the beekeepers
                                in bulk, controls its quality, buys pots and labels, markets the pots.
Training                        Association’s members give training in cultivating the hives and
                                harvesting training.

Marketing                       The BEEKAB produces 3 types of honey (same price for each); it
                                receives Nu 3 for each pot it markets (Nu 95/98) all over Bhutan.
                                Strong demand for honey from Bumthang (quality, purity and
                                “harvested under hygienic conditions” product).
Financing                       Entry fee Nu 800 + annual fee Nu 500 / member + fee per sold pot
                                +. Dutch grant = savings Nu 1,100,100 to give loans to the farmers
                                (up to 40% of the last year harvest of the member) to promote
                                honey only. High income for the beekeepers but not enough for the
                                association to finance the needed investments.
MT / LT expectations            Positive trend: demand growing, not met by supply. Beekeeping is
                                increasingly recognized as an important industry in Bhutan; BEEKAB
                                could be given more responsabilities to promote beekeeping, to
                                train people.
Findings and analysis           Very capable and open chairman; strong potential: beekeeping
                                can significantly improve income of landless farmers as it
                                requires very little investment and land.


An Assessment of the Micro Credit Situation in Rural Bhutan and its Relevance to Helvetas Bhutan.        32
TAMSHING
Bumthang

Milk collecting and processing unit




Supporter / Type of support     Chokhor Gonor Gongphel Chithuen Tshogpa CGGCT started the
                                small scale Milk Collecting and Processing Unit MCPU in
                                September 2004.
                                Government assistance for husbandry, processing equipment +
                                staff (one experienced dairy technician who maintains milk records,
                                performs quality checks, processes milk into products, does
                                marketing, keeps accounting).
Structure                       37 farmers. The MCPU collects the milk from them (and also from
                                non members in Summer).

Training                        The (remunerated) staff is trained to handle milk and produce
                                cheese in hygienic conditions.

Marketing                       The MCPU uses the surplus milk produced by the farmers (on
                                average 290 litres per day paid at a price fixed for the next 3 years)
                                to process it into cheese and butter and to market these two
                                products.
Financing                       This activity is part of the CGGCT (farmers towards participatory
                                move in the Livestock development); after paying the farmers (milk)
                                the technician, the taxi collecting milk, the two operators, etc. it
                                cannot be profitable.
MT / LT expectations            The unit will not develop easily because it lacks technicians (rural
                                youth do not want to be farmers), equipment, machinery. Will act
                                soon as a wholesaler of chugo (a project of the livestock officer of
                                Jakar Dzong).
Findings and analysis           Demand for local cheese and butter is strong but each unit will
                                never be able to pay correctly qualified staff, to improve the
                                equipment (sanitation concerns). The objective of each of the 4
                                MCPUs in Jakar district is probably “social” rather than profit-
                                oriented.



An Assessment of the Micro Credit Situation in Rural Bhutan and its Relevance to Helvetas Bhutan.        33
TAMSHING
Bumthang


Sale of livestock and cattle feed




Supporter / Type of support     Chokhor Gonor Gongphel Chithuen Tshogpa CGCCT was born
                                from the Contract Bull Breeding Program with the initiation from the
                                Brown Swiss Cattle Breeding and support from Jakar and
                                Dzongkhag Livestock Sector.
                                Group loan, training and processes.
Structure                       Group of 44 farmers from 12 different villages.
                                Group loan schemes (1-2 years, interest rate 1% per month)
                                including savings.
Training                        Training to farmers to produce, rear and sell good quality Brown
                                Swiss bulls + equipment.

Marketing                       Sale of breeding bulls (Nu 9,000 for the owner of the bull + Nu
                                3,000 in the group account) and of cattle feed to make the
                                concentrate feed available for the members and other farmers and
                                to improve the nutritional value thereby increasing the milk
                                production.
Financing                       Income generated from the sale of bulls, of cattle feed and entry
                                fees is accumulated in the common account (including share
                                capital, total is above Nu 210,000).
MT / LT expectations            Lease the center to the farmers within 2 years; let them take an
                                active role in the development of livestock industry in the country;
                                create employment for the youth.
Findings and analysis           The Tshogpa’s objective is to shift the production of very good
                                breed bulls from the “farm” to contract farmers so that they
                                get good income. Up to now, this activity is more or less
                                socially and semi-commercially driven. Are the farmers trained
                                enough?




An Assessment of the Micro Credit Situation in Rural Bhutan and its Relevance to Helvetas Bhutan.      34
BATPALATHANG
Bumthang

Private milk collecting and processing unit




Supporter / Type of support     A BDFC SIL loan in 1994 (Nu 6,000; 14%; 6 years term) totally
                                reimbursed today + a 6% loan from a Swiss foundation to help the
                                farmers to buy cows, develop pasture, buy concentrate feed...
                                (repayment is deducted from milk price every month) + loan without
                                interest from private foundation to improve the equipment.
Structure                       A private enterprise, has one full-time employee. Is a member of
                                the Bumthang Dairy Development Association BDDA (25 members)
                                from which he buys milk.
Training                        Training, technical assistance, advices from Fritz Maurer (still now).


Marketing                       Produce butter and three kinds of high-quality cheese (Swiss,
                                Dutch and local) , the Swiss and Dutch ones being sold to tourists
                                in Jakar (60%) and to people in Thimphu (40%).
Financing                       Price of milk is fixed for 3 years; farmers get a bonus or a malus
                                according to the % fat (daily check) and are paid every month.
                                The BDDA has savings up to Nu 800,000 in the bank for loans to
                                the members except him (as a private individual enterprise).
                                Has overdraft facilities if needed (13% interest rate).
MT / LT expectations            There is a need for scaling milk processing activities put in place in
                                the eighties, mainly as far as sanitation and volume are concerned.

Findings and analysis           A real private entrepreneur, who complains of the milk
                                collecting and processing groups that “are financially and
                                technically supported by the government”.




An Assessment of the Micro Credit Situation in Rural Bhutan and its Relevance to Helvetas Bhutan.        35
5. Proposed strategies and models to improve access of Bhutanese
rural families


TO MICROCREDIT.




1. Selection of some existing models and proposals for the Bhutanese rural
market
After visiting some of the remote rural areas of Bhutan and some others that are more
developed, a few microfinance models are analysed in order to identify the most appropriate for
Bhutan: the microfinance institutions (MFIs) that are considered as the benchmark as far as
microcredit is concerned; the community groups that are well developed in remote areas;
cooperatives and value chains that are other approaches for rural financing of more advanced
communities.


           •   Microfinance institutions
               Microfinance institutions are free of any subsidy, are run by a professional staff,
               deliver standardized loans for groups as well as individuals with interest at market
               rates (or above) and require collaterals or guarantees. The model is well adapted
               to urban and populated rural places.

               In areas where villages are too remote and too small to establish an office, the
               microfinance institutions have adopted specific schemes in order to train people
               and then to deliver loans. Using mobile banking network, partnering with
               shopkeeper, agricultural input suppliers or even moneylender have proved to be
               inexpensive and reliable win-win solutions:

                   o   Mobile banking network. The population density, the potential volume of
                       business in the catchment area, the quality of infrastructure (travelling
                       hours from the permanent office), the security situation, etc. determine the
                       frequency of the place visit.
                       In the Grameen approach for instance, the field worker visits a location on
                       a weekly basis to do disbursements and collections and also manage
                       savings accounts.
                       In an extreme case such as some remote areas of Bhutan, the visit
                       frequency could be as low as twice a year so that the savings and loan
                       products as well as the methodology have to be designed according to
                       these physical parameters because the installments have to be
                       synchronized with the visit of the credit officer.
                   o   Partnering with non-financial entities such as shopkeepers or agriculture
                       input suppliers (the latter serve as one-stop center where farmers can
                       receive technical assistance, buy seed and other inputs, receive and
                       reimburse loans). The owner of the local infrastructure gains additional
                       revenue (rent) while the financial service provider avoids the investment
                       and operational costs associated to a dedicated office.
                   o   Partnering with moneylenders. The moneylenders are closely linked to the
                       local community as they bring the money, the human touch, the flexibility

An Assessment of the Micro Credit Situation in Rural Bhutan and its Relevance to Helvetas Bhutan.   36
                               and the absence of regulations that a formal institution cannot bring. In
                               Bhutan, they do an unregulated business but they could be appointed as
                               “financial experts” for instance to collect the instalments for a pre-
                               determined consideration.


                 •    Community-managed loan funds CMLF
                      Microcredit based on grants or totally externally funded usually turn out to be
                      unsuccessful. On the contrary, schemes based on Community-Managed Loan
                      Funds (CMLF) 19 that comprise both savings and credit have proved to be
                      sustainable and have shown quite positive results.

                      A CMLF group has 5 to 40 members who usually know each other well and is
                      usually created for the specific purpose of the revolving fund 20. Non professional
                      and sometimes illiterate members both own and manage the fund that means:
                      collecting the savings, agreeing on individual loans (amount, timing and payment
                      terms, etc.), disbursing the loans, collecting the repayments, etc.

                      It appears that success is strongly linked to the source of loans funding:

                           o   Externally funded groups / projects appear to fail consistently because of
                               high default rate.
                           o   Savings-based groups are successful when loans are financed by the
                               members’ savings and by limited external funding coming after the group
                               has shown a good track record of lending and reimbursing. As savings are
                               lent and repaid with interests, they generate income to the CMLF
                               members.
                           o   Self-help groups who start by collecting and lending savings of the
                               members and later receive large loans from a bank show mixed results.

                      After a group shows a good track-record in managing and repaying loans from its
                      own savings, donors can help in linking the group with commercial banks in order
                      to increase their business.

                      Services offered by a CMLF are few compared with those of a microfinance
                      institution or a bank but its operating expenses are quite low: minimum
                      transaction costs, functions performed by unpaid members, no office, no
                      transportation and communication costs, etc. Only training costs have to be taken
                      into account. And what is much more important, the CMLF empowers its
                      members to take control over their own financial future.

                      The Bhutanese model of farmers’ groups, community forestry groups or villagers’
                      groups that are managed by their members themselves can easily be compared
                      with the CMLF, even if some of them rely on external funds considering that they
                      have no or only a few savings.


                 •    Cooperatives
                      Another way to give rural credit is to form a farming financial cooperative.


19
     Cf CGAP Focus Note n° 36, May 2006, www.cgap.org
20
     A revolving fund is a fund where money is disbursed, repaid so that it may subsequently be reborrowed.

An Assessment of the Micro Credit Situation in Rural Bhutan and its Relevance to Helvetas Bhutan.             37
                    A financial cooperative is a member-owned organization based on the
                    cooperative concepts of mutual self-help and self-governance. The small savings
                    constitute a stable, low-cost funding source that enables the cooperative to make
                    loans at low interest rate.
                    Its mutualistic structure reduces the problem of lack of collateral but does not
                    eliminate it: if all members are poor farmers in the same area, as it frequently
                    occurs, they are all subject to the same risks of climate change and crop failure.

                    In its early years, it offers only one or two credit products, for instance for farm
                    inputs and emergencies, and a savings product but the products range can be
                    increased progressively according to the economic development of the
                    community members and thus to their needs. Many financial cooperatives do not
                    progress beyond this first stage while some others hire a professional
                    management team, link into a network of cooperative banks so that they
                    gradually offer a wider range of products, use standardized procedures, have
                    access to training and to pooled resources.
                    Despite strong by-laws, many cooperatives have faced serious challenges as far
                    as governance policy is concerned: allocation of tasks between volunteer board
                    members and professional managers in charge of making the operational
                    decisions, equality of rights of net borrowers and savers, supervision by skilled
                    and politically independant agencies.


               •    Value chains
                    A value chain “consists of series of actors (suppliers of material inputs,
                    producers, processors, traders, wholesalers, retailers) that bring goods from
                    production to the final consumer.” 21 Developing value chains can improve the
                    livelihood of small farmers as the exchange of goods for payment all along the
                    chain creates opportunities for extending credit to otherwise unbankable
                    population.

                    For instance, agribusiness firms provide seeds and fertilizer as in-kind credit to
                    small farmers forming groups, while processors and buyers of agricultural
                    products provide input credit to them; the loans often take the form of direct
                    advances based on a part of the crop value at an agreed price, and they are
                    typically repaid by reducing subsequent payments to farmers after the harvest. In
                    order to mitigate the risks, collaterals are based on producers’ future sales rather
                    than on his existing assets.

                    Important issues have to be adressed to involve farmers in the process such as
                    their willingness to work in a group and to get financial and technical training,
                    their ability to adopt new inputs or methods, their past credit behaviour, their
                    commitment to the value chain, etc.
                    At the end of the day, when the value chain is a success, the farmers benefit in
                    different ways: all the inputs are provided on time without an initial payment and
                    the price they get for their crop is assured and paid just after the harvest.




21
     Brian Milder, director of strategy and innovation for the US-based social investment fund Root Capital.

An Assessment of the Micro Credit Situation in Rural Bhutan and its Relevance to Helvetas Bhutan.              38
Findings and analysis

           •   International microfinance institutions could be interested in the Bhutanese
               market but they might have a selective approach focusing on vulnerable non-poor
               and moderate poor rather than the very poor and remote rural people even when
               their structure is profitable.

               It is quite an impossible goal for an MFI to focus only on isolated rural areas,
               considering the poor economy, the low number of potential clients and sources of
               income; on the other hand the interest charged by a MFI is an unrealistic burden
               for these communities. Developing a network including rural areas with well-off
               farmers and vibrant economy could make an MFI sustainable, especially if it
               operates a model where collective responsibility of the group is used as a moral
               collateral on the loan (group loan scheme).

               Having a competitor that forces the existing players to adopt a more professional
               approach would be quite profitable for the Bhutanese microfinance clients; but
               having the Royal Government of Bhutan promoting a foreign microfinance
               institution that would compete directly with BDFC seems unconceivable.

               It is important to remind that most microfinance institutions in developing
               countries started as not-for-profit organizations such as NGOs, credit unions, or
               financial cooperatives.


           •   The model based on small community-managed groups seems well adapted to
               the rural remote areas of Bhutan still not connected with a road; households from
               different villages, if not too far away, can create groups. In some isolated Indian
               areas, it appears that this is the only feasible scheme beyond the traditional
               informal ones (family and friends lending, moneylending).

               Promotion of local savings and credit groups, supported by training, prevents the
               loans to outstrip the borrower’s capacity and lending on members’ own savings
               creates an extraordinary financial discipline. Considering that a large part of rural
               people have no savings but are very committed to improve their livelihood, it
               would be beneficial for them to be involved in such a scheme financed with
               external revolving funds.

               The model would work like a village bank, that means a community-based credit
               and savings association, where initial loan capital may come from an external
               source but where the members themselves run the “bank”, elect their own
               officers, establish their by-laws, distribute loans to individuals, collect payments
               and savings, are the “moral collateral” for each individual loan.


           •   In Bhutan, the creation of cooperatives has been encouraged by the
               Cooperatives Act enacted in July 2001 and amended in 2009 and the
               Cooperatives Regulation that came into effect in 2006 but is to be revised
               because of the amended Act.




An Assessment of the Micro Credit Situation in Rural Bhutan and its Relevance to Helvetas Bhutan.   39
                      o   A primary co-operative - that means the first level of co-operative under
                          the Cooperatives Act of Bhutan - is an association of Bhutanese citizens
                          “formed either by individual farmers, individual non-farmers, farmers’
                          groups 22, and non farmer groups, whose main purpose is the provision of
                          quality products and services to satisfy the economic needs of the
                          members and their communities” (article 2-2 amended).
                          Its fundings derive “from the member’s share capital, of loans and
                          borrowings including deposits, revolving capital, subsidies, donations,
                          grants from any local or foreign institutions whether public or private but
                          with prior approval from the Ministry of Finance” (article 18).
                          In order to be registered, the farmers’groups, community organizations
                          and other organizations are required to prove their capability in terms of
                          economic, social, political, managerial, financial and marketing
                          development. The cooperatives may initially be organized and managed
                          as member-owned and operated enterprises but “they shall endeavor to
                          move gradually towards being professionally managed business
                          enterprises to sustain their operations and to provide increased benefits to
                          their members” (the Cooperative Regulation, 2006, chapter 2 -11).

                 The Cooperatives Act was passed in order to have more efficient associations
                 and groups in terms of production, marketing and financing and also to give a
                 legal status to the farmers’groups. At the present stage, very few Bhutanese
                 groups or associations are able to meet the numerous and strict
                 requirements to become a cooperative.

             •   The value chain approach gives access to financial services adapted to the
                 specific demands of the different value chain actors. Developing such a product
                 is challenging because a detailed knowledge of the actors and of the
                 mechanisms in the chain is needed to give adapted services, and because each
                 people involved in the chain must be aware of the interest of it to improve its
                 activity.
                 Some mechanisms of the value chain could be used by farmers’ groups to meet
                 some challenges such as the ones faced by producers of widely cultivated and
                 exported crops:

                      o   “Although the Food Corporation of Bhutan facilitates the auctioning of
                          their potatoes, the farmers say that price fluctuations and delayed
                          payment hamper their business.” 23
                      o   As far as the orange business is concerned, Bhutan Exporters’
                          Association says importers need to come to Phuentsholing for all financial
                          transactions where the only foreign exchange counter is located ; “if there
                          is a foreign exchange counter in every bank in the southern districts,
                          business transactions will be faster”. 24

In the short term, the most feasible and viable micro finance model has to be based on
the people themselves. Peer pressure is a critical aspect of this kind of fund as it is used to
ensure repayment, improve understanding between group members and has proved to
strengthen social networks. The community-managed groups, that lend money to their

22
   “farmers groups mean a group of not less than three members deriving economic benefits from one or more economic
enterprises related to Renewable Natural Resource Sector” (Article 2-20 added).
23
   Bhutan Observer, March 6, 2009.
24
   Bhutan Observer, February 20, 2009

An Assessment of the Micro Credit Situation in Rural Bhutan and its Relevance to Helvetas Bhutan.               40
members and mobilize their savings if any, are currently the most adapted entities to
improve the living of the rural people; their number has to be increased.

Microcredit, should it be provided by profit-oriented or social-oriented institutions, must
not be thought of exclusively as a financial support but rather as a multipurpose household
management tool available on the long term. Whatever the organization at the field level and
irrespective of whether external funds are used or not, technical support is desperately
needed. In Bhutan, the majority of rural people are non or little educated so that they need
considerable adapted training and support to develop their business or begin a new one.

A bottom-up approach positively changes the people’s mindset about credit.
The employees must go to the villagers first and be very committed to those who will be given /
are given support, that means understanding their needs, helping them to analyse the income of
their households, to identify activities that will improve livelihood and require external support, to
elaborate an action plan with a timetable and clear responsibilities, instilling a sense of
ownership and participation among the people, ensuring the sustainability of the groups on the
long term.

This procedure requires much resources at the beginning, human resources as well as time and
money, but it brings the feeling / deep knowledge on the one hand, and credibility on the other.

           •   At the Dzongkhag and Geog levels:
               The limited human and technical capacity to implement and monitor the
               programmes has to be adressed first. The extension officers are the main link
               between the policy makers and the local communities; they are in charge of
               conducting farmers’ training for agriculture / livestock / forestry purposes, of
               planning and monitoring RNR activities, of collecting data, of submitting reports to
               the district, etc. New teams have to be trained in order to provide “financial”
               trainings to the farmers’ groups which will be given loans (and at best will be able
               to give loans to individuals).

           •   Different kinds and levels of support can be provided to the farmers such as:

                       o   Promoting the group: that means explaining to the members the
                           purpose of a group, the responsibilities of each member and those of
                           the group, the characteristics of a loan (methodology, interest rates,
                           maturity, repayment schedule, penalties, etc.), the necessity of
                           compulsory savings, the management of member exits and entrances.
                           However, the villagers forming the group should adapt the modalities
                           to their culture and their needs.

                       o   Training the members: how to manage the projects, and make loans
                           according to the repayment capacity of the borrower.

                       o   Setting up simple and user-friendly loan models and procedures as
                           well as processing transactions and reporting systems that can be
                           easily checked.

                       o   Encouraging savings habits: A large part of the Bhutanese population,
                           estimated as high as 50%, has no savings in any form and the other
                           50% save in form of money kept at home in a box for emergency
                           purposes. Saving habits have to be cultivated in the people’s minds
                           provided there is enough awareness created.

An Assessment of the Micro Credit Situation in Rural Bhutan and its Relevance to Helvetas Bhutan.   41
                             o   Educating farmers on financial matters: (such as managing cash,
                                 preparing budgets and accounts, keeping records, determining
                                 borrowing requirements, bookkeeping) and also on commercial
                                 matters (such as processing, packaging, product grading and
                                 promotion, pricing, marketing 25).

                             o   Owing to a large migration of men to the urban areas, the rural
                                 households are often managed by women who, beside doing the
                                 housework, cultivate the land and raise livestock and consequently
                                 have little spare time available but special training targeting the
                                 women has to be put in place.

                             o   Helping to promote and train the most committed members for group
                                 leadership along with preserving the group’s core mission of serving
                                 all the members.

                             o   Organizing non financial activities including literacy and education
                                 about health (especially for women), discussions about social topics or
                                 even development projects (building schools, roads, irrigation
                                 systems). Adding such trainings to the financial ones helps to
                                 empower members to take a more active role in their community.


2. Helvetas possible involvement in improving the efficiency of existing
models.
Considering that at the present time no Bhutanese organization is really able to provide
these services, international NGOs (that means non-for-profit organizations according to the Article
2 of the Civil Society Organizations Act of Bhutan) could be the needed facilitators:

              •    “As Public Benefit Organizations, the Civil Society Organizations are established
                   in order to benefit a section or the society as a whole and to complement the
                   efforts made by the Government to (among others): prevent and alleviate human
                   suffering and poverty, disseminate knowledge and advance learning; develop the
                   country economically and culturally, promote social harmony and Gross National
                   Happiness (Article 5). They are encouraged to provide cost effective services, be
                   innovative and responsive to the needs of the economically disadvantaged
                   sections of society (Article 109). Public services and charitable activities shall be
                   planned, designed, implemented, monitored and evaluated in an equitable
                   manner with the participation of the people concerned (Article 110)”.

A civil society organization for micro finance established in Bhutan could act as an intermediary
between the targeted clients (villagers, farmers’ groups, cooperatives) on one hand and the
bank in charge of developing microfinance programmes on the other.

The NGO would have financial and social objectives, among which :

              •    Share some of the risks involved with lending to the poor rural by depositing
                   collaterals or guarantees.


25
  “Today, Indian oranges have a better market because of better packaging and sealing. Some of the Bhutanese exporters should
change their mentality; they need to be educated on quality control.” in Bhutan Observer, February 20, 2009

An Assessment of the Micro Credit Situation in Rural Bhutan and its Relevance to Helvetas Bhutan.                          42
             •    If useful, give revolving funds to successful farmers’ groups or cooperatives 26.

             •    In the medium term, link successful and reliable groups or individuals with a
                  commercial bank so that they have direct access to bigger loans.

             •    Train the staff of support providers as well as the targeted poor clients.

             •    Foster synergies with institutions that support productive initiatives in rural
                  communities.

             •    Mobilize resources from civil society, the private sector, the government and the
                  donors.

             •    Be the chosen spokesperson as far as training and financing of rural communities
                  is concerned.

Many support agencies have been working in the rural areas of Bhutan for a long time 27 but
scope of extension is still tremendous. Assuming that the financial support of international
donors will progressively decrease in Bhutan, we think there is a need for greater coordination
and collaboration for the above mentioned supporting initiatives in order to improve the
coherency and the efficiency of the external financial support, to develop synergies, increase
economies of scale and reduce overlaps and duplications.

The micro finance NGO could play a strong anchor’s role in bringing such collaboration between
the international organizations working in the agriculture and agro business sectors and the
Ministry of Agriculture.

For instance, UNDP is developing a new project in order to increase effectiveness and outreach
of rural financial services. It will focus on the development of community based groups and on
innovative forms of credit such as yarn and seed banks or community revolving funds, which
have already been experimented with selected rural producers. The establishment of self-
managed microfinance funds of cooperatives / associations will be promoted using members’
own contribution together with an initial support from the project which can also be used as
collateral.

The expected outcomes of this project (improvement of the skills and income of rural poor
communities through non-formal training and microfinance services, development of small
businesses, improvement of the product quality for handicraft groups, training of BDFC staff
etc.) could be implemented by actors that have already shown real skills in these matters and /
or are already working with the targeted communities.

It is obvious that the Rural Development Training Center (RDTC) in Zhemgang can be
instrumental in this policy, being also partner of any agency involved in adressing rural
issues.

             •    The center trains different groups of people: early school leavers looking for
                  entering the rural life, young farmers with varying educational background,


26
   this “formal” revolving fund that uses seed money is managed by the NGO while an “informal” revolving fund such as a
community-management savings and loans scheme or a cooperative is based on paid for by community savings and managed by
the community themselves.
27
   FAO, GTZ, Helvetas, JICA, SNV, FIDA, UNDP, WFP…. to quote only the best known.

An Assessment of the Micro Credit Situation in Rural Bhutan and its Relevance to Helvetas Bhutan.                  43
               women, potential community leaders (farmers’ groups, community forestry’s
               groups, cooperatives, public servants at the Geog or the village levels...).

           •   The training has been designed in order to cover the diversified needs of these
               groups and to be conducted in the center or at decentralised units across the
               country. Several modules have been developed : apprenticeship, farm business
               training, organisation and management of groups, book keeping and record
               keeping ; a new one concerning management of loans and savings to be taught
               to officers and borrowers could be easily designed and added to the existing
               ones.




Conclusion

Bhutan’s villages have benefited greatly from the development policies that have been
implemented by the Royal Government of Bhutan for decades. However, because of the huge
spatial and socio economic disparities, benefits of growth have not been equally distributed
accross the country and in some places, the agricultural production has still to change from
subsistence to a more market-oriented system.

Poor rural people living in remote areas consider that credit -together with access to a motorable
road- as one of the most effective tool to improve income generation. As a consequence, they
have to be offered innovative, easily accessible and understandable credit schemes.

Only a few international microfinance institutions might be interested in the Bhutanese market
and they would probably have a selective approach.

Consequently, in the short term, the most feasible, effective, viable as well as adapted
microfinance model should thus be based on the people themselves. The number of
community-managed groups that are organized for a specific purpose, that lend to their
members and mobilize their savings (if any) has to be increased. Peer pressure is a critical
aspect of this kind of fund as it is used to ensure repayment, improve understanding between
group members and to strengthen social networks.

Managing such groups is not easy for non professional and often illiterate people, so that
a micro finance NGO can play a key role in terms of financial, technical and social
support. For instance, it can: give revolving funds when people have no savings at all or have
shown their capability to manage their own funds; act as a guarantee; provide technical and
financial training to extension officers and farmers; encourage savings habits; organize non
financial training such as literacy (especially for women). A greater coordination and
collaboration between the international organizations would enhance the efficiency of such
measures.
Developing microcredit is an opportunity to prevent rural migration through providing activities
generating income to the rural households in the medium term. Civil society organizations can
bring the expertise needed to take this forward.




An Assessment of the Micro Credit Situation in Rural Bhutan and its Relevance to Helvetas Bhutan.   44
ANNEXE: Questions and answers about microfinance
(definitions according to Consultating Group for Assisting the Poor CGAP).

   1. Microfinance or microcredit?
      Microfinance is defined as financial services for poor and low-income clients provided by
      microfinance institutions. It refers to microcredit -small loans for “entrepreneurs” with little
      or no collateral- as well as to savings, insurance, and money transfers that have
      developed more recently.

   2. Who are the targeted clients of microfinance?
      Microfinance clients are poor and low-income people that do not have access to formal
      financial institutions. Their “microenterprises” include small retail shops, street vending,
      handicraft, cottage industry, service provision. In rural areas, the majority of the clients
      are farmers or stockbreeders who often have small income-generating activities.
      Most microfinance clients fall near the poverty line, both above and below. Households in
      the poorest 10% of the population, including the destitute, are not traditional microcredit
      clients; the majority of the microfinance institutions (MFIs) serve clients above the
      poverty line or at the higher end of the bottom half.

   3. Are women involved in microfinance demand?
      Women are the majority of clients and they often experience important self-
      empowerment.

   4. What are the loans used to?
      Only half or less of loan proceeds are used for business purposes. The remainder
      supports a wide range of household cash management needs, including consumption
      and cash needs such as education fees, medical expenses, weddings and funerals, or
      even building assets like buying land.

   5. What is the legal structure of a microfinance provider?
      Most microfinance institutions (MFIs) start as not-for-profit organizations such as non-
      governmental organizations (NGOs), credit unions, financial cooperatives, and state-
      owned development and postal savings banks.
      For-profit microfinance institutions may be organized as non-bank financial institutions
      (NBFIs), commercial banks that specialize in microfinance, or microfinance departments of
      full-service banks.

   6. Why are microcredit interest rates for poor people higher than the bank interest rates that
      wealthier people pay?
      The issue is cost:
             • the administrative cost (staff time) of making a tiny loan is much higher in
                 percentage terms than the cost of making a large loan.
             • credit decisions for borrowers who have neither collateral nor salary require
                 the loan officer to evaluate the risk of each loan.
             • areas that are remote or have low population density make lending more
                 expensive (staff time and number).
             • and finally, the majority of microfinance institutions are for-profit oriented.




An Assessment of the Micro Credit Situation in Rural Bhutan and its Relevance to Helvetas Bhutan.   45
   7. What is the government’s role in a microcredit policy?
      The role of any government is not the provision of microcredit. The vast majority of
      government microcredit programs do poorly because they are usually subject to political
      influence and high default; sometimes lending is based more on the borrowers’ influence
      than on their actual qualifications.
      Good microcredit has to be insulated from politics but government can help to deliver
      good microcredit in setting a sound macroeconomic policy that provides stability and low
      inflation, in adjusting bank regulation and in supporting strong technical management
      and training.

   8. Do poor people save?
      Most of poor people have savings but because they lack access to formal deposit
      services or are still not monetarized, they keep cash in a box, buy cattle, jewelry or
      building materials or stock cereals. In fact, poor people want secure deposit services.

   9. Is not microcredit a risk to make poor people even poorer?
      There have been examples where excessive interest rates and abusive lending practices
      have led to over-indebtedness on poor borrowers. Consumer protection measures have
      to be promoted and implemented such as rules related to lending practices, mechanisms
      for handling complaints, and moreover consumer education. The setting up of social
      performance measurement and management allows to pay more attention on protection
      and transparency.

 10.   What is social performance?
       Social performance has been defined along four main dimensions:
           • Outreach to the poor and the excluded,
           • Adaptation of services and products creating benefits for the targeted clients,
           • Improvement of the clients’ social and political capital,
           • Improvement of the social responsability of the microfinance institution.
       Social Performance Indicators Initiatives have been contributed at the beginning of the
       years 2000 (among others) by the French CIDR/Cerise Network, the Argidius
       Foundation, the Swiss Development Corporation, the FPH Foundation, the Ford
       Foundation, the Swiss Intercooperation and the CGAP.
       Social indicators are more difficult to measure than financial indicators but their use
       reflects an awareness that good financial performance does not automatically guarantee
       client interests are being appropriately met.

The CGAP suggests that successful agricultural microfinance relies on a combination of specific
features. A model including the all 10 features probably does not exist, but when combining a
“substantial number” of them, it has proved to work well in many agricultural regions and to
mitigate the risks associated with lending to farming households.

 1.    Repayments are not linked to loan use.
       Repayments are linked to all the income sources of the household: the borrower has to
       repay whether or not the use of the loan is successful.

 2.    Character-based lending techniques are combined with technical criteria in selecting
       borrowers, setting loan terms and enforcing repayment.
       The developed lending models combine group guarantees or close follow-up on late
       payments with knowledge of crop production techniques.
 3.    Savings mechanisms are provided.


An Assessment of the Micro Credit Situation in Rural Bhutan and its Relevance to Helvetas Bhutan.   46
       When rural financial institutions have offered deposit accounts to farming households,
       the number of such accounts has quickly exceeded the number of loans.
 4.    Portfolio risk is highly diversified.
       The microfinance institutions’ portfolios are better protected against agricultural risks
       beyond their control when the borrowers are engaged in more than one crop or livestock
       activity.
 5.    Loan terms and conditions are adjusted to accomodate cyclical cash flows and bulky
       investments...
       ... without abandoning the essential principle that repayment is expected.
 6.    Contractual arrangements reduce price risk, enhance production quality and help
       guarantee repayment.
       When the final quality or quantity of a crop is a core concern (for agricultural traders and
       processors), arrangements combine technical assistance and provision of specified
       inputs on credit.

 7.    Financial service delivery relies on existing institutional infrastructure or is extended
       using technology.
       Using infrastructure already in place in rural areas (even if for non-financial purposes) to
       deliver financial services reduces the delay and costs of transaction. New technologies
       offer tremendous advantages in rural areas: points of sale (for instance, a general store),
       automated teller machines (ATMs), smart cards and mobile phone.
 8.    Membership based organizations can facilitate rural access to financial services and be
       viable in remote areas.
       Transaction costs are much lower when dealing with associations of farmers that can
       also be finance service providers themselves.
 9.    Area-based index insurance can protect against the risks of agricultural lending,
       providing payouts linked to regional levels of rainfall, commodity prices...
 10.   To succeed, agricultural microfinance must be insulated from political interference.




An Assessment of the Micro Credit Situation in Rural Bhutan and its Relevance to Helvetas Bhutan.   47

				
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