With Development Support: How Rural Cooperative Banks in Cameroon are Flourishing
An extensive network of branches and trustworthy structures: “MUFID” provides farmers and traders with access to financing – at half the interest rate of the local loan sharks.
Christian Baforo is 22 years old, a small farmer near Garoua in northern Cameroon, and has just set up on his own, independent of his parents. He received a loan from the cooperative bank MUFID in his home town of Ngong to set up his own farm with two hectares of land. He grows cotton, maize and peanuts. With his small family of wife and child, his next project is to expand his farm and build a permanent brick house so that they can move out of the small mud hut. To realize these plans, he needs another MUFID loan.
MUFID stands for Mutuelles Financières de Développement (Mutual Finance for Development). There are currently 94 MUFID cooperative banks in Cameroon with a total of 120 branches in ten regions. Each bank has an average of around 3’000 members: mainly farmers, small traders and medium-sized companies. The network has set itself the goal of being a leader in agricultural financing in the Central African country – and an important player in the financial integration and financing of micro, small and medium-sized enterprises. It is making good progress – not least thanks to strict banking supervision. But it also has its challenges.
The MUFID banks and German development cooperation
Most of the cooperative financial institutions are local Cameroonian initiatives. They are financed by the deposits of their members. However, German development cooperation (DC) has accompanied and supported the MUFID cooperative banks from the very beginning. This was initially done via DEG (Deutsche Investitions- und Entwicklungsgesellschaft – German Investment and Development Association), which was a shareholder in the Cameroonian commercial bank that originally set up the MUFIDs. The aid organization Misereor then provided long-term support for the establishment and development of new MUFIDs, while GIZ (Deutsche Gesellschaft für Internationale Zusammenarbeit – German International Cooperation) provided advice on agricultural financing and digitalization.
The international department of the German Cooperative Association (Deutscher Genossenschafts- und Raiffeisenverband – DGRV), which in turn receives financial support from the Federal Ministry for Economic Cooperation and Development (BMZ), continues to provide advice on agricultural financing to this day. Overall, with fairly limited funds German development cooperation was able to support the establishment of the most efficient microfinance network in Cameroon which makes a decisive contribution to smallholder agricultural financing. Although Cameroon has also had negative experiences with microfinance institutions in the past, not a single MUFID-bank has gone bankrupt since the first one was founded 32 years ago.
Cooperative services for members
The most important service that the bank offers its members is the safe investment of their savings. There is great insecurity in the villages in the north of Cameroon. Robberies are more frequent during the cotton harvest, when relatively large sums of money are available in the villages. However, if the cotton company can transfer the farmers' income directly to their MUFID accounts, security is increased considerably. For this reason, all MUFIDs have vaults with very sturdy lockers that are difficult to break into and sophisticated access rules. The stored cash is also systematically insured.
In addition to money for agricultural inputs, members of the cooperatives also receive cheap loans for everyday needs, such as the cost of a doctor's visit or children's school uniforms. These short-term loans are usually repaid quickly. Like Christian Baforo, members have access to loans for investments. They enable the purchase of land, tools and draught animals. During the harvest season, the wages of agricultural workers can be pre-financed. With “Warrantage”, the bank grants a loan on the basis of stored maize, for example. This means that the farmers do not have to sell it at very low prices during the harvest period, when maize is in abundance, but can store it until the “off-season” and then sell it at a much higher price. As a MUFID member, women's cooperatives can, for example, finance the construction of stables for small livestock or fences for their vegetable gardens.
Being able to transfer money to family members, friends and business partners in other parts of Cameroon has proven to be extremely useful for MUFID cooperative members. Cooperation with one of Cameroon's largest mobile phone providers is currently being expanded to provide mobile banking options. The socio-psychological factor should also not be underestimated: having your own bank in the village strengthens cohesion, it is an important meeting place and the annual meetings of the members often turn into large celebrations.
Sophisticated structures
There are cooperative banks all over the world – often inspired by the German Raiffeisen model – but in Cameroon, the role of traditional leaders and religious authorities in the advisory boards of the individual village banks stands out. In addition to the board of directors and the supervisory board, the general assembly of members also elects honorary councils made up of respected village figures such as the local priest, the imam or the traditional chief. These honorary councillors mediate in conflicts, e.g. between borrowers and the bank, and ensure that the values of MUFID and the cooperative principles are adhered to.
The Annual General Meeting also elects the members of the Board of Directors of each bank, which employs an average of five to six full-time employees for day-to-day management. As a rule, these employees come from the place where the respective bank is located – often larger towns with several tens of thousands of inhabitants – and have at least a secondary school diploma. In addition, they receive basic training and ongoing further training in order to carry out their tasks.
MUFID's business model does not require external financing or credit lines. In addition to the capital contribution, members deposit their current income and savings with the bank at moderate interest rates of 2-3 percent. MUFID uses these liquid funds to finance loans to its members – at interest rates between 13 and 15 percent per year. This is about half of what a local loan shark charges. Collateral must be provided for larger loans: Valuables, stocks of goods, land or even receivables from the expected sale of crops. In principle, having accumulated savings facilitates access to credit.
If MUFID makes a profit, 20 percent of this is allocated to the bank's regulatory reserves, i.e. equity. Half of the remainder is used to reimburse members, 20% each for interest on capital contributions and a fund for development and social projects in the local community (such as the construction of a school class, a health clinic, etc.) and 10% for the training and further education of members.
The umbrella organization: MUFID Union
Cameroon has learned lessons from the past in terms of regulatory policy for banks and microfinance institutions. Mismanagement and widespread corruption led to numerous insolvencies – many savers lost their deposits. As a result, Cameroon and the entire Central African Economic and Monetary Community (CEMAC), whose single currency is the CFA Franc, imposed very strict banking supervision. This prescribes clear financial indicators and supervisory standards, such as sufficient capitalization, even for the smallest financial institutions. The aim is to prevent further insolvencies, which is increasingly met with success in the region.
However, the banking supervisory authority does not have the capacity to examine every “small” MUFID bank individually. It required all microfinance institutions that only do business with their members to organize themselves as cooperatives and to form networks. The MUFIDs thus founded the umbrella organization MUFID Union, on which the banking supervisory authority mainly focuses its controls. It thus delegates responsibility for the individual MUFID banks in the network, as is also the case with the Raiffeisen banks in Germany.
The MUFID Union is thus responsible for consolidating the figures of the member MUFIDs, auditing and controlling, organizing and managing the information system, monitoring business activities, ensuring mutual support within the network, representing the interests of the MUFIDs vis-à-vis third parties and, finally, organizing training courses. To this end, it also has a supervisory board made up of elected delegates from the MUFIDs at grassroots level – and only limited financial resources.
Only recently have all member MUFIDs been connected to each other and to the head office in a core banking system in real time. Previously, data had to be transferred via USB stick, which was time-consuming. Now the MUFID Union will soon be able to track, process and monitor the individual figures of all members of the network on a daily basis and much more efficiently. Customers will be able to carry out their banking transactions at any other MUFID branch across the country. Abuse, fraud and potential risks in the member MUFIDs can also be dealt with more quickly, potentially with the help of AI-supported deviation analyses. This is an important aspect in a country like Cameroon, which is highly susceptible to various risks and corruption.
The challenges of the MUFID cooperative banks
The banking network must focus on increasing profitability, expanding lending and reducing default rates. Looking at the MUFID banking group's balance sheet for 2023 – with total assets of EUR 150 million, equity of EUR 21 million, savings deposits of EUR 112 million, loans of EUR 45 million and dubious debts of EUR 8.4 million, this leaves a profit of EUR 0.3 million – it is clear that MUFID is extremely liquid but not very profitable. In addition, the proportion of dubious loans is high.
Analysis shows that MUFIDs grant too few loans and in some cases to “the wrong” people, which can be explained by the cooperative structure, among other things. Borrowers are “members” and everyone in the village knows everyone else. Loans to large local traders or large farmers are not always easy to collect. The risk of default in turn feeds the reluctance of MUFID employees to grant new loans. To break out of the vicious circle, MUFIDs need a wider range of products beyond traditional lending to increase the likelihood of repayment.
Contract farming in Cameroon offers great opportunities for the development of “secure” loans, where farmers sell to a large agricultural company and receive technical support as well as smaller agricultural equipment and inputs. For example, the cotton company Sodecoton has 200’000 cotton farmers in the northern part of the country on its books. For cotton that has been delivered, Sodecoton pays proceeds either in cash or – increasingly often – into farmers' accounts at MUFID – and the latter can grant a loan even before the harvest based on a portion of the sales proceeds as collateral. Such a credit product is relatively easy to standardize, the creditworthiness is easy to analyze and the risk of default is drastically reduced.
Contract farming also exists in other agricultural sectors such as palm oil, rubber, pineapple and poultry farming. In the coffee and cocoa sectors, large cooperatives also have close contractual ties with their farmers. In future, the MUFID network would like to make much greater use of these structures for lending.
Some save, others buy livestock
In addition, there are major cultural differences in savings behavior in Cameroon. While the Bamileke in western Cameroon are generally net savers and accumulate part of their wealth in bank accounts, farmers and cattle breeders in the north tend to invest their savings in livestock, which they sell again when needed. As a result, the MUFIDs in West Cameroon usually have a structural excess of liquidity, while in the North the demand for credit exceeds the reserves of the MUFIDs. Here, the MUFID Union can siphon off excess liquidity at interest and pass it on in the form of loans where these are needed in order to expand lending business.
The MUFIDs are also in the process of developing new products in the area of real estate financing. This will also increase the profitability of the system.
The extent to which the cooperative banks in Cameroon are helping to overcome the lack of access to finance, which is a recurring complaint in rural development, can so far be seen primarily in examples such as the young smallholder farmer Christian Baforo. A rigorous impact analysis with comparison cohorts on how poverty has developed within and outside the MUFID network is still pending, but is set to be started with the support of the German Cooperative Association.
All views expressed in the Welternährung are those of the authors and do not necessarily reflect the view or policies of the editorial board or of Welthungerhilfe.
Roger Peltzer is an economist, author, former Head of Department at DEG and an expert on development finance and value chains in the cotton sector.
