Enhancing Access to Financial Services for Productive Use Projects

Recommendations emerging from GIZ’s LIB project in Tibet

Background: The GIZ programme Rural Infrastructure and Vocational Training in Tibet (in the People’s Republic of China (known as LIB I, conducted from 2001 to 2006) was aimed at improving the living conditions of the rural population by ensuring them a sustainable electricity supply by rehabilitating existing small hydropower stations in five districts of Tibet. Secondly, the use of electricity for productive purposes was promoted to increase income, employment and business opportunities. The programme included activities and measures to increase agricultural productivity, and supported efforts to create micro and small businesses. One approach was to distribute selected electrical machines (such as grain mills) on lease to assess the responsiveness of the rural target population to this kind of equipment, and to raise awareness of productivity gains through electricity use in agricultural processing. The figure below shows the results chain developed for the programme.

Important lessons on micro credit for productive power use emerged from the LIB project in Tibet, where a local MFI provided loans to productive use entrepreneurs:

• A loan should be handed over to the borrower as soon as possible after the business plan has been approved. Otherwise it could happen that the business idea will be implemented by another villager who had more investment capital and no need for access to credit.
• If borrowers are very young, their families must first guarantee loan repayment.
• Although loans are intended for the agreed purpose, borrowers sometimes used the money to satisfy a variety of needs. Part of the money was used e.g. to improve the workshop and the rest to buy the needed equipment. This is why a member of the CD section later accompanied borrowers when they purchased their machinery.
• In some cases, loans were used to pay off another loan from the bank (unbeknownst to staff) or to demonstrate creditworthiness and apply at the same time for a second loan from the bank.
• During the three-year repayment period, borrowers saved money already and re-invested it in the business. In rare cases, a totally new business idea was implemented.
• Very often, additional equipment for income generation was purchased: a refrigerator, motorbike, TV, DVD player, or mobile phone.
• Over the course of the programme, the Chinese Government introduced a micro financing system in rural areas. Clients from varying economic backgrounds could open a savings account and then be entitled to apply for a loan. More than 90% of the borrowers participating in the project had such a savings book after the first programme loan was paid back. This process helped link the creditors to the public banking system.
• Although these various steps of the productive use approach seemed very long (entrepreneurship and vocational training, business plan approval, and loan provision in cooperation with a bank), they helped gain the confidence of the population, assured transparency in the selection process, combined training possibilities with the credit scheme, and integrated the community in the overall development process.