#### STICHTING BAKENS VERZET

#### 1018 AM AMSTERDAM, THE NETHERLANDS

Director,

T.E.(Terry) Manning,

Schoener 50,

1771 ED Wieringerwerf,

The Netherlands.

Tel: 0031-227-604128

Homepage: http://www.flowman.nl

E-mail: (nameatendofline)@xs4all.nl : bakensverzet

## MODEL FOR SUSTAINABLE SELF-FINANCING INTEGRATED RURAL AND POOR URBAN DEVELOPMENT FOR THE WORLD'S POOR

Incorporating innovative social, financial, economic, local administrative and productive structures, numerous renewable energy applications, with an important role for women in poverty alleviation in rural and poor urban environments.

"Money is not the key that opens the gates of the market but the bolt that bars them"

Gesell, Silvio The Natural Economic Order

Revised English edition, Peter Owen, London 1958, page 228

Edition 11: 15 August 2006

## THE ROLE OF MICRO-CREDIT IN SELF-FINANCING INTEGRATED DEVELOPMENT PROJECTS

Edition 01: 20 November 2000

### INTRODUCTION

An innovative Model Integrated Self-financing Development Project covering a complete package of basic services for sustainable development in poor rural and urban areas has been developed. It includes hygiene education, the provision of drinking water and sanitation services, PV lighting for study, PV lighting and refrigeration in clinics, waste removal, high-efficiency stoves and bio-mass to fuel them. It provides a strong thrust for on-going local development, productivity, and employment. It contains many decentralised solar energy applications.

The Model has been placed in the public domain.

The Model is strongly demand response oriented. Project applications are worked out together with the users who execute, run, maintain, own and pay for the project structures. The Model provides practical working solutions for sustainable integrated development and covers all major development priorities. It constitutes a practical way of applying modern development concepts such as those outlined in the DFID "Guidance manual on water supply and sanitations programmes" (WEDC for DFID, 1998). It integrates in a practical and feasible manner policy, finance, technology and human capacity building to offer sustainable solutions to development.

Project applications are self-financing, subject to an interest-free seed loan repayable in 10 years. The Model is structured for communities of 10000 households (50000 users) but can be adapted to smaller and larger project areas as required. The minimum amount of the interest-free seed loans is US$ 3.000.000 or US$ 60 per user, which covers the entire basic package of structures and services, and calls for a monthly payment of US$3 per family of 5 into a Cooperative Development Fund. The Model is structured so that some, if not all, of these monthly payments can be recovered by savings on the current expenditure of the families for the (inadequate) structures and services available to them.

Project applications require 75% financing in the form of a 10 year interest-free loan by an External Support Agency. Regional or state authorities in the beneficiary countries are expected to supply the remaining 25%.

Project applications are self-financing because they allow the recipient communities to fully exploit a network of sustainable development activities using:

(i) The interest-free loan itself
(ii) Local Exchange Trading Systems (LETS)
(iii) Multiple re-cycled interest-free micro-credits to be administered by a local micro-credit institution. They are generated by recycling seed loan repayments and project reserves during the loan term, and by recycling repayments of the micro-credit loans themselves.

### REDUCING FINANCIAL LEAKAGE FROM PROJECT AREAS

One of the most important causes of poverty is on-going financial leakage from poor rural and urban areas and nations to richer national and international havens and nations. If poverty alleviation projects are to succeed, financial leakage from individual project areas has to be reduced and preferably stopped altogether. This does not imply closure of project areas to the outside world. It implies that the balance expressed in formal currency of transactions for goods and services imported into and exported from individual project areas must tend to zero.

Some important factors causing financial leakage are energy imports, import of industrial goods and services, and interest. The cumulative interest content of a typical western industrial product is thought to be anything up to 40% of the cost to the end user. This interest normally exits from project areas never to return.

Technologies using local energy such as human energy, local biomass, PV and wind energy, and locally recycled wastes together with appropriate financial instruments help create and encourage open competition and free enterprise within the framework of a cooperative and non profit-making global financial structure. As the Model shows, self-financing integrated development is then able to flourish.

### ROLE OF MICRO-CREDITS IN PROJECT APPLICATIONS UNDER THE MODEL

Multiple re-cycled interest-free micro-credits provide formal money needed to develop local production capacity. The rest of the development under project applications is carried out under local exchange trading (LETS) systems set up in each project area.

The formal currency capital available for recycling in the form of micro-credits is made up of :

a)Part of the initial seed loan money until it is needed for the project application
b)Seed loan repayments
c)Micro-credit repayments
d)The long term maintenance fund
e)System capital replacement fund which will be built up after the ten years' seed loan has been fully repaid

For instance, a woman may need a sewing machine to be able to make clothes. She will need "formal" currency to buy the sewing machine (and perhaps some cloth), which is presumably not made in the project area itself. That money will be made available to her in the form of an interest-free micro credit. She will sell outside the local LETS system some of the clothes she makes to earn the "formal" money she needs to repay her loan. The rest of the clothes can be sold within the local currency LETS system. As she repays her loan, the repaid capital can be promptly recycled for another interest free micro-credit project, so the available seed money repeatedly re-circulates within the local economy.

(Fig 1)

THE INTEREST FREE LOAN CYCLE

### HOW THE MICRO-CREDIT STRUCTURES WORK

Micro-credit systems within the framework of project applications under the Model will be set up by local micro-credit institutions.

The proposed micro-credit systems will be different from most of those formed up till now. Formal currency loan capital repayments and longer term reserves within the projects themselves will be used to finance the micro-credit systems. These funds are already available for multiple re-cycling, interest-free. When, at the close of the ten years' seed loan repayment period, the original project capital is repaid, the users will continue to pay their monthly contributions into the Cooperative Development Funds to build up capital for system extensions and/or to replace system hardware after 20-30 years. These fresh Cooperative Development Funds will become quite large. They in turn become available for interest-free micro-credits within the project area until they are needed, so that permanent on-going sustainable development in ten-yearly cycles is ensured .

Final repayments of blocks of micro-credits will be co-ordinated so that money for long term capital investment purposes (system replacement and extensions) will be available when it is needed. An example of this is shown in columns 37, 38, 39 and 40 of the chart in fig 2, where the higher columns indicate shorter payback times for the last lots of micro-loans so that the entire interest-free seed loan capital of Euro 3.000.000 is available for payment in the 41st quarter.

Money for the interest-free formal currency micro-credits granted is therefore generated by the users themselves within the framework of the project applications. The money and the micro-credits belong to the users. They are interest-free and continue to re-circulate within the local economy. Based very conservatively on an average payback time of two years, the theoretical average interest-free micro-credit finance made available during the first ten years to every family of five persons in a given project area is US$ 1500. If the average payback time were to be shorter, the interest-free funds available would be greater still.

The following chart (which has been drafted in Euros) shows a typical build-up of micro-loan investment over the first period of ten years of a project application. It shows the amount of new micro-loans actually (re)invested each quarter during the first period of ten years. The amounts are net of current outgo for project administration and maintenance of structures, which have already been deducted.

In the chart, the original interest-free seed loan is paid back in the 41st quarter. The capital available for micro-loans temporarily falls back to the amount actually being paid into the Cooperative Development Fund each month by the users. It will then gradually build up again over the next period of ten years, so that a further amount of at least US$ 1500 can be made available (on an average) to each family in the form of interest-free micro-loans. This time the funds accumulated belong to the users themselves, and are available for renewal and/or extension of project structures when needed.

(Fig. 2)

CHART SHOWING THE DEVELOPMENT OF MICRO-LOANS

### COVERAGE OF THE COSTS OF THE MICRO-CREDIT INSTITUTIONS

The local micro-credit institution will charge a fee for each transaction to cover its costs and make a socially acceptable profit. The local bank's fee will be set before each project application becomes operative. However, the fee will be expressed in the local LETS currencies to stop financial leakage from the local economy. The bank will have special permission to accumulate LETS credits for this purpose. The bank may then use its LETS credits to purchase local goods and/or services available within the project area and sell them outside the project area for formal currency.

Associated activities such as collection of payments and distribution of information will all be paid for in the local LETS currencies.

Local micro-credit institutions are, therefore, regular members of the local LETS systems.

### USE AND REPAYMENT OF MICRO-CREDITS

The purpose of the planned Micro-Credit systems is to ensure that individuals or co-operatives without access to formal currency can get interest-free micro-credit loans for capital investment for production purposes to boost the local economy. The interest-free Micro-credit loans are therefore applied mainly to buy items necessary for production purposes which are made outside the local currency trading (LETS) systems.

The pay-back time for the interest free loans will vary from case to case. Some micro-credit investments will generate more goods and services that can be sold outside the local LETS currency area than others. Some users will therefore be able to earn formal currency to repay their micro-loans more quickly than others. The users themselves will decide from case to case during their monthly meetings on what is acceptable to them.

The possibility of sale of some of the production to consumers from outside a project area for formal currency will usually be a condition precedent for the granting of a micro-credit loan. This condition of partial "export" sale lapses as soon as the micro-loans have been repaid. In project applications where an export-import cooperative has been set up, the cooperative may often be able to help the beneficiary of a micro-loan export part of his or her production in exchange for formal currency.

The rate at which micro-loans in formal currency can reasonably be recovered will determine the payback period, which could therefore be anything between a few months and a few years. The rate of the loan repayments must be realistically possible for the borrowers. The system is co-operative and interest free and designed to enhance the general welfare within the beneficiary communities. As with the Grameen bank systems, any person or co-operative group wanting a Micro-Loan will be expected to produce four friends who agree to be jointly and severally liable for the periodic loan repayments, and to make sure they are made on time.

(Fig 3)

HOW THE ORIGINAL SEED LOAN MONEY IS USED

### HOW THE MICRO-CREDITS ARE MADE

Since the Micro-credits are essentially self-financed by the communities through their Cooperative Development Funds, the funding priorities must be left to the communities themselves. This is especially so where potential conflicts of interest arise because there is not enough funding immediately available to meet all requests for assistance. Meetings to discuss members' proposals and further developments with on-going projects will become a feature of the social life of the communities at tank commission level. Since it is expected that many of the beneficiaries under the scheme will be women and women's groups, women will need to have full representation during such meetings. One of the basic goals of the formation of the Community Health Clubs foreseen in the Model Self-financing Integrated Development Project is to use the Health Clubs as a launching pad to create women's groups. These groups will give women the chance to discuss their needs, develop their priorities, and make submissions during the Micro-Credit meetings. The Health Clubs should also be able to ensure that women participate en bloc at the Micro-Credit meetings.

### SOME BASIC PRINCIPLES APPLYING TO MICRO-CREDITS

Rules for the organisation of the Micro-Credit meetings will be set up during phase two of the various project applications with the full participation of the beneficiary communities. These rules must lay down the general principles behind the systems. These would, for example, presumably include the following principles:

1) All loans are to enable the beneficiary to extend his/her LETS and formal currency income by producing more goods and services

2) The goods and services must benefit the general interests of the community and encourage exchanges under the local LETS systems.

3) Some of the goods and services must be saleable outside the LETS systems to earn formal currency to repay the micro-loans.

4) The Micro-Credit loans must promote the rapid circulation of formal money within the beneficiary communities. For example, using formal currency to build a clinic or hospital would not qualify for micro-credits because the capital invested cannot be re-circulated. On the other hand, buying equipment for testing water quality (foreseen in the Model) would qualify, as the formal currency cost can be recovered by charging in formal currency for water analyses conducted for users outside the project area until the micro loan has been repaid.

5) Special priority will be given in the first instance to micro-loans to start the collection and transport of compost, urine, and grey water, and establish the recycling centres that will collect, store, and export non-organic waste products from the project area. The formal currency micro-loans will be recovered by sale of the waste outside the project areas.

### ACCOMPANYING DRAWINGS

The following drawings and graphs form an integral part of this paper.

SELF-FINANCING INTEGRATED DEVELOPMENT PROJECT - FULL PROGRAMME
DRAWING OF INSTITUTIONAL STRUCTURES.
CASH FLOW DIAGRAM.
HOW THE ORIGINAL SEED LOAN MONEY IS USED.
GRAPH SHOWING DEVELOPMENT OF MICRO-LOANS .
THE INTEREST-FREE LOAN CYCLE.
TANK COMMISSION - THE BASIC PROJECT STRUCTURE

### ACCESS TO THE COMPLETE MODEL PROJECT

The Model Self-financing Integrated Development Project the micro-credit aspects of which have been discussed in this paper has been placed in the pubic domain and can be freely accessed and downloaded together with drawings, charts and graphs in colour from the home page of website : www.flowman.nl

### LIST OF KEY WORDS

Anhydrite, use of; Banks, role of in development; Gypsum composites products; Bio-mass, for cooking; Briquettes, bio-mass; Chain control, integral; CO2 emissions, reduction of; Compost, recycling; Composting toilets; Cookers, high efficiency; Cooperation, role in development; Development projects, structures for; Development, sustainable; Drinking water supply; Economy, developing countries; Economy, development projects; Economy, foreign aid; Economy, industrial development; Economy, interest-free development; Economy, Local Exchange Trading (LETS) systems; Economy, nominal local currencies, development of; Economy, micro credits; Economy, self-financed development; Economy, taxation and development; Education, hygiene; Gender, role of women; Gypsum, cheap; Hand pumps; Health Clubs, development projects; Hygiene, education; Industrial development; integral chain control; Integrated development projects; Interest, role of; LETS systems; Loans, interest-free; Local currency systems; Local Exchange Trading (LETS) systems; Materials, regeneration of; Micro-credit systems; Photovoltaic (PV) home systems; Photovoltaic (PV) lighting; Photovoltaic (PV) pumps; Photovoltaic (PV) refrigeration; Poverty alleviation; Pumps, solar; Pumps, hand ; Rainwater, harvesting; Recycling, compost; Recycling centres; Recycling, waste; Regeneration of materials; Rural water supply; Sanitation, developing countries; Sanitation, dry; Self-financing development projects; Solar pumps, submersible; Stoves, high efficiency; Sustainable development; Tanks, gypsum composites, local manufacture; Toilet facilities, gypsum composites; Toilets, dry; Urine disposal; Washing places; Waste collection systems; Water purification, UV; Water supply projects; Water supply, rural; Water tanks, gypsum composites, Women, role of in development.

List of articles on subjects related to the Model.

List of attachments to the Model.

Complete index of the Model.

Model Homepage.

Homepage Bakens Verzet