Financing cooperatives The good, the bad and the ugly!

  • Hannah SIEDEK, European Investment Bank (EIB)
  • Oliver SCHMIDT, AFC / GOPA-Group
  • Edouard SERS, Grameen Credit Agricole Foundation
  • Thos GIESKES, Oikocredit
  • Francois LEGAC, SOS Faim Luxembourg


Moderator Hannah SIEDEK asked the panellists, from their experience, to shed light on the challenges and benefits of financing cooperatives. Oliver SCHMIDT set the scene by explaining how and why investors should finance savings and credit cooperatives. He argued that such cooperatives, both formal and informal, play an important role in financial sector development in many countries. Investing in them can be relevant to achieve development mandates. Nevertheless, risks for investors are potentially high, depending on situational and structural factors of the cooperative, he stated.

Schmidt explained that investors generally worry about internal controls if a cooperative is barely formalised, and in a fast-growth-phase, lacks capacity of members, especially when regulation does not prescribe (internal) controls. These factors increase the risk of fraud, mismanagement and over-exposure. Investors generally worry about the capacity of members/officeholders of cooperatives if there are low (financial) literacy levels, thin or no meso-level support and/or when regulation doesn’t prescribe/enforce officeholder traits. This would increase the chance of over-exposure to risk, while it decreases reliable reporting and sustainability of an investment.

As such, Schmidt argued, investing in savings and credit cooperatives is more likely to be successful if the investment is aligned to strengthen the governance and operation of the cooperative. The investment should also go hand in hand with systematic strengthening of internal controls, ideally in concert with meso-level organisations such as NGOs or associations. Schmidt concluded that investments would also be more successful if a time-horizon beyond 2-3 years would be taken, and if investments are accompanied by technical assistance that takes cooperative principles into account (on which cooperatives are based).

According to Bruno DUNKEL, strengths of cooperatives relate to the fact that credit decisions are taken locally, and that membership ensures deep roots in the local economy. In Poland, he continued, there are very few failures or bankruptcies, partly because weaker banks merge with stronger ones, which is in the best interest of clients.

Dunkel then moved on to the weaker points of cooperatives. First, he mentioned governance, as difficulties are mostly generated by weaker management of a cooperative. In general, when a cooperative becomes bigger, Dunkel said, the lack of competences becomes stronger. Secondly, size is an issue: the heavy weight of the growing regulation is a real burden for small cooperative banks. These smaller cooperatives also tend to be less adapted to embrace digitalisation, as adaptations are costly. Lastly, Dunkel called the independent spirit of cooperatives a difficulty, as cooperatives may not consider that you can be “stronger if together”. 

Thos GIESKES acknowledged the challenges of size and governance as laid out by Dunkel. Regarding the benefits, Gieskes indicated that cooperatives have lower annual percentage rates charged by institutions to customers, compared to non-cooperatives. Cooperatives also score higher on adhering to client protection principles and client retention rates, compared to non-cooperatives. In addition, non-financial services, literacy and business trainings are more common for cooperatives than non-cooperatives.

Regarding challenges, Gieskes mentioned that investing in cooperatives is riskier. Although loss numbers might not be significant, cooperatives require more technical assistance and capacity building to grow in either their governance or their management skills.

Francois LEGAC explained that MFIs which successfully offer rural and agricultural credit, often integrate client participation into their operations or decision-making processes. These highly decentralised processes increase the rural outreach of such organisations. He argued that both the legal status and the operating modalities bring cooperatives closer to their customers/members. This allows cooperatives to better understand the needs of customers and to develop appropriate financial products, both loans and savings.

Legac then emphasised the importance of good regulation, as a weak regulation system of cooperatives can undermine the development of the sector. It is important to train board members to enable them to play the right role. Legac argued that strategic alliances play a key role in the development of cooperatives. Partnerships between organisations involved in complementary activities allow cooperatives to diversify and increase their services and sustainability. 

Edouard SERS explained that cooperatives have a larger rural outreach and contribute to the resilience of people in rural areas. In addition, cooperatives provide savings, which is often more important than credit. Investing in cooperatives is riskier in terms of the cooperative’s capacity of risk management and governance, he continued. As such, the systematic provision of long-lasting technical assistance to cooperatives is crucial.


An audience member raised the issue of a possible destructive influence of governance interference, for instance when they pour too much money into cooperatives, as was the case in Uganda. Schmidt replied that politicization is an issue. Not only from governments but also from investors. Nevertheless, he argued, regulation is needed. As such, you should always watch governments and assess whether they are committed to strengthen oversight of the sector in a technical and regulatory sense.

Next, a “devils-advocate” position was outlined, summing up several arguments why not to deal with cooperatives, and concluding that they are old-fashioned. Schmidt said that the biggest problem in the cooperative sector, particularly in Africa, is that even if cooperatives do not perform well in the market, they continue to exist and find funding. Europe has a better way to deal with those weak performing cooperatives, for instance through mergers, he argued. 

Siedek wrapped up the session by stating that investors may consider financing cooperatives through other means than loans. An alternative is the provision of subordinated debt to reinforce the cooperative’s capital structure. Siedek then concluded that financing cooperatives is not easy lending and requires more involvement from investors. It may require more capacity to do due diligence, for follow-up and to provide good support to cooperatives. Regarding the last point, there was wide consensus: the provision of good technical assistance to strengthen the governance of cooperatives remains crucial.