The Performance of the Lesotho Credit Union Movement: Internal Financing and External Capital Inflow

This paper looks at the effects of using financial cooperatives in Lesotho as conduits for providing financial resources to the poor. The empirical study which forms the basis of this paper explores the factors that have determined the success of credit cooperatives in this country. It is part of a larger empirical investigation carried out in several developing countries, which provide a proper basis for judgement on the desirability of promoting credit cooperatives by providing them with external funds. 

The paper includes an overview of the results of the empirical investigation that was carried out and looks at the performance of the credit union movement during the second half of the 1980s. It finds that:

• Performance of the movement was generally disappointing. While it was difficult to establish the growth in target group orientation, it was very clear that the viability of the apex organization as well as the credit union base was very much in the balance;
• Decreasing performance went parallel with the injection of an enormous amount of aid. Between 1971 and 1991 more than US $6 million were pumped in by some 10 donors through even more projects;
• Disappointing performance of the Lesotho credit union movement could be attributed mostly to the interpretation that was given to the principles on which credit unions are was based. These principles led to a pricing policy that distorted incentives for members and management alike;
• Problems that were inherent in the design of the credit unions were exacerbated by the injection of external funds. Projects were not aimed at strengthening the credit union movement but were targeted at individuals. Necessary improvements in credit technologies were postponed, and distorted incentives were continued. When external support was withdrawn, it was too late to correct policies and save the majority of the credit unions;
• The poor in Lesotho would benefit most from a programme that targeted the credit unions themselves. Credit unions should be helped by making them self-sufficient and increasing their outreach by introducing a market-oriented pricing strategy and a results-based system of remuneration.