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Savings and credit cooperatives provide financial services to millions, including poor and low-income people in many countries. They are user-owned financial intermediaries that have the advantage of being able to reach people in very remote areas without access to banks, and providing savings services to the members. This briefing note argues that working with these cooperatives offers many advantages for donors who want to increase access to financial services but, to be effective, donors must learn how to overcome several unique challenges.

Some of these challenges are identified as:

• weakness in governance: often the co-operatives are run by volunteers and lack professional management. This leaves room for community elites or net borrowers to dominate the structure for their own benefit
• inadequate regulation and supervision: savings and credit cooperative systems in developing countries have a history of instability
• limited menu of products: many co-operatives offer only one type of loan product with no variation according to risk levels
• damage done by external credit: donors have channeled funds through savings and credit cooperatives to target specific types of clients, which tends to decrease the incentive to mobilize deposits

Recommendations for donors are:

• focus on deposit mobilisation first
• invest in building capacity rather than injecting external funds for lending
• encourage sound governance policies
• support savings and credit cooperatives that want to learn new techniques to reach poorer customers
• keep financial standards at the core of internal management and external supervision
• support competent, independent external supervision of savings and credit cooperatives by banking authorities where possible
• concentrate resources on savings and credit cooperatives that are willing to implement sound policies and standards, rather than spreading them over all the cooperatives in a country

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