Journal Issue

The World Bank, Project Lending, and Cooperatives

International Monetary Fund. External Relations Dept.
Published Date:
March 1972
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John A. King. Jr.

The World Bank continues to be interested in farm cooperatives because they could be, and often are, a most effective way of making Bank financing available to farmers or for assisting them in carrying out development projects which the Bank finances through other channels. But the Bank has learned that there are limits to the extent to which farm cooperatives can be used in its lending programs because cooperatives in developing countries often lack good management, particularly financial management, and suffer from poor organization. Other conditions or institutions which may be essential to their successful operation may also be missing. Though cooperatives have contributed effectively in the execution of Bank projects in many instances, the Bank has also found that in other cases cooperatives had very poor resources of business management: they could not use funds effectively for the purposes for which they were intended; they could not provide the services needed; they could not ensure the repayment of loans made to their individual members; and so forth.

The Bank 1 is not alone in criticizing poor financial management of cooperatives. Yet, in the face of some unhappy experience, the Bank continues to look for opportunities to use cooperatives in its lending programs, and at the same time it looks for means of strengthening them so that they can better achieve their objectives.

Agriculture has been the only sector of the economies of developing countries where cooperatives have been directly concerned in the implementation of Bank projects. Outside the agricultural sector, cooperatives have occasionally been incidentally involved in projects in electric power and industry. Sometimes, when cooperatives were involved in the implementation of projects, cooperative organizations were the channel through which Bank funds were made available for project purposes; in other instances, Bank funds were used to build or provide facilities which were put to use through cooperative organizations after they had been built or acquired; in still others, cooperatives contributed to project objectives by providing needed services without receiving funds from the Bank.

From 1959, the date of the Bank’s earliest loan in which cooperatives were involved, to the first months of 1971, the Bank has made 150 loans for agriculture, totaling some $1,700 million. Of these, 34 loans in 24 countries 2, totaling $487.9 million, were for projects in the agricultural sector in which funds were provided directly or indirectly to cooperatives (or to organizations which are not true cooperatives but have many of their characteristics), or in which cooperatives contributed significantly to project objectives. Twelve of these loans, totaling $197.5 million, have been made in 9 countries 3 since January 1, 1970. These figures demonstrate that in spite of all the difficulties, the Bank does find opportunities for lending for projects which use cooperatives to achieve project objectives.

Many of these cooperatives differ in several ways from cooperatives as they are known in North America and Western Europe today. First, there is little spontaneous, from-the-bottom-up organization; sometimes, indeed, the coercive character of the organizations has been an obstacle to their success. And cooperatives in the developing countries are often subject not merely to political control, but to a kind of political interference that hampers their work. Second, there is often no federation of the primary cooperatives providing managerial or other services to them, or, if an organization exists, it is sometimes not a cooperative but a public agency or a specialized banking institution designed to exercise control over the primary cooperatives and to channel government subsidies to them. Third, when providing agricultural credit, these cooperatives often limit themselves to short-term credit; because of lack of staff experienced in appraising credit risks, they find it difficult to provide medium-term and long-term credit, leaving that field to specialized public agricultural institutions. Lack of experience indeed is what lies behind many of the shortcomings of the cooperatives, and critics from the developed countries must remember that similar institutions in their countries have reached their present advanced state only after a relatively long period of development.

Types of Cooperatives

The cooperatives involved in Bank projects can be classified broadly in two types: (a) those providing services such as processing and marketing, or inputs such as irrigation, fertilizer, credit, and the like, and (b) those for production, i.e., where the resources for production are owned and used cooperatively. As far as production cooperatives are concerned, the Bank has had only a limited experience, but that experience suggests that, with rare exceptions as in Israel or possibly livestock projects in Africa, production cooperatives have not been nearly as successful in the developing countries as service cooperatives.

Experience in Tunisia

The story of the Bank’s lending for production cooperatives in Tunisia illustrates some of the problems which such cooperatives pose, not the least of which is their tendency to get caught up in political and governmental pressures. The promotion of the widest possible use of cooperatives in the Tunisian economy as a whole had long been an objective of the Government and the Neo-Destourian Party, Tunisia’s principal political party, when the Government approached the Bank in the mid-1960s with an ambitious project for the creation of cooperative farm units to modernize the agricultural sector. The concept was to use the state farms (modern farm units expropriated earlier from French and other non-Tunisian owners) as nuclei of cooperative farm units to be created by adding contiguous small parcels of land owned and farmed by peasants in the traditional way. It was hoped that modern farming could thus be introduced to the peasants and the productivity of Tunisian agriculture thereby increased.

The Bank was concerned over the scale of the proposed project, and the complex organizational, managerial, and human problems connected with production cooperatives generally and with the specific situation in Tunisia. Before deciding to support the project, therefore, the Bank secured the Government’s agreement to limit the project to (a) a review and consolidation of the existing 213 cooperatives established prior to 1966 on about 185,000 hectares, and (b) to an expansion limited to the establishment of new cooperatives on about 160,000 hectares over the next two years. In February 1967 the Bank and IDA made a loan/credit of $18 million for this project. Progress in carrying out the project, however, was slow during 1967 and 1968 because of the organizational and managerial problems which turned out to be even more intractable than had been foreseen. During these two years, however, the Government established 134 more cooperatives on about 142,000 hectares, bringing the total of cooperatives to 347. In January 1969 the situation worsened when the Government, without consulting the Bank, made a political decision to accelerate the formation of cooperatives throughout the economy, including the formation of 600 new cooperatives for agricultural production in northern Tunisia by 1970/71 covering about 500,000 hectares. In addition, the area of the 347 cooperatives making up the Bank project was increased by almost one third to 433,000 hectares by adding land to already established cooperatives.

These measures had serious adverse effects on the Bank’s project and agriculture generally. Because of staff shortages created by the organizational effort required by the new cooperatives, the effectiveness of the 347 cooperatives making up the Bank project was greatly reduced, and in some instances work came to a standstill. Farmers, threatened with forced entry into cooperatives, attempted to liquidate their investments in livestock and machinery, causing severe losses to thse economy. The Bank was compelled to point out to the Government that it had violated the loan agreement by making these changes in the project without consultation and that the consequences were adversely affecting the country. In September 1969, the Government, in response to internal political pressure and to economic considerations, reversed the decision of January and adopted a strictly voluntary approach to cooperatives. As a result, virtually all small landowners have chosen to reclaim their lands, leaving production cooperatives operating on about 210,000 hectares of state lands with a membership consisting mostly of landless persons and former laborers. Because of the disruptions caused by all of these developments, the project was modified, its scope reduced, and a substantial part of the loan/credit canceled. Though satisfactory progress has since been made in improving performance on this modified project, it still presents problems, particularly in the area of organization and management.

It would be unfair to conclude from this history of the project that production cooperatives cannot work. But this experience, particularly during the first two years before the political decision for accelerated development of cooperatives, suggests that it is hard to organize them on a large scale in a short period of time and to get them to operate successfully on a sound basis.

… and in Dahomey

Developments in the Hinvi Agricultural Development Project in Dahomey confirm this conclusion. This project was started in 1967 by the Société Nationale pour le Développement Rural du Dahomey (SONADER), a Dahomean autonomous public entity, and the Fonds d’Aide et de Coopération (FAC), a French organization supporting overseas development. In 1969 IDA agreed to provide a credit of $4.6 million, amounting to approximately half of the estimated costs of the project.

The project consisted of two main physical components:

  • Palm oil production—planting and bringing to maturity 6,000 hectares of oil palms and constructing an oil mill to process the product.

  • Crops and other production—preparation of 6,000 hectares of land for annual cropping; planting 1,000 hectares of teak and cassia trees; construction of maize silos with a total capacity of 3,000 tons; purchase of 310 head of beef cattle for developing a larger herd.

SONADER was given responsibility for managing the project during both the development phase and first years of production and for organizing and developing the ten cooperatives which would take over the operations and finally own all the facilities created under the project.

By 1971 it became apparent that the project was in difficulties. Though its physical side, the planting of oil palm and land preparation, was proceeding well, the program of annual cropping was not. Because they preferred their traditional methods and disliked SONADER’s direction on behalf of the cooperatives, which had not improved their incomes, the farmers were not using the cleared land. In fact, SONADER’s cropping plan suffered from technical flaws. As far as the oil palm plantings were concerned, most farmers did not see them as a cooperative venture of which they were part owner but rather as a government estate on which they worked as hired labor. Finally the growth rates of the herds of beef cattle had been unsatisfactory. The Bank is making suggestions to the Government for steps to improve the situation, but it is clear that providing the management and motivation necessary for these production cooperatives is a very large task and that success is not achieved easily.

Livestock Projects

Where they have been used in livestock projects, production cooperatives have been more promising than in other types of projects. In the Bank’s livestock projects, cooperatives and quasi-cooperatives have made an effective contribution both as sub-borrowers and as providers of various services, and the Projects Departments of the Bank believe there are possibilities for more projects using cooperatives in this way. In Africa at least, where cooperative ranches are sub-borrowers under some of the Bank’s loans for livestock development, livestock appears to be one of the rare exceptions to the Bank’s general experience that production cooperatives have not been nearly as successful in the developing countries as service cooperatives, perhaps because the concept of common ownership of livestock already exists there.

Service Cooperatives

Though service cooperatives, too, may present serious problems of management, they appear to be more likely to achieve their objectives and to offer greater possibilities. Agricultural credit is a field where the Bank has used service cooperatives in achieving project objectives, and it looms large in the totals lent for projects involving cooperatives. In India, for example, the Bank has relied heavily on cooperative agricultural credit institutions, the state cooperative land mortgage banking systems, for carrying out its agricultural credit projects. These projects illustrate how the Bank can use cooperatives as a means of retailing a large loan to a substantial number of individual borrowers.

There are currently five such projects, one each in Gujarat, Punjab, Andhra Pradesh, Tamil Nadu, and Haryana, for a total of about the equivalent of $147 million, and additional projects of this sort for other states in India are in the process of preparation and appraisal. Under these projects funds are provided to the cooperative land mortgage bank of the state in question for relending through local primary land mortgage banks (which, in effect, are often branches of the state land mortgage bank), to individual farmers for financing such on-farm improvements as minor irrigation wells, land leveling and drainage, and farm mechanization. It is expected that, under these five projects, several hundred thousand individual loans will be made.

These land mortgage banks have been in existence for some time and are seasoned institutions. But some of them have recently gone through periods of rapid growth and have, as a result, some weakness in organization and staffing. In some instances the state has agreed to limit the expansion of the system to rates compatible with sound administration. Though there is a history of spontaneous private organization of credit cooperatives in India, today the land mortgage banks in each state are largely subject to government initiative and they in turn take the lead in forming the primary banks. The state banks are owned jointly by the state in question and the primary banks, the state being a minority shareholder but having a rather strong voice on the board of directors. The primary banks are owned by borrowers and prospective borrowers; borrowers are required to become shareholders. Such cooperative banking systems tend to be organized from the top down, rather than from the bottom up.

The World Bank has confidence that these systems are useful and effective channels for making funds available to individual farmers to enable them to increase their productivity. It is interesting, however, that a major element in each of the projects is the reorientation of the lending criteria of these systems. In the past, loans were made largely on the basis of the collateral available; under the projects, loans to farmers will be based on development criteria. It is hoped that these new criteria will permit the systems to reach more individuals and have greater developmental impact. To put the new criteria into effect and to appraise individual loans in accordance with them, the management and technical staff of the cooperatives have to be strengthened, and steps are already being taken to do this. But these changes will not make these institutions self-sufficient. Their success depends also on other elements, such as the provision of extension services, short-term credit, fertilizers, and improved seeds from other sources and the fact that Indian law and land tenure provide adequate security mechanisms to support lending.

No tangible results of these projects can yet be seen. The five loans are all recent, having been approved in 1970 and 1971, and no disbursements have been made under them. It is expected, nevertheless, that they will all be fully disbursed in approximately three years from their respective dates of effectiveness.


The provision of finance is one kind of service that may be undertaken by cooperatives; another is irrigation. Here, experience suggests, not surprisingly, that most cooperatives in developing countries (or perhaps in any country) are not up to the task of building and managing large-scale gravity irrigation projects; the technical and logistical problems of construction are too great and the administrative characteristics of participation in a gravity system appear to make it unsuitable for management by cooperatives. The infrastructure may be owned collectively by water user associations but participation is compulsory and individuals cannot withdraw.

Even in large-scale gravity irrigation, however, cooperatives and quasi-cooperatives may provide important auxiliary services, such as marketing or milling, or the credit and fertilizers necessary to achieve project objectives. The Muda and Kemubu irrigation projects in Malaysia, for which the Bank has loaned a total of $55 million, provide examples of such activities. Or these bodies may collect funds to pay for related services, such as road maintenance. Where irrigation is provided by small pumps, however, cooperatives may sometimes be suitable for operating the irrigation system itself, though special attention may have to be given to extension services and pump maintenance. The Bank has made several loans for projects of this sort in East Pakistan and has others under consideration, for example in Pakistan and Afghanistan. If the managerial, staffing, and training problems involved can be solved, there seem to be opportunities for cooperatives in this field.

To cope with these problems, the Bank has included funds for various kinds of technical assistance, including management assistance, in a number of these projects, but this has not been a complete answer because expertise in cooperatives and perhaps the institution itself are not always easily transferable from one economic and sociological environment to another. Nevertheless, the Bank is continuing and expanding this approach and experimenting with new ways of meeting these needs.

The magnitude of the training and institution-building often required in projects using cooperatives can be illustrated by referring to the agricultural credit project in Senegal, approved in February 1969. The objective of this project was to bring about and maintain substantial increases in farmers’ incomes and in government revenues during a period of declining export prices for groundnuts. Its specific goal was to foster a continuing high rate of increase in the production of groundnuts and millet by the following:

  • (a) Furnishing credit through cooperatives to farmers for the purchase of farm implements, draft animals, and fertilizer.

  • (b) Providing technical assistance for strengthening the Office National de Coopération et d’Assistance au Developpement (ONCAD), the apex organization of the 876 farmer cooperatives in the project area.

  • (c) Providing financing for the merger of cooperatives and training of their managers.

  • (d) Providing financing for the services to cooperatives and their members supplied by the Société de Développement et de Vulgarisation Agricole (SODEVA), an organization newly created to provide agricultural extension services in Senegal, which had formerly been provided by the Société d’Aide Technique et de Coopération (SATEC), a French quasi-governmental technical assistance organization.

  • (e) Providing financing for the accounting reorganization of the Banque Nationale de Developpement du Senegal (BNDS), the agricultural development bank.

IDA is providing the equivalent of $6.0 million, 69 per cent of the estimated total cost of the project, with government sources and the farmers providing the balance. About half of the IDA funds are intended for the technical assistance side of the project, items (b), (c), (d), and (e), above.

The 876 cooperatives in the project area had an average of about 100 members each. Though this meant that only about 55 per cent of the farmers in the area were formally members, effective membership extended to virtually all the farmers in the area by means of the extended family. The cooperatives were the channel through which credit and groundnut seeds were provided to the farmers and through which the groundnut crop was marketed. The cooperative was collectively responsible for the repayment of the credit made available to it for its members.

Though the cooperatives had been in existence for some time, they were not functioning effectively at the time the project was appraised. Proper books of account were not being maintained and financial control was weak. There had been some abuses of the position of weighmaster, the cooperative financial agent responsible for weighing the farmers’ produce and paying them for it.

At the time the project was being appraised and approved, the Government recognized that ONCAD, the apex organization, also suffered from deficiencies. It was not providing the services that such an organization might have been expected to provide to its members so that SODEVA was providing, on its behalf, such services as helping individual farmers prepare their annual farm plans and input requirements and helping the primary cooperatives administer their semiannual meetings. ONCAD’s management of the groundnut seed stockpile was unsatisfactory. It was overstaffed and inefficiently organized, and its accounts were in poor condition and in arrears.

A major objective of the project, therefore, in addition to providing credit to increase production, was to correct the deficiencies at both the primary and apex levels of the cooperative system by providing consultants to reorganize it and assist it in managing its affairs effectively. Clearly this task meant working at many levels and influencing substantial numbers of people. Though the physical objective of increased production was not achieved in 1971 for a variety of reasons, including very unfavorable weather and an unsatisfactory price policy for the purchase of groundnuts, efforts are being made to strengthen the cooperative system. Smaller cooperatives are being reorganized into larger units so as to make them economically viable. Managers are being trained and proper accounting practices are being introduced. ONCAD’s staff and expenditures have been reduced, and organizational changes have been introduced and made effective since April 1971, as well as a new pricing policy for the purchase of groundnuts. Much still remains to be done, but prospects for 1972 are brighter.

In Other Sectors

Outside the agricultural sector, the Bank has had some contact with cooperatives in the fields of power and industry. Cooperatives and quasi-cooperatives are being used in a number of countries to provide rural electrification. As is well known, U.S. AID has actively and successfully encouraged this work. The Bank has not made loans for rural electrification as such, through cooperatives or otherwise, but some of its borrowers sell bulk power to cooperatives and many assist directly in rural electrification as their systems expand. As these programs have developed, the Bank has watched with sympathy but also with concern to make sure that the financial integrity of its borrowers is not endangered by having to provide the subsidy which is usually inherent in widespread rural electrification. In addition, the Bank’s growing interest in rural development is causing it to look more closely at cooperatives as a means of providing services in rural areas. In industry, cooperatives have been suppliers of Bank-financed projects and have also assisted in the marketing or distribution of products of facilities financed by the Bank. This has been particularly the case in fertilizer distribution.

The World Bank is interested in cooperatives as one of the possible means of carrying out development projects and of bringing the benefits of such projects to the people. So far, capital has not been lacking, but well-organized and well-managed systems, capable of channeling funds and other inputs to small producers and of carrying out medium-term development programs, are scarce. The challenge and the opportunities are great; if sound and viable cooperatives can be organized from the bottom up, the Bank can work with the cooperative movement in providing funds to help small farmers and others to enjoy the benefits of economic development. The Bank continues to look for ideas and resources to attack these problems.


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