Microcredit: An Opportunity for the Cooperative Credit System in Italy

Microcredit: An Opportunity for the Cooperative Credit System in Italy Pasquale Stefanizzi, p.stefanizzi@economia.unile.it University of Salento, Italy

Abstract Microcredit is a financing tool used in Developing Countries (DCs) that provides loan concessions to poorer members of the population who would otherwise have difficulty accessing traditional financing from banks.

The Microfinance Institutions (MFI), the institutions that provide this service, consulting with the poor (as characterised by a low-level of education and 'insufficient managerial knowledge'), offer support that is considerably greater than the offer of credit. This encompasses a set of relevant ajunct services such as technical-management structuring and auxiliary aid for creating commercial networks.

With the worsening of living standards in industrialised countries one imagines that microcredit could also be a tool for economic growth in Italy and that the Cooperative Credit Banks (BCC) [Banche di Credito Cooperativo] could act as intermediaries through which the whole concept can be managed.

Introduction Microcredit is a financing tool used in Developing Countries (DCs) that provides loan concessions to members of the population who would otherwise have difficulty accessing traditional financing from banks. The latter can be distinguished either by the consistency of the operations, or by the kinds of investment and initiative that it supports. The main aim of microcredit lies in an attempt to overcome the limits in the provision of financial services should the applicant be paying in conditions of poverty. The institutions that provide this service in DCs and that, in more general terms, deal in microfinance (Microfinance Institutions, herein referred to as MFIs) for the poor (characterized by a low level of education and insufficient managerial knowledge), offer them a wider support that comprises important additional services, such as technical and managerial training or help in the forming of commercial networks.

In fact, the freeing from poverty and the improvement of living conditions have become dependent variables of a function aimed at the development of independent business activities, set up through reduced loan amounts.

As a result of its rise in global importance, microcredit has become a major tool to combat poverty.

For this reason, and subsequent to the deterioration of living conditions and the increase in the socalled “new poor” that has characterized Europe and Italy in recent years, which relates to this current study, it is considered that microcredit could also be a means of incentivising development in our own country.

In this study an in depth understanding (theoretical and practical) is born out on the interaction between microcredit and credit cooperation in order to find strengths and weaknesses of this potential combination. The findings that have emerged from a study of the relevant literature have suggested that it may be necessary to define in advance the "state of the art" and the willingness of the cooperative credit system to implement new types of loans aimed at immigrants.

Having outlined the objectives and methodology, the work was divided into three sections: the first questions the assumption that relationship lending could be the model that summarises the following relationships: “Cooperative Credit Banks (BCC [Banche di Credito Cooperativo]) - small enterprises” and “MFI - microenterprise”, the second highlights the critical relationship of the bank and small enterprise in Italy, the third makes a comparison between the elements that have determined the success of Agricultural Credit Unions in Italy with the characteristics of microcredit in DCs in order to idealize a product of microcredit to be offered by the Italian cooperative credit system.

Objectives and Methodology The aim of this work is to demonstrate that the network of BCC in Italy is the best system to offer credit and financial products that meet the canons and principles of microcredit in DCs, especially the Grameen Bank i model. To achieve this result a comparative analysis was carried out (incorporating relational, environmental,

technical and operational factors) on the interacting systems 'credit institution – fund borrower' that determine either credit cooperative or microcredit and allow two different models on offer to be weighed up equally. To such end, the national and international literature was reviewed with primary interest regarding the models for determining creditworthiness by the BCC in Italy and the Micro Finance Institutions (MFI) in DCs. Subsequently the critical factors that characterize the BCC - enterprises and MFI - microenterprise relationships were analyzed.

Attention was then shifted to the preconditions for the success of the Credit Unions (hereinafter CR [Casse Rurali]) ii in Italy, in order to find useful analogies with what is happening at present in DCs and what could potentially occur in Italy if a microcredit product were directed at immigrants. From the model of Galassi and Cohen (1996) the concordant elements in the success of Credit Unions in Ireland and of group lending in DCs were pinpointed.

1. Relationship Lending 1.1 Overview

The literature on bank financing of businesses shows the existence, basically, of two distinct models: the transaction-based lending and relationship lending.

The first type of model is characterized by the fact that the decision-process for granting of credit, by the banking system, is derived from information that is formal, structured (hard information), publicly available, easily retrieved and processed, relative to the counterparty and / or the quality of the assets given to guarantee the loan. Several factors, including, in particular the widespread obscurity of information and the lack of high quality assets to provide a loan guarantee, make this form of financing scarcely available to smaller size and / or newly established companies.

Relationship lending, however, presupposes a very tight credit and long-term bank and company relationship that is remarkable for the informative nature of its purely private and confidential content. The decision to grant or renew credit by the bank is, therefore, based mainly on confidential information, prone to subjective interpretation (soft information), and obtained through mediated interactions repeated over time, whether through the company (via an articulated and complex report based on a variety of financial services rendered) or with the relevant local community (Cosma, 2004).

Assuming that the technical and administrative effectiveness of any intermediary depends on their ability to manage customer information, it appears that if the recipients of bank loans are small businesses (usually marked by obscure finances and little incentive to provide information to the market), the model more frequently used is the relationship lending one as it increases the importance of the relationship with customers and, therefore, the management of specific information obtained in the course of time relating to the individual customer (Cosma, 2002). The intensity and exclusivity of the banking relationship are transformed into benefits in terms of lower costs for selection and control (for the bank) and lower research and movement costs (for the customer). Numerous empirical studies have found that the adoption of relationship lending in the banking small business relationship provides important benefits, particularly when there is strong asymmetry in information,iii such as:  better contractual conditions whether in terms of cost of financing and availability of credit or of smaller requested guarantees (Petersen and Rajan, 1994; Berger and Udell, 1995; Harhoff and Körting, 1998; Scott and Dunkelberg, 1999),  increase in the availability of credit in times of greater demand or temporary financial difficulties (Cole, 1998; Machauer and Weber, 2000; Fernando Chakraborty and Mallik, 2002),  anti-cyclical function or, in other words, “protection” in terms of price conditions for financing against the effects of restrictive monetary policies (Berlin and Mester, 1998; Ferri and Messori, 2000),  more flexibility in the relationship and, therefore, greater possibility of renegotiating the contractual terms and technical form of the loan (Petersen and Rajan, 1994 and 1995),  improvement in the reputation of the financed enterprise.

The costs and the risks for the enterprise resulting from the application of this model are:  an information monopoly (hold-up) by the bank that could lead to the “capture” of the customer (who becomes informationally captive, that is imprisoned from the informative point of view) and tightening of the conditions of access to creditiv (Sharpe, 1990),

 soft-budget constraint, to the extent that the loan bank, driven by the need to recover previously granted credit, be induced into providing additional funds in situations of potential default (Di Salvo, Lopez, Pezzotta, 2004).

It has been shown (Di Salvo, Lopez, Pezzotta, 2004) that the advantage for small banks to adopt the model of relationship lending in dealing with smaller firms stems from their basic organizational structure, which creates more incentive to manage the unstructured information and poses fewer agency problems, thus shortening the hierarchy through which information passes. The deeper understanding of the economic and financial conditions of the enterprises, beyond the quality of their investment plans, comes from the acquisition of soft information from the branch manager / loan officer who become the holders of strategic information on the enterprise and the corresponding local community. The potential of exploitation in this role is, however, founded in a trade-off between the need to recognize a high autonomy in individual decision-making on the funding plans and the pursuit of agency cost minimization v. Small banks relying on their basic organizational and functional structure and their local character may have an advantage in dealing with such a trade-off than the larger banks; an advantage translates into more incentives for the branch managers to accumulate soft information and lower agency costs for the bank.

Specifically, the factors that contribute to defining this benefit can be summarized as follows: greater permanence of loan officers at the same branch (with an additional incentive to accumulate information about the businesses in the area), less dependence of the individual bank loan officer on the maintenance of local information assets that they have accumulated. This is resulting from a greater uniformity between the bank and production network, lower costs, in terms of loss of relevant information linked to the transmission of information on business customers within the different structures of the bank, less information problems between loan officers and management and between the latter and shareholders.

Moreover, it was shown that the increase in the degree of competition in the banking and financial markets tends to encourage small banks to invest further in these credit relationships because, due to the high barriers of an informational nature, relationship lending is less vulnerable to competitive pricing than transaction-based lending (Yafeh and Yosha, 2001; Berger and Udell 2002, Degryse and Ongena, 2003).

1.2 Relationship Lending and BCC

The intensity and the degree of exclusivity that characterizes the BCC-small businesses relationship seem to identify a way of "banking" that responds fully to the theory of relationship banking (Di Salvo, Lopez, Pezzotta, 2004). In fact: the BCC commonly relate to their customers in more direct way, especially for companies that rely on a single bank, to the growth with the company which decreases the likelihood that the BCC is chosen as a reference bank. This also applies to companies that do not show a high interest in credit, that the probability of choosing a BCC increases significantly for businesses that give importance to bank initiatives in the territory and localised accessibility and the likelihood of being a BCC customer is greater in concentrated markets where the presence of BCC is relevant. It does not diminish with increasing dynamism in the local market, client companies of BCC see a greater relevance in the knowledge used in the granting of credit (the strategic management of soft information), the most "opaque" are more likely to choose a BCC and the BCC business customers seem less likely to feel “rationed� and receive a refusal to an application for a loan. These results, in line with most studies on the subject, in addition to confirming the validity of the role of local banks, offer the opportunity to reflect on the relationship between relationship lending and competitive dynamics.

While on the one hand it is believed that competitive pressures tend to invalidate the enduring relationship between bank and company, on the other hand, its greater specialisation on relationship lending is seen as a possible response to price competition. The latter theory, then, means that the role that local banks supply the needs of a business network (not only territorial but also social, such as the community of small businesses run by immigrants) is characterized by a greater number of small enterprises that cannot be covered with the same efficacy as other intermediaries.

It is also not an underestimation the fact that, in Italy and, more generally, in countries where credit cooperation has been successful that the legal form of a cooperative society has offered its community the

benefit of the effects from peer monitoring (mutual control between members) and the mechanism of social sanctions (Di Salvo, Lopez, Pezzotta, 2004).

Empirical evidence has also shed light on the highly competitive capacity of the Credit Cooperative to mediate traditional creditworthiness in the small business sector (Di Salvo, Guidi and Mazzillis, 2004). The shift of customers towards BCC is mainly associated with better access to credit than that offered by other banks.

Further factors for attraction to the BCC are the greater availability of personnel, the ability to provide advice, as well as by the convenience of the branch location.

1.3 Relationship Lending and Microcredit

It can be noted in the relevant literature that the success of microcredit is due to the ability of the MFI to institutionalise some of the common processes of the informal credit market into a product that has clear banklike characteristics This is achieved through the constant monitoring and continuous analysis of the behaviour of their customers, retraining and redefining the way it acts on the basis of information gathered on the reliability of potential customers. This information that is private and confidential, being the exclusive preserve of those who live in the same community, is at the same time at the core of the microcredit / banking relationship. The updating of the wealth of knowledge and experience from among the scheme participants in a microcredit project and between them and the community to which they belong constitutes one of the most important factors on which the resulting model of credit risk is based. As it is with the BCC, at the base of the organizational pyramid of the MFI there is an elementary structure that surrounds the "village manager" (loan officer) who acts for the institution in the territory and has a thorough knowledge of all those belonging to the various credit groups; their problems, their ambitions and their abilities. The holding of soft information becomes strategic especially in cases of regular non-repayment of loans because it allows one to discern, with a good degree of approximation, customers defaulting from those in real difficulty.

The particular work of the loan officers of the MFI allows a greater closeness, not only informatively and in moral support, but also more importantly in physical closeness to their customers (often operating in the streets or meeting applicants directly at home or at their workplace, thus removing any physical or personal barrier). This implies a quite peculiar way of "banking" and it is difficult to conceive by those accustomed to working in the formal credit market. For these reasons, the interbank mobility of the “village managers” is very low and it further settles information assets to the point of considering them substitutive collateral for the real and personal guarantees necessary to gain access to the formal market.

The strong personalisation of the relationship also allows entrepreneurs to obtain the best possible contract terms whether in terms of financing cost or availability of credit.

2 Criticality in the Bank - Small Relationship Enterprise If relationship banking turns out to be the better methodological approach in the “BCC-small enterprises” and “MFI-microenterprise” relationships, then the attempt by the Italian Credit Cooperative to deploy a microcredit product directed at immigrants can be welcomed (Quarta, Stefanizzi, 2008).

The distinctive feature of these firms is their small size, in fact, they often start up as sole proprietors, have a small number of employees and operate in mature sectors. Consequently, it was considered useful to analyse the literature in terms of the criticality of financing of small enterprises in Italy vi.

The factors affecting the choice of a credit institution by a company are primarily attributable to the assured willingness to extend credit, the standard terms offered, the timeliness, operational efficiency, personal knowledge and to the extensiveness of the range of financing options. With reference to the factors for success in obtaining credit, businesses indicate how crucial the provision of guarantees, the financial results achieved by the company and contractor‘s reputation are; elements that reflect a kind of guaranteeing approach by the banks.

Of significantly less consideration, however, is the interest in the prospects of the markets in which these companies operate, pointing to the lack of attention that the banks reserve for qualitative information such as market structures, the characteristics of investment projects and production processes of companies.

Empirical research (Cipolloni, 1995), conducted in the specific area of credit cooperation, have revealed a greater propensity by the BCC to support the credit needs of small and very small businesses, a greater tendency to support specific areas of activity(crafts and agriculture), a lower average unit value of loans and a higher presence in non-urban areas. These findings confirm the view that local banks offer coverage to the

financial needs of customer segments that have been prevented or severely limited access to credit by large financial intermediaries.

It was further revealed that a more contained credit exposure of the small banks which depend on the proximity (not only physical but also social) to their market and, therefore, a more thorough knowledge of the entrepreneurs (thanks to the timely, continuous and systematic flow of information received on behalf of the client), with a lesser burden on the relationship and greater stability in relations. The cooperative way still offers other potential benefits, such as knowledge about applicants before granting financial assistance, increased monitoring of borrowers, whose solvency is held by its members and the low interest in the competition because of its classification as a "member".

The elements that are considered crucial in the consolidation of the small bank - small business relationship have a high quality and are strongly linked to personal relations existing between entrepreneur and bank employee. In this sense, the degree of job security of staff and the varying susceptibility to turnover in branch directors (in the light of the role they play in the creation and management of soft information) acquire great importance. This is related to the relative job stability of managers in terms of duration, which appears to make the BCC standout from the other banks (Andreozzi, Angelini, Di Salvo, Ferri, 2004).

The BCC attribute to the factor "reputation as an entrepreneur� a value comparable to that of economic performance and financial results of a business. In regard to the checking stage, most of the BCC seem to follow a traditional practice mainly based on annual updates of the same information provided at the time of the original granting of credit and on a more restrictive interim report (Di Salvo, Lopez , Pezzotta, 2004).

The increase in time of knowledge assets concerning debtors reduces the unevenness of the information held and produces a more efficient allocation of credit, improving cost conditions and reducing liquidity constraints.

3 From the Success of Credit Unions to the Success of Microcredit Galassi and Cohen in 1996 found that the capacity of Credit Unions (CR) to effectively manage the problems associated with moral hazards and adverse selection could be a useful reference for similar forms of microcredit in Third World Countries. The contribution of such authors has ended, but the analysis of the reasons for the success of the credit cooperative in Italy are, they have argued, that the CR have managed to broaden its customer base in fragmented and risky markets as the campaign's end '800, thanks to its ability to filter (in a more appropriate way than the larger lenders) entrepreneurs for funding and to contain operating costs.

In this part of the study, the ideas offered in that and adapting the model used for analysis, we tried to delineate the strengths and weakness of an innovative instrument of microcredit which, in Italy by traditional operators and directed credit to target immigrants, can act as an important tool to combat poverty. In other words, broken down by the elements that have defined the success of the credit cooperative in Italy, it has sought to understand whether there are similarities with the success of Grameen Bank, in order to understand whether the BCC and the evolution of the Credit Unions may be the institutions that can represent the brokers able offer a new microcredit tool in Italy.

3.1 Basis of Success of the Credit Unions

The relevant literature (Zeller, 1994; and Guash Braverman, 1986) defined the “formal market� as the credit market in which employers and funds are willing to accept a collateral whose value exceeds that of the capital, the interest and the transaction costs, regardless of fortuitous events and the individual performance of the borrower, those who were difficult to verify reliability and collateral of modest or even nonexistent (the poor, in essence) they would be excluded.

The informal credit market stands on these inefficiencies in the banking system, the informal lenders are not immune to the problems of moral hazard and adverse selection but relying address to a highly personal relationship with their entrepreneurs. In informal credit, screening is performed by "incorporating" a reliance on a network of social and personal relationships and bonds that offer the service provider the means to commit based on the reliability of the borrower.

For this, informal providers extend credit only to entrepreneurs who are part of a certain social context because outside of that the cost of screening would become prohibitively expensive in relation to the size of the loan. The high transaction costs (collection, evaluation and updating of the information required to make an

effective client selection) that are incurred in screening can only be dealt with through a detailed and specific knowledge of the borrower and can be a real barrier to accessing the formal market and, in fact, can create pure profit for moneylenders.

To understand what is actually exposed, the lending rate formula is referred back to, which balances the model under investigation, yielding several steps: rk + wl0 re* = r + wl1 + e xi

(1)

in which r represents the interest rate of the debtor paid by the intermediary to obtain deposits; wl1 represents the cost of the wages (w) paid to the employees (work load, l 1) which deal with the stages of acceptance and administration of the loans; rke represents interest on the net worth of the cooperative (made up from the contributions of its members); wlo represents the cost of wages (w) paid to employees (work load, l0) involved in the screening; xi represents the size of the ith loan.

The first derivative of the balanced lending rate in relation to the size of the loans is:

d re* rk + wl 0 =− e d xi x i2

(2)

Having a negative value, it indicates that as the size of the loan increases, the lending rate decreases, so reducing the cost of formal intermediaries in granting funding to small entrepreneurs. Also, the indivisibility in fixed costs (rke and wlo), due to the reduced size of the loans, would require providers to raise the cost of capital at this point to be made to oust the small entrepreneurs from the same market. The containment of costs in the numerator of the ratio mentioned in (2) is the source of an advantage enjoyed by informal lenders, more specifically, it refers to the special arrangements for screening and the consequent reduction in costs, as informal lenders link the creditworthiness of a person to information from the dense network of relationships and social relations in which they have been entered at the local level.

Lending by small entrepreneurs in the formal market is not only held back by the high unit costs of loans, because there are also limitations arising from the collateral required for its acquisition. Normally a credit limit is imposed on each borrower which is at least the value of their assets to ensure the proper repayment of the loan (indicated in the model with Ai), which is why to a poor borrower with no property, formal credit is in fact precluded.

Returning to the organizational and institutional cooperatives, which differ from the other alternative of "doing business" by its strong social and participative membership, the difficulties associated with this claim are attributable to the problems of moral hazard and free-ridingvii that have influenced the rise in credit cooperatives in Ireland, in the period before the First World War and, more recently, in some DCs. The Italian CR have cornered the local informal markets, overcoming the problems previously revealed, thanks to a comprehensive internal organization based on stringent criteria for screening members, accurate definition of property rights within the cooperative, adoption of strict associative criteria, proceedings to expel from the cooperative individuals inclined to detrimental behaviour, provisions for heavy sanctions on entrepreneurs who jeopardize its financial stability and, consequently, that of the cooperative credit. Similarly, to what happened to the informal lenders, the CR have also limited the scope to limited geographical areas with a reduced variability of local conditions and a high awareness and appreciation of the other members.

With the above model, Galassi and Cohen have shown that the balance between the economy in the cost of the loan and the disadvantages associated with small cooperatives is due to the fact that the members provide some of the elements are often difficult to obtain because they are intangible (information, knowledge, experience, etc.). This leads to economies of scale in the administration of loans. It is not be underestimated that the members form the principle market for the collection of monetary resources for reinvestment in the same area, serving, simultaneously, the same role as creditors, debtors and members of that organization.

The model of choice for the borrower provides two solutions:

1) to obtain access to credit at lower cost than they would have incurred through the informal market, for the provision of input into the cooperative at prices lower than that of the market or even without any compensation, 2) required to market prices for their input in the face of high interest rates on loans.

The logic of the model provides for the membership of the cooperative if the opportunity-cost of time spent, but unpaid, in the cooperative is at least equivalent to the savings on interest payments made to the cooperative, benefitting from lower interest rates. However, as lower interest rates allow the borrower to make more investments, the benefit deriving from the first option is greater than the simple difference between the interest rates of the cooperative and alternative ones multiplied by the value of the loan because it includes the additional output generated by an increased capital investment (for simplicity, the latter element was not included in the algebra). In algebraic terms, the authors have made use of a levelling out of the functions for the income of entrepreneurs, assuming the limitation that requires a loan lower than the guarantees ( xi ≤ Ai ).

If the borrower does not enter into a cooperative credit but uses an informal lender or a bank, its function of income is of type: B a = q (l, x i ) − ( wl + ra* x i ) (3) If the borrower enters into a credit cooperative, its function of income is of type: (4) Bc = q (l, x i ) − w (l + lc ) + rc*x i

[

]

in which: q(l,xi) is the production function of the borrower (unchanged in both situations), assuming that the funding of business resulted from debt; lc amount of work that the borrower employs in the cooperative in order to belong to it, without it being paid for; ra* rate of interest on loans used by entities other than the cooperative (bank or informal lender), ra* interest rate on loans charged by a cooperative.

A potential borrower has an interest in joining a cooperative credit viii if: Ba  Bc ⇔ (5) wl c  ra* x i − rc* x i

In short, the individual grant to join a cooperative, for a given investment project, depends on three factors: the opportunity cost of labour, the difference between the interest rates charged by other providers and the rates applied by the cooperative, productivity capital ix. Increasing rates of wealth and more capital-intensive production reduce the benefits that come about from membership of a cooperative. Moreover, the rise in the number of members increases the costs of screening and monitoring out of proportion for all members (members always have a greater workload apportioned so they effectively perform their assigned operations) and this makes it less attractive to join the cooperative. So there is an optimal determinable size for a cooperative in the opposing costs of screening when rapidly growing a more diverse portfolio.

To express these findings in algebraic terms, a case of non-fulfilment of duties by entrepreneurs in the cooperative is assumedx.

In so much as can be assumed the screening of the lender is in the initial phase of the process to grant a loan aimed primarily at excluding entrepreneurs who are potentially prone to default on payment. The resources used for this purpose are indicated by L0. The characteristic shape of the function (L0= L0(M)) is crescent (first derivative >0) and convex (second derivative >0), indicating that accentuated rate of increase in the cost of screening to the rise in loan numbers. To increase the number of loans, however, the lender may reasonably rely on a "best" portfolio, due to the increased number of loans that have gone well, simply by virtue of the increased diversification of the portfolio. If P is the number of loans repaid regularly, this variable may be represented by an increasing function (first derivative >0) and concave (second derivative <0) of the total number of loans, P=P(M), which means that the number of repaid loans increases, but in a way less "rapid" than as compared to the total loans). The formula of the rate of interest of balance (1) is conditional on these two new elements:

r* =

wL o ( M ) + l1x + rK P( M) X

(6)

L0 and l1 indicate the investment (in terms of loaned work) born by the cooperative members (lc) for the provision of information, knowledge and control of the loans. The benefits arising from the cooperative (in terms of interest rate balance paid r*) decreases with the labour required of its members (because the numerator of the previous proportion grows more rapidly than the effect of portfolio diversification does on the denominator), namely to increase the number of new loans and thus the number of potential new members xi.

3.2 Conditions for the Success of Microcredit in Italy

In light of the evidence revealed, it seems useful to ask whether the success of the Italian CR recourse to microcredit (as operated by Grameen Bank) and whether it is replicable by the BCC in Italy to the benefit of immigrants. To this end, it has been used as a rationale for comparison between the two experiences and, in particular, between the operation of the CR and groups lending. It is unfortunate that the elements of comparison are situated in differing organization bases, as the CR were independent institutions that would get together on unique association occasions and within a particular territory for all those who wished to join, while groups lending represent the more complex end of the organizations, governed by the MFI, which hold the functions of regulation, planning and management of those groups.

CR and groups lending are also different in their dimensions, in fact, whereas the CR started off small, growing in tandem with the slow growth of their community (for the reasons set out before), the MFI quickly became the reference of entire nations or more nations, deforming in their characteristic size and the nature of the relationships with each customer and translating the decisive importance of these elements at the last stage of the organization into the single groups lending.

Elements of convergence between the experience of the CR and MFI can be found in the ownership (in fact, major shareholders are the clients / creditors / debtors) and attention to improving the sustainability of relationships with customers. In regard to the latter, the literature has treated the development of forms of "credit consortium", tested in Italy and based on collateral services through initiatives of pooling syndicates among potential beneficiaries, like those of groups lending and other forms of "rolling" credit that have emerged in DCs (Besley, Coate and Loury, 1993; Besley and Coate, 1995).

With the terms of comparison defined, the analogy continues following precisely the characteristics of success of the credit cooperative in Italy compared to what is happening in DCs. As noted, the resolution of the problem of imperfect information and free-riding has been addressed by the CR: resorting to a complex administration of relations between members / debtors / creditors and limiting the scope of the territory, whilst proclaiming the importance of the circulation of information about the creditworthiness of each member.

These same conditions are also the basis of microcredit, as the act of solidarity of all the members of each group lending and to each group lending in society permeates the operating philosophy of the intermediaries that offer this credit tool whose principles of operation are based on peer selection, joint liability, peer monitoring and social enforcement.

In summary, the groups also claim the reduction of incomplete information is the result of a balance between a simple and functional organization; one that is hierarchically structured for intermediate levels, information-oriented, respectful, and beyond the often unwritten regulations, customs and social norms, the violation of which involves the exclusion from the life of the community. As is suggested, there are interesting confirmations in the literature that deal with cooperation credit and development of poor countries. Varian analyzed the act of peer monitoring with reference to its Grameen Bank.

The reduction of operating costsxii supplied by the same members of certain strategic inputs (often intangible and with immediately reference to information on the quality of entrepreneurs), represented the competitive advantage of an economic nature of the CR compared to the banking system, cutting down on transaction costs. For microcredit this benefit is related to yet more intangible characteristics and closely related information about the proper observance of rules and regulations by members of a community, considered impossible by the entrepreneurs to carry out their work given the conditions of poverty into which they had fallen. The containment of loan rates, for the part related to costs associated with employee screening and

monitoring (lc), is financed by foreign capital (NGOs, World Bank, International Monetary Fund) or by local organizations that have managed to free themselves from severe conditions of poverty.

The limitation in the amount of credit is yet another feature that distinguishes the work of the CR and MFI. In DCs, because of the conditions of poverty, the amount of the loans is very much reduced (often around $50), consequently relatively consistent sums of money may allow the opening of numerous autonomous business activities and resulting in widespread improvements in living conditions. Conversely, the high fragmentation of the loans may lead to an increase in transaction costs and the cancellation of the economies of scale. The managerial autonomy of the groups lending allows the MFI to not have to enter into the details of the loans, while maintaining the advantages mentioned, except in moments of difficulty for entrepreneurs (easily detectable moments to find, thanks to tight deadlines on the repayment instalments). Interesting empirical surveys, conducted in the area of research on the Italian credit cooperation, have refuted the usual view that creditworthiness for loans of a restrained amount requires more attention, since they are characterized by higher levels of risk. On the other hand, it was seen that the commitment of major banks in the assessment and monitoring of loans is required by creditors of central classes of loans distribution, with indices of unpaid work generally more than 10% and which relate to commitments of a relevant size. The smaller banks and BCC reported the lowest value of the ratio of voluntary work / jobs (6%), against an average of 6.9%, while a value three times that of the average recorded by the professional central institutions (Cipolloni , 1995).

De Gregorio (1996) noted that in DCs the financing of microenterprises by the cooperative banks, as well as enjoying the usual benefitsxiii, is encouraged in peer monitoring, respect for social norms and the importance of reputation (characteristics which led to the success of credit cooperatives in Germany in '800).

Notwithstanding that, the author has pointed out that in order to prevent the loans of the group turning into ineffective means of transferring credit internationally, we need institutional and institutionalized projects assigned for this purpose.

The downsizing of the importance and, in extreme cases, the elimination of the demand for collateral to cover the repayment of the loan has been an element of distinction and novelty in the work of CR as different today as microcredit is from formal credit. It was noted in the literature (Galassi and Cohen, 1996) that the use of collateral is not effective in eliminating the risk of adverse selection and moral hazard. Access to the collateral provides the lender information on the borrowerâ&#x20AC;&#x2122;s past, or if the latter was able to accumulate assets, but a guarantee in itself cannot reveal whether this is the case with skill, luck or dishonesty. Also, if the reluctance to risk is inversely proportional to wealth, the wealthiest entrepreneurs can take risks more than the poorest entrepreneurs. Finally, collateral can only effectively secure a loan if the creditor can seize and sell goods with minimum transaction costs. This important prerogative also differentiates the operation of the BCC and the MFI, which usually include in the processes of custody evaluation of the capability of success and income of the initiatives for which a request for financial support. This element gives a more complete examination of creditworthiness, because it considers the factors that go well beyond the collateral requirements. It is in use in DCs that the MFI constitute in each group lending a small guarantee fund, subtracting for the granting of microcredit and any weekly refund a small percentage for this purpose. This, however, is only a mechanism for reducing the credit risk following the deliberative phase, what is important is that entrepreneurs without collateral obtain credit equally.

Another fundamental aspect that characterizes much of the past CR, as current BCC, and the groups lending is the space concentration of initiatives, which follows the direct and often personal knowledge on entrepreneurs and a better degree of social cohesion. In relation to the latter, it was noted that a low level of civil and social organization and the economically very poor can affect the validity and effectiveness of the cooperation. It appears this was the case with many areas of the southern Italy, where the local bank is often associated with situations of economic marginalization and, sometimes, degenerative forms of income (Putnam, 1993; and Caleffi Di Salvo, 1998). In microcredit, the daily and mutual observation of consumption habits and regular repayment of debt (made on very tight frequent deadlines, often weekly) for each individual on all members of its group of credit and each group of credit on all those in the extreme area, peer monitoring significantly reducing the risk of free-riding. Furthermore, the increase in the size of the group probably reduces the effectiveness of microcredit, because of the greater commitment of information which each member would be subjected to the search for information about other members. This is what happened in the CR where the surplus of labour required for members in evaluating the creditworthiness of potential entrants could undermine, if not carefully considered, the benefit resulting from a positive difference between interest rates charged by traditional formal credit system and / or informal credit system with those charged by CR.

Interesting considerations are now emerging from the literature on the credit cooperative (Cannari L. and LF Signorini, 1996) with respect to, not only the benefits, but also the local disadvantages and cooperative spirit on the information structure of the contract between supplier and borrower of funds. The benefits take many of the elements that have already emerged in dealing with the relationship lending model and analysis of the Galassi and Cohen model; this is to highlight that there are real chances for success of microcredit in Italy if started within the cooperative credit system. These advantages are: localism, adverse selection and monitoring costs. The BCC, as local banks, have superior information about the creditworthiness of customers (the staff of the BCC are not very mobile and therefore earn a special knowledge of local dealers and typical activities of the place). Moreover, being able to see a greater number of features of the person requesting credit, BCC should be able to split the customers into a very large number of segments, characterized by poor variability within the parameters of distribution of performance. At the limit, if the bank shared all information held on the person concerned, they could assess the risk to themselves exactly as if it were evaluated by the borrower; cooperative spirit and peer monitoring. Opportunistic behaviour (for example, holding concealed information relevant to the credit assessment or use of funds received for purposes other than those declared), although immune from legal sanctions and direct financial effects, may be subject to any form of stigma, especially when the victim of opportunistic behaviour is a group of your peers; legal form and structure of individual incentives . The shareholders are the cooperative for the bulk of customers.

The following elements represent disadvantages instead:  potential conflicts of interest between BCC and customers, to the extent that the banks overlook the basic fundamentals of credit risk and grant credit to customers defaulting or obviously and irreparable conditions of credit freezing,  lesser mobility of staff than the other banks, which could carry on practices too informal or less objective conclusions on the assessment of reliability.

The transformation of these potentially negative elements into real disadvantages depends on the organizational mobility of each bank and the characteristics of the environment in which it operates. The model of cooperative credit could be particularly effective in the context of local systems of small businesses, where the higher the degree of collaboration between the actors that are part of the community itself. This last aspect is what is assumed for situations like those in DCs where, from the extreme conditions of poverty, it is possible to find substantial evidence of contact and social cohesion that would justify measures similar to those cooperatives (such as microcredit).

3.3. Assumptions of Success of Microcredit and Immigrants in Italy

The idea of being able to extend microcredit to immigrants in Italy stems from their membership to the so-called unbanked, based on their low level of fee-charging because, although the flows of remittances to countries of origin has increased steadily in recent years, more than half of it circulates in the banking channels and therefore takes the form of informal transactions.

At a formal level, there are no obstacles to access to credit for immigrants, but you can find high cultural difficulties, such as knowledge of the Italian language (not having the majority of banks prepared materials in foreign languages nor a specific contract). Forms of discouragement were also found that cannot be defined as direct and conscious discrimination as they are the result of excessive demand for documents or guarantees from the banking system (Research Project Avanzi - Federcasse, 2003). In order to acquire this large slice of the market, currently “snubbed” by the banking system, it would require that potential bidders first revolutionise the mode of approach to these parties, then adjusting their procedures, their services and products to the needs of recipients, often linked to ethnic, religious and cultural factors.

Another interesting food for thought, which may be a prerequisite for the extension of microcredit in Italy, is the cohesion of socio-economic relationships already in place in communities of immigrants. The adoption of peer monitoring as part of selection of members to groups of credit assumes the existence in the target community of a strong sense of belonging and mutual respect and extensive personal knowledge of each person, these are the characteristics that distinguish the behaviour of many communities in Italy xiv. Another item not to overlook the wealth of knowledge about the practice of microcredit acquired by immigrants in their countries of origin due to personal experience or very close relatives. The relevance of the “immigration”

phenomenon in Italy is also contributing to the development and growth of the business, particularly small and micro enterprises (often individual companies) operating in various economic sectors and particularly in the retail or handicrafts. These types of companies are the typical recipients of microcredit and the partners of the usual system of credit cooperative. The size of the firms also implies requests for credit and their low level, which are also the initiation measures for microcredit. The high level of education of immigrants could be the key against which to operate the lever of the reduction of transaction costs, it could delegate to credit groups, which arose independently, numerous stages in the processing of loans, including the rate of reimbursement.

The acquisition of detailed financial information about the behaviour of those belonging to his group could also arise from an interception in the market of remittances and the management of savings held in Italy (it could, as is the case in DCs, force the entrepreneurs to become the payers of funds generated from business activities undertaken through the assistance of microcredit). Despite the socio-economic conditions in which immigrants in Italy are not comparable to the state of poverty in which many people live in DCs, it should be noted however that it is impossible for them to provide guarantees to cover the loans, hence the need arises to create mechanisms to guarantee that focus on trust, on information, on the diversification of risk, on cooperation on personal knowledge and respect for social rules even before the regulatory requirements. The presence throughout the national territory of the BCC and the existence of a strong relationship with the territory of reference also facilitate the achievement of people originally removed from the local community reference, the degree of interaction with it would be the prerequisite information necessary for the functioning of microcredit.

In the opinion of the writer, only a credit system that meets the requirements of being a direct and immediate to their customers, able to listen to the needs of applicants, attentive, as well as economic goals, not least for ethical and moral ends. Located in decentralized areas, accustomed to thinking in a cooperative way and concerned with the fate of the funded enterprise even before the goods put up as collateral against loans, can be a useful and interesting reference for immigrants in Italy and in any country that is not their original home.

To support this assumption, the literature has expressed the idea that the element that constituted the starting gun in Italy and development of bodies such as the Mag first and Banca Etica (Ethics Bank) lies in the need to affect the allocation function or, rather, to address the funding for persons discriminated against by traditional banks, in the logic of microcredit. As what happened in Italy with the launch of the CR and the development of cooperative credit, depositors of an ethics bank provide delegates with a clear reference to the choices of credit, in addition to the time of CR depositors replace its confidence in the institutions that appeared to have close ties with the territory and solid will for endogenous development. The delegation follows or can follow the selection criteria for entrepreneurs or all of the procedures for use of credit delivery. In this respect, for example the Banca Popolare Etica uses criteria for evaluating the credit quality, at least in part, differently from the traditional focus on the microcredit scheme, in which the guarantee is required by moral restitution. This criterion is similar to that used in experiments in microcredit that are impacted, as has been repeatedly stressed, by the mechanisms of peer monitoring among the beneficiaries of funding. The model of Banca Popolare Etica is thus a kind of solidarity that the bank derives from the experiences of Grameen Bank type (Locatelli, 2003). It is noted in closing that the necessary technical equipment used to develop a project of this magnitude certainly requires a strong belief on the part of the BCC and their central institutions of representation on the quality and feasibility of the project. The theoretical assumptions stated need to have concrete and proactive confirmations, which can only result from investment in human and financial resources. The survey and the timely and accurate knowledge of the behaviour of the various immigrant communities (uses, customs, traditions, integrative project, habits of consumption, the level of conflict with the financial system, etc.) and the real interest on the part of them to have to provide a microcredit product also needs an effort in understanding and social identification which is difficult because of deep differences between cultures. It is really for these reasons that it was considered necessary to implement the empirical survey presented below.

Conclusions In this study theoretical suppositions were sought for the conceptual system on which to base the creation of a microcredit programme in Italy as tried and tested in DCs. Relationship lending and the successful cooperation of credit suggest that it is possible to initiate interesting initiatives, especially if aimed at immigrants. The difficulties in operation in the implementation of the empirical part of the doctoral work, in addition to the failure of a well-known microcredit project launched in a cooperative Onlus (Avanzi) with Federcasse exposes

the likely disinterest in this instrument of credit in Italy. Despite several BCC in the north of the country, greater attentiveness to the socio-economic dynamics in development, have resulted in full autonomy, to individual initiatives, which have also seen some success.

References [1] Andreozzi P., Angelini P., Di Salvo R., Ferri G. (2004). Piccole imprese e credito cooperativo: relazioni più intense e stabili che con le altre banche? I risultati di un’indagine, Cooperazione di Credito, 183/184, 353-401.

[2] Banerjee A., Besley T. e Guineane T. (1994). Thy neighbor’s keeper: the design of a credit cooperative with theory and a test, Quarterly Journal of Economics, 109, 491-516.

[3] Besley T., Coate S. e Loury G. (1993). The economics of rotating savings and credit associations, American Economic Review, LXXXIII, 792-810.

[4] Caleffi F. e Di Salvo R. (1998), Il ruolo delle banche locali e del Credito Cooperativo nell’allocazione delle risorse finanziarie nel Mezzogiorno, Cooperazione di Credito, 159, 7-18.

[5] Cannari L. e Signorini L.F. (1996), Rischiosità e razionamento: un’analisi dell’efficienza allocativa delle Banche di Credito Cooperativo, Cooperazione di Credito, 152/3, 403-441.

[6] Cipolloni A. (1995), Il mercato del credito in Italia: considerazioni intorno ai profile di rischio della clientele e agli effetti sul grado di esposizione dell’attivo bancario, Cooperazione di Credito, 145, 61-100.

[7] Di Salvo R., Lopez J.S., Pezzotta A. (2004), L’evoluzione del relationship banking nei mercati creditizi locali: il ruolo delle Banche di Credito Cooperativo, Cooperazione di Credito, 183/184, 81-113.

[8] Galassi F.L. e Cohen J.S. (1996), Il costo delle informazioni e i problemi di gestione nelle banche di credito cooperativo: il caso delle Casse Rurali Italiane, 1883-1926, Cooperazione di Credito, 152/3, 327-349.

[9] Nakamura L. (1994), Small borrowers and the survival of the small bank: is mouse bank mighty or mickey?, Business Review, nov.-dic, Federal Reserve Bank of Philadelphia, 3-15.

[10] Progetto di ricerca Avanzi – Federcasse (2003), Il fenomeno dell’esclusione finanziaria. Prospettive per il Credito Cooperativo, Cooperazione di Credito, 182, 477-507.

[11] Sharpe S. (1990), Asymmetric information, bank lending and implicit contract: a stylized model of customer relationship, Journal of finance, 45,1069-1087.

[12] Stiglitz J.E. e Weiss A. (1981), Credit rationing in markets with imperfect information, American Economic Review, vol. 73, n. 5, 912-927.

[13] Stiglitz J.E. (1990), Peer monitoring in credit markets, World Bank Economic Review, 4, 351-366.

[14] Varian H.R. (1990), Monitoring agents with other agents, Journal of Institutional and Theoretical Economics, 146, 153-174.

[15] Zeller M. (1994), Determinants of Credit Rationing: a Study of Informal lender and Formal Credit Groups in Madagascar, World Development, vol.22, n. 12, 1895-1907.

Contact author for the list of references

End notes

i

Progetto di ricerca Avanzi – Federcasse (2003), “…I primi esempi di microcredito si devono alla Grameen Bank, fondata nel 1975 da Muhammad Yunus in Bangladesh, allo scopo di concedere prestiti e supporto organizzativo a gruppi o singoli individui esclusi dal sistema creditizio tradizionale. Dall’iniziativa di Yunus è partito un movimento di sensibilizzazione rivolto all’importanza del microcredito quale strumento di lotta allo sfruttamento ed alla povertà che ha trovato il punto di culmine nel 1997, quando le Nazioni Unite hanno approvato una risoluzione sull’importanza del microcredito come strumento per sradicare la povertà…”, pag. 482. ii The Credit Unions represent the first form of credit cooperation, particularly in the agricultural and rural crafts sectors. iii Di Salvo, Lopez, Pezzotta, (2004), “…I principali studi in materia non sempre giungono a risultati del tutto univoci, ma evidenziano margini di incertezza circa la consistenza, nel tempo e nell’ambito di differenti sistemi istituzionali e condizioni macroeconomiche, dei benefici del relationship lending…”, pag. 88. iv Andreozzi, Angelici, Di Salvo, Ferri, (2004). So that the bank carries out the costly investment information necessary to know about a new business it should have an expectation of future profits, without which the bank does not make the investment and the enterprise does not receive the credit. Once, however, the bank achieves this investment, it becomes a monopolist to the customer. Neither company will use the exit to avoid that bank whilst turning to another, because this is precluded by its advantage gained from the information bank. v The highest decision-making autonomy, which must be given to loan officers, may lead to perverse incentives that would induce them to act differently than optimal for the bank (e.g. Operators to extend credit to them but whose neighbours’ investment projects have a negative net current value). This inevitably heightens the cost of agency. Hence the need for the bank to intensify the monitoring activities with respect to all its decision-making centres, such monitoring tends to be very expensive because of the nature of information is predominantly used in decisions to grant credit. vi Andreozzi, Angelici, Di Salvo, Ferri, (2004).The BCC keep more intensive and stable relationships with its customers over time than it is for other banks. There is more affected by liquidity constraints firms resident in the South, those of the youngest and the most indebted. The probability of being rationed is less for companies that record highly concentrated indices of credit, for those who have not recently broken relations with banks and those single-loan companies from the BCC. Overcoming the barriers of information could involve the conferment of the bank to a monopoly position, making possible the extraction of surplus from the company, however all other conditions being equal, the BCC does not seem to exploit this position of strength to impose interest rates more burdensome to single-loan companies. vii Galassi e Cohen (1996), “…Free-riding: se gli input sono di proprietà privata e gli output sono sotto forma di fondo comune, i soci sono incentivati a tentare di non fornire gli input di proprietà. Se anche gli input sono sotto forma comune, l’assunto standard della crescente inutilità marginale dello sforzo, suggerisce che i soci potrebbero adottare un comportamento elusivo dei propri doveri. In entrambi i casi la cooperativa dovrebbe investire enormi risorse nel monitoraggio dei comportamenti…”, pag. 336. viii In equation (5) it was not possible to insert the additional output generated by increased capital investment that the borrower can take due to lower interest rates. ix The first derivative of Ba in respect to xi and Bc in respect to xi are the same r* suggesting that the subjective benefit to join a cooperative rises for a given wage, with the growth in productivity of capital. This implies that as the greater opportunity cost of labour decreases the incentive to join the cooperative increases, if over time the capital intensity of production increases the marginal product of capital declines, making it less attractive to the cooperative association. x The reasons for non-repayment of the loan are two-fold: - although the borrower shows desire to repay the loan, he is unable to repay the debt and defaults, - the borrower is willing to repay the loan but does not do so for amounts in arrears. xi Progetto Avanzi-Federcasse (2003), “… Gli elementi qualitativi che caratterizzano il servizio e la relazione con le banche attribuiscono al rapporto di clientela un valore superiore a quello offerto dalle banche sul mercato, conferendo al Credito Cooperativo una forte leva competitiva per posizionarsi con successo su segmenti di mercato marginali. L’orientamento ai soci, la stabilità della relazione, la connotazione locale della banca che agevolano l’accesso all’informazione rendono più facile il processo di valutazione della clientela marginale e meno critici i problemi di selezione avversa e di recupero crediti. Sul fronte degli impieghi, la specializzazione e la prossimità territoriale facilitano la conoscenza dei clienti, aumentano la capacità di screening, consentono di sfruttare il prestito in modo da minimizzare l’esposizione ai rischi. Data la specificità di questa clientela e dei processi valutativi richiesti, è necessario adottare un approccio fortemente personalizzato, ma dati i costi di gestione richiesti, lo sfruttamento di procedure standardizzate, così come l’accesso a tecniche e tecnologie gestionali sofisticate, devono essere potenziate e pienamente sfruttate. Il trade-off rilevante per un impegno efficace nel settore della clientela marginale è dunque tra accentramento ed automazione dei processi per sfruttare economie di scala e tra decentralizzazione operativa per garantire un approccio personalizzato. Al crescere della dimensione della banca, la caratterizzazione personale tende a disperdersi, a meno di non attivare processi produttivi ed erogativi che possano beneficiare di economie di scala: si tratta di realizzare meccanismi che consentano alla banca di ampliare la propria clientela tenendo sotto controllo i costi operativi specifici, cosa fattibile solo in presenza di consolidate relazioni di clientela basate sulla piena fiducia verso

l’operato dell’istituto…” pag. 499 The elements that create inefficiencies in the direct exchange of funds between major providers and entrepreneurs and that justify the presence of institutional stakeholders dedicated to the management of credit provide imperfect information and transaction costs. xiii Nakamura, (1994). Elements related to the close connection to the land, the constant monitoring of the economicfinancial balance of borrowing entrepreneurs, better assessment of the settlement and financing of small local businesses that, by maintaining this status for a long period of time allow credit intermediaries a steady return. xiv Progetto di ricerca Avanzi – Federcasse (2003) “…l’applicazione del peer monitoring è possibile solamente in determinate situazioni (ad es. la comunità filippina): è necessario che i prenditori di fondi abbiano un forte senso di appartenenza alla propria comunità cui corrisponda un chiaro potere sanzionatorio. Non è detto che tutte le minoranze etniche presenti in Italia soddisfino tale condizione; inoltre tale potere, laddove esista, potrebbe essere anche indebolito dal mutamento di abitudini provocato dalla permanenza nel nuovo paese ospite…”,pag. 505. xii