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Local financing in rural areas

[ Summary ]


Chapter 4:
Challenges for the future


4.2 Financing formulas cursorily explored
by a few LEADER groups


Three formulas are involved:

  • partnerships with commercial banks;
  • facilitation structures;
  • ethical structures initiated by civil society.


4.2.1 Local partnerships with commercial banks

Two formulas call for special analysis:

  • integrating financial structures into the local partnership and exploiting this partnership to diversify financing possibilities;

  • negotiating benefits to aid territorial development.

a) Integrating financial structures into partnerships

    Under LEADER I and II, Local Action Groups often integrated banks or other financial structures into their partnerships. At first sight, such integration has not had much of a serious impact on the attitude of such structures to territorial development or to the conditions for granting loans to the Initiative’s final beneficiaries.

    A challenge for LEADER+ will be to reflect more deeply on the relationship to be developed between LEADER groups and their partner banks. This should start by examining the intervention rationale in the area, addressing such questions as: Which market “segments” are covered by the banks? Which segments are rejected, and why? How much of the credit granted to local SMEs do banks provide? What support is provided for new business creators? [31]

    What is more, partner banks may well be able to introduce new activities into the Local Action Plan. An interesting example of this is the Presila Krotonese LEADER group from Calabria which included FinCoop (a guarantee cooperative) into its partnership. Thanks to the support of this partner, a measure was created within the group’s local action plan: business “Information Points” which provide a range of services, including information on access to finance, all in a one-stop shop.

    An active partnership with financial organizations should make it possible to integrate measures for: investigating the financial provision for local activities; ascertaining the quality of the products on offer and their suitability for the area’s needs; a more detailed identification of the need of rejected segments for financial advice, etc. Some such measures could include a number of LEADER groups as partners within a collective negotiation framework.

b) Collective negotiation (by a number of LEADER groups) of territorial development benefits

    Collective negotiations by a number of LEADER groups with financial structures can be useful for securing advantageous credit terms and increasing the local impact of financial resources.

    Such collective negotiations can focus on various aspects of the relationship between banks and local areas: processing the funding applications of final beneficiaries of the LEADER Initiative, creating products to match local needs, social investments or investments of community interest, conditions for managing LEADER funds allocated to the groups, etc.

    As a result, consultation between several LEADER groups can also create a degree of competitiveness between banks, vying to offer the best benefits to encourage LAGs to open an account with them.

    It is chiefly in Spain that we find examples of collective negotiation between LEADER II groups and financial institutions. In all cases, the negotiations, conducted at the level of the autonomous regions, were preceded by the organization of a regional network of all the groups operating in region. The example of Aragon, below, describes this approach and its results.

    In 1996, Aragon’s 13 LEADER II groups set up the non-profit-making association, Aragon Rural Development Network (RADER) [32]. The Network immediately launched a series of collective projects involving all of the LAGs.

    They included the signature of an agreement with the leading regional bank, “Ibercaja”, an institution attaching great importance to Aragon’s rural development, which had already financed a number of studies and development projects.

    The agreement contained three types of benefit:

    • logistical support for the LEADER groups and for RADER, by making available a fund totalling EUR 84,000. Thanks to this fund, RADER was able to finance its own central office and the salary of the network coordinator;

    • the groups belonging to the network gained much more flexibility in managing the LEADER programme (interest on positive balances, overdraft facilities of up to EUR 6,000, an exclusive credit line to cover late payment of the outstanding balance of 20%, free current account transaction and access to the bank’s on- line information system);

    • the project promoters themselves benefited from special terms reserved for the bank’s preferential customers (access to credit on advantageous terms, risk management facilities). Based on these minimum terms, project promoters can negotiate further benefits depending on the guarantees that they are able to provide.

    This agreement has served as a model for other regional Spanish networks, as well as for Spain’s Ministry of Agriculture to negotiate a similar agreement with a national bank for the other LEADER groups.

    The agreement concluded with the bank considerably increased the LAGs’ room for manoeuvre and improved the dynamics of the project. However, because of the negotiation terms themselves, the agreement failed to alter the guarantees needed for accessing credit and it did not really increase the possibilities for financing either projects with a strong social, environmental or cultural content, or projects put forward by disadvantaged groups.

    This example illustrates an interesting approach, which has nonetheless had limited impact. The negotiation did not, for example, focus on aspects such as the transparent use of funds or the creation of products appropriate for Aragon’s rural SMEs. Nor did the agreement provide for any mechanism for improving the dialogue between project promoters and financial institutions, with LEADER beneficiaries having to organize access to counter-party funds on an individual basis, for example.


4.2.2 Facilitation structures

Mediation between financial institutions and social project promoters, new business creators and unemployed people seeking credit to set up their own businesses is still a challenge that most rural areas have yet to take up.

Due to their legitimacy, LEADER groups - which generally represent a series of local interests - will be able to play a more effective role in the financial domain, either by creating mediation services (e.g. LEADERFIDI-type guarantee cooperatives) and evaluating project viability and the debt carrying capacity of business firms, or by sticking to existing initiatives that are not very active in rural areas (such as the Presila Krotonese LEADER group’s partner, FinCoop).

This mediation function also encourages greater involvement by banks in the development of local initiatives. Its role is therefore to “alert” the banks about projects requiring support and initiatives in progress, about the product needs of small business people (e.g. treasury funds), etc.

In this area, it would be useful to explore a number of issues further in the future, including:

  • an analysis of the obstacles blocking access to credit;
  • services for providing financial management training/advice and supplying information on the quality and suitability of the various financial products on offer;
  • measures aimed at local authorities.

a) Analysing the obstacles blocking access to credit

    Analysing the obstacles blocking access to finance is another future task of the LEADER groups. First this means:

    • Pinpointing individuals or groups that may be potential project promoters but are rejected by the banks in the area (e.g. people who fail to respond to the entrepreneur “profile” demanded by the banks: women, artists, young project promoters with no management experience, young people from ethnic minorities, unemployed people from disadvantaged groups [33], etc.).

    • Identifying the sectors that fail to attract the banks but which do, however, contribute to economic and social development, thereby fostering innovation and the creation of new occupations.

    • Identifying market segments that have been abandoned by the banks.

    With regard to small and very small businesses, the analysis should focus on:

    • Adapting financial services to suit micro-businesses requiring easier access to funding, providing loans suitable for the scale of the business, for the players’ degree of financial dependence, for their lack of liquid assets, etc.;

    • The adaptation of, and access to, specialized financial advisory services and the ability to react to difficult situations that may arise during the development of the enterprise (rapid growth, credit control, lack of fixed assets);

    • The ability to access venture capital and other sources of funding or a sudden need for large sums in the case of a business start-up.

b) Services for providing financial management training/advice and supplying information on the quality and suitability of financial products

    One of the spheres neglected by rural interventions has been the organization of financial information services accessible to entrepreneurs (assistance for the first funding application, advice on the right financial product, etc.). Telephone help lines, for a group of LEADER areas, to provide answers to more or less ad hoc questions may be of particular interest.

    In 1993, the British government introduced a mediation service for small businesses (“Ombudsman for Small Firms”), which received 2,600 telephone calls and 1,600 letters from small businesses in 1997 alone.

    The problem of over-indebtedness amongst rural operators appears to be reaching alarming proportions. Due to the fact that they are rooted in the local area, LEADER groups are able to detect this type of problem and attempt to resolve it through mutual aid networks.

    Taking advantage of solidarity, the association “CILDEA” created a system of mentorship in the Loire region (Auvergne, France), to help farmers in difficulty (chiefly due to over-indebtedness) to find solutions for their problems. Farmers who are well established and maybe even hold positions of responsibility in the local area (cooperative chairman, former mayor, etc.) act as the mentors.

    The LEADER groups can therefore take measures to:

    • provide financial management training to potential customers of financial institutions;

    • standardize applications for bank credit and support applicants (in many cases, small businessmen have to contact several financial institutions before they receive a positive response). However, in most LEADER areas, project promoters have been left to deal with this procedure alone;

    • group together credit applications in order to negotiate more advantageous access and reimbursement terms;

    • ascertain real financing needs and the possibilities of accessing the necessary funds. This is a very important activity, given that, in many cases, the funding received by small-scale project promoters (determined on the basis of official bank ratios) falls short of their requirements, which can cause problems for the borrower at a later date;

    • rebuild confidence in official credit mechanisms, especially in areas where distrust, lack of vision or, worse still, systems of usury have become established.

    In rural Calabria (Italy), LEADER groups promote credit access instruments (such as FinCoop and the LEADER subsidies themselves) and the advantages of using them for business creation, by first rebuilding trust and legitimacy. To this end, the LAGs hold information meetings in the presence of the public authorities.

c) Measures aimed at local authorities

    Local authorities are becoming increasingly involved in job creation, which is the ultimate objective of development initiatives and of numerous public investment measures.

    Measures aimed at local authorities may involve using public funds to create and support collective guarantee systems (of the LEADERFIDI type) in order to alter the attitudes of banks in rural areas.

    In the case of LEADERFIDI, for example, the local authorities contribute one euro per inhabitant per year, but this contribution may become more substantial as a result of the LEADER groups’ efforts to raise people’s awareness of how important it is for local project promoters to have access to finance.


4.2.3 Ethical structures initiated by civil society

One of the key aspects on which LEADER groups must focus more in the future is raising people’s awareness of the importance of investing local savings in activities based in the area.

Within the context of an integrated approach, based on the creation of local links, it is essential for the local community to understand the social and ethical impact of business creation and the need for combining local savings with mutual aid.

Business and job creation now goes beyond the economic sphere alone: it has become an integral part of a social objective for using human resources and achieving cohesion. Employment, as Europe’s governments constantly remind us [34], has become the cornerstone for building social cohesion and mutual aid. Hence the need for LEADER groups to guarantee access to finance for all those who contribute, or who could contribute, to creating and maintaining jobs.

Lack of access to finance leads to a decline in business activities or to a lack of business creation and hence to greater dependence on state welfare (unemployment benefits, income support, etc.). Furthermore, the large influx of applications from unemployed people wishing to create their own businesses, which Imprenditoria Giovanile received under its loan programme for the unemployed (see above), highlights the extent of unsatisfied need in a social group at very great risk of exclusion. Solutions of the Imprenditoria Giovanile type help the jobless escape from a situation of dependence and to build up small businesses for themselves, when they are given favourable finance conditions in terms of cost and reimbursement schedules.

The attitude of local communities to the productive use of local savings for mutual aid is one of the major factors to be taken into account in designing an area-wide awareness/coordination programme.

How can banks be made more transparent with regard to local savings/local investment? How, too, can product quality be improved to meet the needs of rural areas? Meeting such needs is becoming increasingly important to counteract the trend for banks to withdraw from the area in which they are based, in favour of financial speculation operations on international markets.

LEADER groups could play a role in this respect by proposing that banks open up “accounts for local employment” in order to encourage local savers to become involved in job-creating initiatives. The banks themselves would grant the funds collected in such accounts to LEADER beneficiaries or to new business creators in the form of loans.


[31] Greater transparency can be demanded at
local level from banks regarding the percentage of
savings reinvested in local development activities.
Such transparency is important for raising the
awareness of the local population about the use of
its own resources to serve the needs of the area.

[32] For more information:
Red Aragonesa de Desarrollo Rural, C/San Lorenzo,
6-10, 1° - BOficina 3 y 4, E-50001 Zaragoza.
Tel: +34 976 29 64 18;
Fax: +34 976 39 03 01;
E-mail: or

[33] See: Granger Benoît & INAISE for the
types of people rejected by Europe’s banks,
op. cit. p. 41-45.

[34] Commission of the European Communities,
COM(2000)79 final, Brussels 1.3.00, Communication
from the Commission: Building an inclusive Europe, p. 6

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