Local financing in rural areas
[ Summary ]
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
- 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
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? 
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
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) . 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
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,
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 , 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
With regard to small and very small businesses, the analysis should
- 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
b) Services for providing financial management training/advice and
supplying information on the quality and suitability of financial
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
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
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
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 , 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
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
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
 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.
 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: email@example.com or
 See: Granger Benoît & INAISE for the
types of people rejected by Europe’s banks,
op. cit. p. 41-45.
 Commission of the European Communities,
COM(2000)79 final, Brussels 1.3.00, Communication
from the Commission: Building an inclusive Europe, p. 6