bestprac

Best Practice of Banking with the Poor
J.D. Conroy, K.W. Taylor and G.B. Thapa, 1995 (x + 117 pages)

Executive Summary

Non-governmental organisations and self-help groups

Information and comments received from all sources in the region confirm the conclusions of our 1992 Banking with the Poor report. NGOs and SHGs hold the key to the successful provision of credit to the poorest of the poor in this region. This is not to say that the performance of all NGOs and SHGs is equally good, or that any one of their programs is optimal. It is simply to conclude that experience thus far reported has demonstrated that using NGOs and SHGs to develop and operate microfinance programs has proved to be the best practice thus far devised to reach the poorest of the poor in our region. Specific conclusions are as follows.

The poor are entitle to credit.
NGOs succeed through building SHGs of the poor.
NGOs have ‘comparative advantage' in dealing with the poor.
SHGs need simple but comprehensive guidelines.
Interest rates should be market-related.
Replication and expansion are necessary.
NGOs need specific training.
NGOs need more financial and technical assistance.
Exchange programs are needed for NGOs.
National coordination is needed.
Impact upon the poor should be measured.

NGOs need to be accountable, transparent and, above all, cost-effective in their operations, and to possess the commitment and potential to build up their capacity to manage (or act in partnership with banks to manage) sustainable microfinance programs. The following recommendations are made to NGOs.

1) NGOs committed to poverty alleviation through provision of credit should be encouraged and supported by governments, central banks, commercial banks and international aid agencies to take the lead in forming and training SHGs for successful banking with the poor.

2) NGOs engaged in building and training self-help groups should assist them to save and establish common funds and to practice financial disciplines, to be ready to receive lines of credit or wholesale capital loans from the banks for the productive use of their members.

3) NGOs and SHGs should adopt and follow, in so far as possible, the guiding principles for self-help groups adopted by NGOs and banks at the second regional workshop, reprinted in section 6.1.

4) NGOs and SHGs involved in credit programs for the poor should charge market-related interest rates in order to cover their costs, to be sustainable, and to grow. These should vary between the rates charged by commercial banks at the local level and moneylender rates, at a level assuring financial viability in the long run.

5) Better training in financial management, record keeping and monitoring of SHG operations should be organised by NGOs with the help of bankers' associations and others.

6) In view of the overwhelming needs of the 800 million poor in the region, NGOs, governments, central banks and commercial banks should concert their efforts to promote and train other like-minded NGOs to undertake programs of credit for the poor, using the proven principles and methods of Banking with the Poor. This is a necessary step towards the required expansion of the program.

7) In order to meet that challenge, NGOs should request bilateral agencies and others providing grant funding and technical assistance to increase support for institutional development and capacity building for sustainable banking with the poor. A distinction may be made, in determining eligibility for such support, between ‘early' NGOs with positive trends in performance, and ‘mature' NGOs, from which full adherence to performance standards should be expected.

8) NGOs should also request bilateral agencies and others providing grant funding and technical assistance to offer increased support for the exchange of personnel between regional NGOs working among the poor with credit, and for the training of such personnel.

9) NGOs and banks should create national consultative mechanisms to help each other, to exchange information, to promote participation of other national NGOs, to deal with governments and central banks and with commercial banks and their associations, for loan capital and training, and the agreement and review of performance standards.

10) In the interest of exploring, demonstrating and publicising the scope for increased access to credit for the very poor on a sound commercial basis (the basic mandate of the Foundation for this project), thorough evaluations of the impact of these programs on the reduction of poverty should be undertaken. These would focus on incomes, jobs and microenterprise development, together with more qualitative issues such as increased self-reliance and freedom of choice, and should be conducted on a more scientific basis than has been done in the past, with more attention to the collection of baseline data through household and other surveys by independent researchers, and with appropriate international assistance. The results of these studies, if positive, will further validate an increased commitment of the international community to poverty reduction through banking with the poor.

Governments and central banks

Conclusions:

1) Most official poverty alleviation programs involving credit in the past have not been effective.

2) The lack of a commercial approach in official credit programs has been counter-productive.

3) NGOs need technical and financial support from domestic sources.

4) Strong and effective SHGs are essential to a linkage program, and official policies should be supportive of them.

5) Recent experience supports the original BWTP recommendations to governments and central banks.

It is heartening to note that governments and central banks in BWTP Network countries have fully endorsed the findings and recommendations of Banking with the Poor. As a result of its unanimous endorsement as an effective tool at national workshops in seven countries of Asia, banking with the poor has entered upon a new phase. The most pressing need now is to operationalise the process in all countries and to expand its implementation in order to make significant inroads into poverty. Hence, the following recommendations are made.

1) Governments should adopt the credit and savings principles and practices of banking with the poor as outlined in this report and elsewhere. They should, where appropriate, incorporate them into their periodic development plans to facilitate its implementation, or otherwise provide such endorsement of the process as will facilitate its widespread adoption.

2) Specifically, governments should encourage commercial banks and NGOs and others to adopt banking with the poor, and advise central banks to take appropriate steps to that end.

3) Governments should accord appropriate recognition to the role of NGOs in the banking with the poor process, encouraging them to form their own central coordinating organisations to provide a forum for active dialogue and consultations.

4) Since the organisational strength of NGOs in forming and developing effective SHGs of the poor is central to the success of the linkage program, governments should set aside funds on an annual basis for NGO capacity building, and also help secure such funding and technical assistance from external sources.

5) Central banks should:

(i) cause surveys to be carried out, in collaboration with banks and NGO umbrella organisations, of the involvement and operations of NGOs in credit and savings activities in various parts of each country, including backward regions with higher poverty concentrations. They should make such information available to government agencies and banks to facilitate speedy implementation of the linkage program, as well as applying their research and information dissemination capacities to other aspects of microfinance

(ii) as a matter of urgency, encourage banks to launch banking with the poor programs, including programs on a pilot basis where necessary, and to approach bankers' associations to adopt these on a wider scale

(iii) encourage bankers' associations to establish a mechanism for periodic exchange of experience among banks involved in linkage programs

(iv) encourage the bankers' associations to plan training and orientation programs for bank and NGO personnel involved in implementation

(v) strive to remove regulatory constraints on lending to the poor, thus creating a conducive climate for banking with the poor. In particular, recognition of group guarantees as acceptable collateral, simplification of banks' loan procedures, and the eligibility of SHGs as loanees despite their being informal in nature, are among issues to be resolved as early as possible

6) Governments and central banks could encourage bankers' associations and NGO coordinating organisations to exchange experience with other countries for further improvement of the linkage programs in operation. They should supplement NGO resources available for this purpose.

Commercial banks

Conclusions:

1) Previous microcredit programs undertaken by commercial banks have diverged fundamentally from the basic principles of BWTP.

2) A significant start has been made in the use of NGOs and SHGs as intermediaries for credit delivery by network commercial banks .

3) Continuing development of appropriate banking practices and approaches is needed, including ongoing consultation between NGOs and banks.

4) Reduction in banks' transaction costs is achievable through the use of NGOs and SHGs as intermediaries.

5) Effective banking with the poor requires change in the banking culture.

Recommendations to banks made by the second regional workshop in Kuala Lumpur in 1992 have subsequently been discussed with meetings of professional bankers in seven Asian countries without serious challenge or question. The following recommendations derived originally from the Kuala Lumpur meeting and revised in the light of subsequent experience are made to commercial banks.

1) Commercial banks and other financial institutions (as appropriate in country-specific conditions) should engage in lending to the poor via NGOs and SHGs of the poor that meet agreed standards of operation. Excellent repayment rates, sound operating and financial structures, and competence in expanding outreach to large numbers of low income borrowers should be among the indicators of performance chosen for this purpose.

2) Commercial banks and other financial institutions should operationalise linkage programs in their organisations as early as possible. Where these have not yet been started, banks may also consider introducing pilot testing in particular regions of the country with greater potential and availability of NGO service. Based on the successful conduct of piloting, banks should expand the scope of such coverage. A staged approach will allow banks to acquire experience in practice.

3) Commercial banks and other financial institutions should review and redesign loan procedures applicable to their linkage programs, introduce new financial products, and devise new ways to address the needs of poor borrowers. These revisions should be concerned with simplifying loan procedures, accepting collateral substitutes, and accepting the informal status of NGOs and SHGs.

4) The group guarantee as collateral substitute has been found to be most suitable for small loans to the poor and ensures high repayment rates through group pressure. It should therefore be accepted by commercial banks and other financial institutions.

5) Banks, with the help of bankers' associations, other regulatory bodies and central banks (as appropriate in country-specific situations) should establish a mechanism for periodic dialogue and consultation with NGOs and (if appropriate) governmental organisations involved in group credit in order to assess their needs, solve emerging problems, and build an understanding of the successful conduct of banking with the poor. The agreement and review of performance standards is an appropriate task for such consultative processes.

6) Banks may also create forums for exchange of experiences among banks engaged in linkages, for consolidation and strengthening of the system.

7) Bank and other financial institution staff should attend regular training and orientation programs designed to impart knowledge about linkages; their concerned personnel at all levels should be involved in this sensitisation process.

8) Banks and other financial institutions should regularly monitor the working of the linkage and disseminate the information among all related institutions and personnel. They should accord a place of importance to this work, and publicise its achievements regularly through their own publications as well as through the media.

External agencies

The recommendations to external agencies in Banking with the Poor distinguished between international financial institutions, bilateral aid agencies and other agencies. However, there are some general conclusions arising from recent experience of banking with the poor which are relevant to the concerns of all external agencies. These are as follows.

1) Microfinance programs contribute to the broader process of domestic financial sector development.

2) Targeting the poorest of the poor requires that primary emphasis in external assistance programs be directed to the provision of microfinance leading to microenterprise development (MED).

3) External agencies should endorse the banking with the poor linkage mechanism for microfinance delivery.

4) The principle of full cost recovery should not be extended to include establishment costs.

5) Costs of support for the formation, training and seed-funding of SHGs are a particularly appropriate object of support.

6) Banking with the poor facilitates the redeployment of external funding.

7) External agencies should deal with microfinance as a specialist area requiring appropriate administrative arrangements.

8) Networking will develop microfinance expertise in NGOs.

The experience of our BWTP Network partners, as well as of governments and central banks in the region and of external agencies, confirms the general validity and applicability of the recommendations addressed to the external agencies in the 1992 report on Banking with the Poor. However, in view of the experience of the last two years in the implementation of banking with the poor, it may be useful to review those recommendations afresh in the light of that experience. Accordingly, the following recommendations to external agencies are offered.

1) Agencies aiming to alleviate the poverty of the poorest of the poor should direct assistance to helping indigenous NGOs build up self-help groups of the poor.

2) Such assistance to NGOs and SHGs should aim to build self-reliance, financial discipline and savings in preparation for the injection of small loans or lines of credit from commercial banks, to be onlent to their members for productive purposes.

3) Where assistance is provided by international financial institutions in the form of soft loans (where there is a lack of adequate domestic resources for that purpose), such financial assistance should be:

(i) required to be onlent to final borrowers at market rates assuring full sustainability

(ii) designed and wherever possible required to stimulate commercial banks to supply increasing volumes of loan capital (possibly on a matching basis) to augment the resources available for lending to the poor.

4) A clear distinction should be made between this loan capital assistance and the separate need for technical assistance for institution-building, so that where the latter is required in support of a World Bank or Asian Development Bank loan it can be provided through associated bilateral grant aid, as has occurred increasingly in the recent past. In this connection we quote with approval from the recent recommendations of a United Nations Expert Group: ‘Multilateral, bilateral and private funders should encourage, assist and fund institutional development, with a focus on lateral learning among practitioners, and dissemination of success stories, best practice and successful forms of intermediation'.

5) Such bilaterally sourced assistance should be provided directly to NGOs, which are in a better position to assess their most urgent needs, and to do so more economically, than any centralised advisory service created specifically for a project.

6) Assistance of bilateral aid donors should follow the same principles, whether it is supplied as associated aid with financial institution loans or directly to the countries concerned.

7) Now that more of the loanable funds, previously provided by donors, are available from domestic sources, particularly from commercial banks and local savings, the clear challenge to bilateral aid agencies and others providing grant funding and technical assistance is to increase support for institutional development and capacity building for sustainable banking with the poor.

8) Recognition is due to UNDP as the major multilateral agency providing technical assistance. The initiative of UNDP in launching the credit components of its Regional Poverty Alleviation Programme, with a strategy of supporting non-governmental networks working effectively in the field of credit in the region, is a positive one. The BWTP Network acknowledges the support of UNDP for its own activities, the positive outcomes of which are detailed in this report. BWTP recommends to UNDP that it should continue and expand its support to the major non-governmental networks in the region to enable them to continue and intensify their advocacy of a range of innovative approaches to poverty alleviation through microfinance, including banking with the poor.

9) Activities which are needed include:

(i) the inventorisation of training resources available in the region to support the expansion of novel approaches to microfinance provision;

(ii) better monitoring and evaluation of the performance of NGO programs of credit (including proper studies of their impact upon recipients);

(iii) replication of successful approaches and further research (on matters such as transaction costs, collateral substitutes, interest rate structures, loan repayment rates, and the viability and profitability of various approaches from the viewpoint of banks, intermediaries and other institutions), which is important in persuading the commercial banking community of the region of the commercial viability of banking with the poor.

To avoid duplication of effort, research in these fields by the networks and by APRACA should be coordinated. Exchanges of personnel between NGO programs throughout the region (which might also extend to commercial bank staff in appropriate cases) could permit technology transfer between programs, enabling best practice to be disseminated widely.

10) Following upon its sponsorship of the important conference on microenterprises in developing countries in 1988, which served to focus attention on the importance of credit issues for microenterprise, the World Bank should take further action to organise the response of the donor community to the need for microfinance by means of some permanent institutional arrangement. As noted above, the Third Regional Workshop welcomes the Bank's proposal for the establishment of a consultative group to assist the poorest of the poor (CGAPP), and encourages the donor community to support this initiative.