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Banking with the Poor

G B Thapa, Jennifer Chalmers, K W Taylor and John D Conroy, 1992 (xiv + 223 pages)

More than one billion people in the developing world (including some 800 million in Asia) live in absolute poverty. Yet the poor have the capacity to help themselves, and to improve their lives, without handouts or subsidies.

The poor in developing countries, especially those without adequate access to productive land or paid employment, support themselves with a myriad of "self-employed" activities in trade, services, crafts and petty manufactures, as well as in agriculture. But they lack access to credit, even in the very small amounts needed to finance their individual "microenterprise" activities. This lack of access to credit is a crucial obstacle to self-help by the poor.

Banking with the Poor is an attempt to explore, demonstrate and publicise the scope for increased access to credit for the poor on a sound commercial basis. This unique regional project was initiated by the Foundation for Development Cooperation, of Australia, at an Asian regional meeting in Manila in May 1991. There the Foundation enlisted leading banks and non-governmental organisations (NGOs) from eight Asian countries, namely Bangladesh, India, Indonesia, Malaysia, Nepal, Pakistan, the Philippines and Sri Lanka, as participants in the project. We believe this is the first time such a significant international dialogue has occurred between banks and NGOs.

Reflecting a commitment to continue and deepen that dialogue, parallel case studies were prepared for each of the eight participating countries in the following year, by teams consisting of a major commercial bank collaborating with one or more NGOs in each case. A common set of terms of reference ensured comparability between the various studies, which focussed on the issues mentioned below, as well as coming to findings on the conduct of credit programs for the poor.

Bank participation involved their examining at first hand the methods of their NGO colleagues in operating successful programs of credit for the poor. They conducted studies focussing on such key issues as the need to target the poor effectively, and the roles of NGOs and grassroots "self-help groups" acting as intermediaries with the poor.

Other issues studied by the banks included how to reduce transaction costs on very small loans to the poor, how to find substitutes for collateral on such loans, and whether the poor can pay market rates of interest to enable loan schemes to recover their costs. Evidence of the impact of NGO credit schemes on the welfare of the poor was investigated, and the roles of governments, central banks, and international agencies in supporting such programs were reviewed.

A notable feature of this bank/NGO collaboration was the decision by all participating banks to offer lines of credit to test the validity of the NGOs' credit programs. The documentation of resulting successful linkages between banks and NGOs is one of the most valuable features of the case studies.

The findings of the eight case studies on these major issues were synthesised and analysed by the Foundation in a draft report, presented to the participants who met for a second time at a regional workshop, in Kuala Lumpur in July 1992. After an extremely constructive week of meetings, involving discussion and amendment of the draft, participants approved the final Report presented here. Some of the conclusions of the Report are briefly summarised below:

• The poor are good credit risks; they have a high propensity to save if opportunity and motivation are given to them, and they are fully "bankable".
• In this connection, the main problem the poor experience is to achieve better access to credit, rather than to reduce its cost.
• Given better access to credit, the poor are willing and able to help themselves.
• Women borrowers have proved to be the most reliable and successful borrowers.
• Non-governmental organisations, and self-help groups of the poor, are playing a key role in giving the poor better access to credit. They are able to mobilise group savings, to provide group guarantees as a substitute for collateral, to reduce transaction costs through group action and voluntary labour, and to achieve high repayment rates on loans.
• Banks can meet the credit needs of the poor by adopting well-conceived delivery systems, using NGOs and self-help groups as financial intermediaries. Commercially-sound linkages have been established through this project between commercial banks, and NGOs and self-help groups active in providing credit for the poor.
• Governments and central banks in developing countries need to give official recognition and support to NGOs and self-help groups engaged in credit for the poor, and to encourage commercial banks to participate in meeting their loan capital requirements. They should also establish a favourable policy and legislative environment for that purpose.
• International organisations and donor governments should give strong support to these policies, and also provide more substantial financial support for the institutional strengthening of NGOs, for the formation of self-help groups engaged in credit management, and for the linkage of such groups with commercial banks.
• These linkages of banks with NGOs and self-help groups represent a constructive form of financial development for Third World countries. They extend the reach of the formal financial sector to new sections of the population, mobilise new sources of savings and tap new markets for credit, and in the process increase the prospects of self-reliant development for the poor as a group and for the national economy as a whole.

Findings and conclusions derived from the Case Studies are set out in detail in the draft Report. They were considered by participants at the Second Regional Workshop on Banking with the Poor. The participants then formulated a series of recommendations, directed to all relevant agencies capable of implementing or influencing programs for the provision of credit for the poor on sound commercial principles. These recommendations form the concluding part of the Report.

In accordance with a decision of the conference, relevant recommendations have been drawn to the attention of the specific agencies (governments, banks, international organisations, NGOs, etc) to which they were directed. Since these recommendations have not been repeated in this summary, the reader is urged to consult the text of the Report itself. The recommendations are set forth in Part D, while the detailed findings on which they are based are set forth in Part C.