THE “PROMISING PRACTICES” CASE STUDY SERIES:

PROGRAMS, PRODUCTS AND SERVICES SPECIFICALLY DESIGNED TO REACH

VERY POOR PEOPLE

Local Financial Institutions Learning to Move Down and

Out:
the Cases of Credit Unions and Rural Banks Adding Village
Banking to Their Traditional Lines of Service

I. Context

Building microfinance institutions from scratch became the norm in the 1990s for
fostering outreach and down reach of financial services to the poor. This MFI building
movement was in reaction to lack of interest among traditional financial institutions in
the kinds of service delivery innovations needed to engage the truly poor, especially very
poor women in rural areas. While motivated by stronger social commitment and greater
innovative spirit, the institution-building movement is running into the same cost issues
as the traditional institutions have faced. Ironically, many of the new MFIs are reacting
in the same self-limiting ways that reduce commitment and innovation to engage the truly
poor, especially very poor women in rural areas.

Even more ironic, one way to break through this cost-structural impasse is to take
advantage of the traditional financial service infrastructure already located nearby where
the very poor live. This case study looks at how credit unions and rural banks—which
pre-dated the MFI-building movement—have grafted onto their existing service
portfolios some of the same service delivery innovations around which many of the MFIs
have been built, but at lower marginal cost for reaching out and down.

This case actually represents several cases spread over the world—West Africa,
Madagascar, the Philippines and Ecuador—and over more than a decade of experience.
Three common denominators of these various cases:

1. They all involve relatively small, institutionally fragile but financially self-sustaining,
local financial service organizations that are owned by members or local investors
and regulated as deposit-taking institutions under government charters.
2. These institutions are close to the communities they serve, which gives their
leadership a sense of obligation to reach further out and down in order to address the
poverty-related problems they see as they go out of the office to visit members,
clients, friends and relations. Moreover, these communities include relatively large
numbers of not just poor but very poor people (higher percentage of the local
population than the national average, mostly because these communities are more
rural than the national average).
3. Each case has a history with Freedom from Hunger, which offered them the
opportunity to learn about, adopt and adapt key service innovations developed by the
microfinance movement, most particularly, group-based lending to relatively poorer
 women in relatively rural areas, who would not have been aware of, much less able to
join or otherwise use the services of these organizations without these innovations.

Tables 1 – 3 list the organizations by their acronyms and countries (contact information is
appended at the end of the case study):

 Federations of numerous, rather small credit unions in Africa—Benin, Burkina Faso,

Mali, Madagascar, Togo

 Individual credit and savings cooperatives in Ecuador and the Philippines; and
individual Rural Banks in Ghana.

These tables show standard portfolio and performance data for each federation or
individual institution, as of the end of 2004, regarding just the portfolio of members and
borrowers participating in the group-based lending program of the institution or
federation. While the people involved in group-based lending may out-number the
people who use the institution’s traditional (individual-oriented) lines of service, these
individual-service users usually account for the great majority of the institution’s total
portfolio of deposits and loans outstanding.

The number of group-based program members is usually far less than 3,000 per
individual institution, but the aggregate number for a federation of credit unions can be
quite large (54,707 for FCPB in Burkina Faso) and very large worldwide: 162,865
(88,747 for African credit unions; 11,040 for Ecuadorian cooperatives; 20,484 for
Ghanaian Rural Banks; 42,594 for Filipino cooperatives). Because these are deposit-
taking institutions, people do not have to be borrowers to be members; the number of
borrowers is around 79 percent of the number of members in the group-based program.
The average size of the groups is about 18, but it varies geographically. Group size is
about 23 everywhere except for the African credit unions, which have much smaller
group size (average ranging from 6 to 14).

Virtually all these groups are composed entirely of women living in relatively poor rural
communities. There is no means-tested targeting of poorer families; only a village
banking design focused on the needs and constraints of women living in relatively rural
communities. Recent evidence indicates that the peer-selection process of village
banking may discriminate against the poorer members of the communities they draw their
members from, especially the very poor and vulnerable who may be perceived by peers
as posing untenable credit risk to the mutual guarantee mechanism. This case study
presents evidence relevant to this concern about the village banking design.
II. Description of Methodology

As already stated, the service delivery mechanism adopted and adapted by the local
financial institutions is women-focused village banking. In addition, the village
banking is integrated with adult education for essential life skills that improve child
health and nutrition, women’s health and self-confidence, and family financial and
enterprise management. These integrated services are adapted from the generic
Credit with Education model offered by Freedom from Hunger (descriptive
materials, training and operations manuals, and impact and other studies are
available from Freedom from Hunger at www.freefromhunger.org and
www.ffhtechnical.org). The rationale for this intervention package, or theory
of change, is shown in the figure below:

High-Performance
Program (HPP) Freedom fro
Characteristics

Large
Scale
The first step in the adoption process begins with a combination of interest of a local
financial institution in doing more than it already does in the area served and awareness
of the option offered by Freedom from Hunger to add a new line of service. The main
attraction of this new line is the opportunity to reach out to people who are not currently
Credit
served – thereby generating more business for the institution and more benefits for the
local area. Freedom from Hunger specifically identifies and offers its services only to
institutions that have a mandate to reach out to more women, to poorer people and more
Cost-
deeply into the rural areas than they currently know how to do without ongoing subsidy.

The second step isEffectiveness

a Management Orientation Training by Freedom from Hunger for the
senior managers and board of directors of the interested local financial institution (or
federation of such institutions). The training thoroughly acquaints the institution leaders
with the benefits and the challenges of adopting the new line of service. Most Women’s
Associations
challenging is the necessity to hire, train and supervise a new cadre of staff—field agents
who take the service into the communities and to groups of women served. Associated
with this new staff are new systems of management, including training, supervision,
incentives, transportation, and quality control through monitoring and reporting. Another
major challenge is the new clientele. Just to do business with (especially very poor)
women in rural areas, the institution must address or somehow deal with their illiteracy,
lack of self-confidence, limited entrepreneurial experience, social and geographic
isolation and major health and nutrition problems for themselves and their families. The
Management Orientation Training shows how adult education can be cost-effectively
facilitated by the same field agents to address most of these constraints in the regular
(weekly, biweekly or monthly) meetings of the women’s groups. (Literacy generally
requires much more than the time provided by the regular meetings of the women in their
groups.)

The third step is the local financial institution’s decision to adopt the new service
delivery mechanism, or not. If yes to adoption, then the institution must also decide how
it will go through the adoption process.

The fourth and biggest step is the adoption process itself. Freedom from Hunger has
sufficiently documented the process and systems involved to allow an experienced and
determined institution to go through the adoption process on its own. However, most
institutions choose to partner with Freedom from Hunger to receive experienced training
and other technical support for the adoption process. This involves:

• recruitment and training of field agents and their supervisors

• training for management staff in the supervision and monitoring/reporting
systems recommended for the Credit with Education line of service
• training of at least one in-house trainer for ongoing training of field agents,
including skill upgrades and new recruit orientation training.

There are three major types of cost associated with adoption of the new line of service.

 Cost of technical assistance and training from Freedom from Hunger, which in all the
cases cited here was covered by grants directly to Freedom from Hunger

 Cost of operational deficit over the period between inception and breakeven of the
new line of service. In the first several adoption cases, Freedom from Hunger offered
to cover all these operational deficits (from its own grants) in order to reduce the
perceived innovation risk – that the new line of service would not generate sufficient
surplus in later years to recover the operational start-up costs. Due to their cash flow
constraints, local financial institutions have continued to seek this start-up subsidy
even in the face of evidence that costs will be recovered, especially when the period
to breakeven is shown in that country to be likely to span two or three years.
However, most recently, some local financial institutions in the Philippines and
Ecuador are showing willingness to cover the operational deficit with their own
 resources, especially when they can see nearly identical institutions in the same
country reaping substantial profit from the new line of service.

 Cost of the loan portfolio required to fuel the new line of service as it grows rapidly.
One of the attractions of local deposit-taking financial institutions is that they may
already have substantial funds on deposit and as equity to invest in the portfolio of the
new line of service. There was sufficient liquidity available in every case of adoption
cited here, at least for start-up and early stages of expansion. No external portfolio
financing was required.

III. Results

Client-level Impacts

Considerable evidence has been collected by Freedom from Hunger and others to show
the impacts of Credit with Education for the women who participate and for their
families, especially their young children. Summary analyses of the various studies1 show
the following general impacts:

• Effects of Financial Service: women have more income & assets; households have
better consumption smoothing and shock coping
• Effects of Education: women learn essential information and put much of it into
practice regarding breastfeeding, child feeding, diarrhea treatment, immunization,
family planning, and HIV/AIDS prevention and coping
• Combined: women’s empowerment is bolstered; children’s diet and nutrition
improve; client satisfaction and demand increase

The summary analyses drew from the results of the flagship study of impact from
integrated village banking and adult education services conducted in the mid-1990s with
women clients of the Lower Pra Rural Bank in Western Region of coastal Ghana. Also
included in the analyses were less rigorous and comprehensive studies conducted with
clients of Kafo Jiginew, a federation of credit unions in central and southern Mali, and
the Reseau des Caisses Populaires du Burkina, a federation of credit unions throughout
Burkina Faso. All three of these West African institutions are among the cases offered
here.

Poverty Status of Clients

1
Credit with Education Impact Reviews (available at www.ffhtechnical.org):
No. 1 “Women’s Empowerment” by Barbara MkNelly and Mona McCord (October 2001)
No. 2 “Economic Capacity and Security” by Barbara MkNelly and Mona McCord (Sept. 2002)
No. 3 “Children’s Nutritional Status” by Barbara MkNelly and April Watson (October 2003)
See also “Building Better Lives: Sustainable Integration of Microfinance with Education on Child Survival,
Reproductive Health, and HIV/AIDS Prevention for the Poorest Entrepreneurs” by Christopher
Dunford (Chapter Two in Pathways Out of Poverty: Innovations in Microfinance for the Poorest
Families, edited by Sam Daley-Harris, Kumarian Press, 2002).
While there is extensive evidence of impact, there is less evidence of the poverty level of
the clients who experience these impacts. The Ghana study rigorously compared
participants with non-participants in communities randomly selected to receive the Credit
with Education services and also with residents of matched communities randomly
selected to serve as control for the participant communities. Before the introduction of
Credit with Education service by the Lower Pra Rural Bank, there were no important
differences found in the general characteristics of the people who later become
participants compared to those who became non-participants (by choice in the participant
communities and by chance in the control communities), including no differences in
indicators of poverty level such as household assets and consumption. The conclusion is
that women residing in participant communities had equal access to the Credit with
Education service regardless of their poverty status. In other words, the distribution of
poverty status among the women served by Credit with Education is the same as that in
the general population of eligible women in the participant communities. The village
banking design did not discriminate against poorer women in this case.

What this conclusion does not yet address is whether or not the “poorer women” in these
communities were in fact “very poor.” However, Freedom from Hunger defines “very
poor” as being poor enough to be chronically food insecure. The impact study did show
that incidence of food insecurity was quite high in both the participant and control
communities and was substantially reduced among the participants (and their households)
after at least one year of Credit with Education participation. The conclusion is that
many “very poor” (food insecure) people resided in these coastal Ghanaian communities,
and they joined the Lower Pra Rural Bank’s village banks in the same proportion as in
the general local population. Moreover, the status of the very poor was substantially
improved, for many to the point of leaving the category of “very poor.” The village
banking design did not discriminate against even the very poor in this case.

Corroboration of the conclusions of the Ghana study is found in a study of poverty

outreach in the two Malian credit union federations included in the cases here.2
Participatory Wealth Ranking was used to sort all households in nine communities into
four relative wealth groupings that local informants defined as:

i. Households which are food-secure

ii. Households vulnerable to food insecurity
iii. Households with periodic food insecurity
iv. Households which are chronically food-insecure

The wealth distribution of Credit with Education members mirrors the overall wealth
distribution in the communities in general. Despite the program terms, a certain number
of women from better-off households will join Credit with Education. And despite their
extreme poverty, a surprising number of women from the poorest, most food-insecure
households will also join.

2
“Mali Poverty Outreach Study of the Kafo Jiginew and Nyesigiso Credit and Savings with Education
Programs.” Freedom from Hunger Research Paper No. 7 (May 2001), by Anastase Nteziyaremye and
Barbara MkNelly. Available at www.ffhtechnical.org.
Women from the poorest third in the community were interviewed – women who had
never joined the program, women who were current members, and women who were ex-
members – in separate focus groups. The discussions revealed little to no evidence of the
poorer women being systematically excluded either by better-off members or by program
representatives. However, some poor women were self-excluding, choosing not to join
out of fear for their already precarious economic situations.

Does Credit with Education serve poorer clients than the other products of local financial
institutions?

The same study of the two Malian credit union federations also used a basic needs
methodology, which creates a poverty index based on the population’s own perceptions,
as the interviewees themselves define what is a “basic need” (that which no household
should have to live without). Credit with Education clients were in the relatively poorest
client category for both credit union federations. The same result was found in an IFPRI
study of the OTIV credit union federation in Madagascar (another of the cases here)
using the CGAP Poverty Assessment Tool.3 Credit with Education members appear to
be the poorest group in the sample collected; “classical” members of OTIV were
significantly better-off compared to both non-clients and “caisse feminine”
(Credit with Education group) members.

However, extending credit union services beyond the towns and large villages in which
the branches are typically located seems to be more important than loan terms (including
joint liability groupings) or even preferential lending to women. For example, in Mali,
borrowers of credit union financial products designed for farmers were not significantly
less poor than Credit with Education clients, though they were mostly men borrowing as
individuals. The rural borrowers (farmers and Credit with Education clients), however,
were significantly poorer than urban borrowers. The IFPRI study also found that the
poorest households were much more likely to be rural than urban, and two-thirds of the
Credit with Education clients were rural while the opposite was true for the “classical”
members of OTIV credit unions. Products brought to the villages reached a relatively
poorer clientele.

The value of Credit with Education for poverty outreach by local financial institutions
may not be so much in its evident cost-effectiveness (stimulating demand by the poor,
even the poorest) but in its efficiencies (the group methodology in particular) for credit
union operations in rural communities (facilitating supply to the poor, even the poorest).

Impacts on Local Financial Institutions

While there has been solid, diverse research on the client-level impacts and poverty
outreach of credit unions and rural banks offering Credit with Education in rural areas,
3
“Assessing the Relative Poverty Level of MFI Clients – Development of an Operational Tool: Synthesis
Report for the Case Study of OTIV-Desjardins in Madagascar.” International Food Policy Research
Institute research report (April 30, 2000), by Cecile Lapenu, Manohar Sharma and Eliane Ralison.
Available at www.cgiar.org/ifpri .
there has been less rigorous investigation of the impacts on the overall performance of
these institutions – as affected by client recruitment costs and retention rates and loan
portfolio performance. Still, there is indicative evidence. Executives of most local
financial institutions cited here have reacted positively to their experience with the Credit
with Education line of service. Their persistence in providing Credit with Education over
the years indicates a degree of satisfaction with the performance of the line of service in
helping the institution meet its objectives. In 20 of the 36 cases offered here, the
institution has been providing Credit with Education for five or more years (three of them
for 10-12 years). Moreover, this group-based service delivery design has spread within
countries (from rural bank to rural bank, from credit union to credit union) by
demonstration and word-of-mouth influence of early adopters on later adopters. There
has been a similar diffusion internationally – from Burkina Faso to Mali, Togo,
Madagascar and Benin (through the Desjardins network mostly) and from the Philippines
to Ecuador (through the World Council of Credit Unions).

Reasons for executive satisfaction seem to vary, but the most general one is that Credit
with Education is very often a profitable line of service. Of the 25 institutions reporting
the operational self-sufficiency ratio for their Credit with Education lines of service, 20
are reporting greater than 100 percent (all but one of these 20 report more than 110
percent).

In Burkina Faso, the Reseau des Caisses Populaires du Burkina (RCPB) initiated its pilot
test of Credit with Education in 1993, at which time the federation’s loan-to-savings
ratio, or transformation rate, was 22%. The transformation rate improved to 150% in
1998, partly due to widespread adoption of the group-based line of service, which had
allowed credit unions to transform surplus urban savings into loans for a rural market.
These new clients generated regular income for the credit unions through interest
payments on these redirected savings while achieving the social mission of the credit
union to serve the community.4

In the Philippines, four credit unions initiated Credit with Education in August 1998,
adding the new service to five or six other services. By the end of 1999, the new group-
based line of service accounted for 33% of the total clients and 8% of their outstanding
loan portfolio. Only the Credit with Education service had zero percent of portfolio at
risk. This led the four credit union managers to expand their support for Credit with
Education and brought in another four credit unions, whose managers cited low
delinquency as the primary reason for their interest. A comparison between the eight
credit unions and others that had not yet adopted the new line of service indicated no
difference in overall institutional performance, suggesting that this poverty-focused
service did not create a drag on institutional performance. On the contrary, the return on
assets ratios were generally better for the adopting credit unions, and they lowered their
operating expense ratios after adoption.5 Since these data were collected, eight more
credit unions have adopted the service, and the average operating self-sufficiency ratio

4
“A Business Model for Going Down Market: Combining Village Banking and Credit Unions” by
Kathleen Stack and Didier Thys in The MicroBanking Bulletin (No. 5, September 2000).
5
Same as above
for the Credit with Education service in the 16 Filipino credit unions was 152% at the end
of 2004.

In addition, the new group-based, women-focused service is perceived as helping credit

unions recruit new members. Women in rural communities are generally unable or
reluctant to join a credit union directly, because they cannot meet credit union
membership fee and deposit requirements, or they are unfamiliar or uncomfortable with
formal financial institutions. However, these constraints are relaxed or non-existent for
membership in Credit with Education groups – members join the credit union as a group
rather than as individuals. However, they have no access to other credit union services
besides the Credit with Education services. Credit unions offering the new service
believed that once these group members became familiar with using formal financial
services through the group and increased their earnings and savings, they would become
willing and able to join the credit union directly as individual members. It also was
thought that extending credit union services into the community would attract non-
members of Credit with Education from those communities.

To test these ideas about recruitment, field research was done with both Nyesigiso and
Kafo Jiginew credit unions in Mali.6 In eight credit unions that had been implementing
Credit with Education for about four years, 691 people just joining the credit unions as
new individual members (57 percent of all new members in the credit unions) were
polled by credit union managers and cashiers over a period of 12 months. The new
members surveyed were primarily men (70%) and were divided among five primary
professions (38% farmers, 16 % retailers, 16% salary workers, 16% housewives, 9%
craftspeople). An average of 60% of new members surveyed lived within a 2-km radius
of their credit union, while 11% lived more than 15 km away.

Notable findings:

• Credit with Education seems to influence people to join the credit union as
“regular” individual members: half of new individual members (52%) knew of the
Credit with Education service; 29% were informed about the credit union by a
member and 17% by a field agent of the Credit with Education service; one person in
five (19%) joined the credit union because of a Credit with Education member or
field agent.

• Credit with Education is more likely to influence people traditionally

underrepresented in the credit unions -- women and individuals living in less-
accessible villages: 41% of women joined the credit union because of Credit with
Education members and/or field agents, compared to only 9 percent of men; 84% of
new members living more than 15 km from the credit union had heard of Credit with
Education compared to only 41% of those living within a 2-km radius or less.

6
“Impact of Credit and Savings with Education on Recruitment of New Members to the Credit Unions of
Kafo Jiginew and Nyesigiso.” Incomplete research report by Anastase Nteziyaremye, Kathleen Stack and
Barbara MkNelly (Freedom from Hunger, Davis, CA, USA).
 • Credit with Education allows a significant number of its members to improve
their socioeconomic status and/or self-confidence enough to join a credit union as
individual members: 35% of new women members were former or current Credit
with Education members; the majority of these women joined the credit union after
participating at least one year in Credit with Education.

• Graduation to regular membership status did not require the women to leave their
Credit with Education groups: 24% of the women joining credit unions were still
Credit with Education members; their reasons for remaining (in frequency order) –
valued the group’s solidarity, liked the education component of the service, wished to
continue to borrow and save through their group as well as directly with the credit
union.

Without the benefit of these findings in Mali but after about six years of experience with
Credit with Education in some of its regional federations, the board of directors of the
Reseau des Caisses Populaires du Burkina adopted this line of service as a standard
offering throughout its nationwide network. In fact, Credit with Education was used by
the RCPB as the lead activity for member recruitment as it sought to create new credit
unions in un-served rural areas.

On the other hand, another initially very successful six-year experiment in offering
Credit with Education was abandoned by Kafo Jiginew, a totally rural credit union
federation in the southern cotton-growing areas of Mali. Management problems with the
staffing of the new line of service were cited as the reason for this decision to cease the
offering after it had already engaged with more than 16,000 rural women clients. There
is substantial evidence of positive client-level impacts and satisfaction and positive
effects on the Kafo Jiginew federation and individual credit union performance.
Unfortunately, it remains unclear what were the senior executive perspectives that led to
this cancellation decision.

IV. Resources Required/Cost to the institution

The cost-effectiveness and sustainability of adding village banking to the established

services of existing local financial institutions are demonstrated by the results just
presented. There is an “economy of scope” in this strategy that reduces the start up and
recurrent costs. Back office and overhead costs can be shared with other self-financing
service lines of the local financial institutions. These deposit-taking institutions have the
capacity to finance a new service line from internally-generated resources (savings).
Credit risk can be spread over a diverse loan portfolio.7 Note that no cross-subsidy is
required. The group-based service can be fully self-financing, even quite profitable.

All these factors are reflected in the costs to Freedom from Hunger to help local financial
institutions adopt and sustain a village banking service. It is much less expensive to work
with well-established credit unions and rural banks than to create new institutions or
work with nascent MFIs. Up to the year 2000, Freedom from Hunger spent US$ 6.4
7
See footnote 4
million in direct grants and technical assistance to create institutional capacity for
reaching 30,000 women through two MFIs specializing in provision of Credit with
Education in Bolivia and Uganda – that is, $211 per member. Yet it only cost $700,000
to create institutional capacity for reaching 36,000 women through two credit union
federations in West Africa – that is, $20 per member.8 One tenth the expense in half the
time.

V. Challenges and Pitfalls/Lessons Learned

As in any “buy or build” business decision, the availability of existing, sound businesses
to “buy into” is a critical determinant. Credit unions and (to a lesser extent) rural banks
supply more lending and savings services than any other type of financial institution
except commercial banks. They are widespread, even in rural areas beyond the reach of
most commercial banks, and often have regional and national networks that can promote
efficient diffusion of service innovations. However, these locally owned and operated
financial service institutions tend to be institutionally fragile vessels, into which we pour
at our peril ambitions for large-scale outreach to the very poor.

The Kafo Jiginew case is a particularly cautionary tale, because all indications were that
the adoption of village banking was enthusiastic and successful. The ambiguity of the
reasons for cancellation of the village banking line of service highlights the intangible
nature of management and staffing issues that can derail the adoption and diffusion
processes. The risk of institutional idiosyncrasy can be mitigated, however, by spreading
the risk over a fairly large number of institutions. Note that Kafo Jiginew is a rare case in
the totality of cases offered her.

There is more generally in Benin, Burkina Faso, Mali and Togo a regional problem that
threatens any poverty outreach strategy that depends on charging relatively high interest
rates to cover relatively high service delivery costs. The interest rate cap imposed on
credit unions by policy of the Central Bank of West Africa (the BCEAO controlling the
CFA franc monetary union) has made it more and more difficult to recover the full costs
of offering the Credit with Education service in rural areas. This pernicious effect has
dampened interest in and commitment to offering the Credit with Education service on a
sustainable basis. Similarly, in Ghana, very high reserve requirements (at times over
50%, ostensibly to counter inflation) have so limited liquidity of the rural banks that
Credit with Education could not be expanded by any rural bank to serve substantial
numbers of women even where demand is high and management is willing.

In sharp contrast, the Filipino credit unions benefit from an almost too loose regulatory
framework. They have great latitude to charge whatever interest rates their markets will
bear and use large proportions of their deposits to make loans. The surprisingly high
operating self-sufficiency ratios that some of these credit unions enjoy indicates that they
could offer Credit with Education quite sustainably at significantly lower interest rates.
Not lowering the interest rates may be both exploitive of the poor and a barrier to entry
by the very poor.
8
See footnote 4
Thus, the regulatory environment and the local institutional commitment to poverty
outreach are major determinants of success for this strategy of poverty outreach through
local financial institutions.

An important learning from this study is that the major advantage of village banking for
poverty outreach may simply be that group-based lending, in general, is a more efficient
(and therefore more affordable) mechanism for delivering services in rural areas, and any
services taken to rural areas seem to reach relatively poorer clientele. In other words,
village banking may not be more attractive than other lending methodologies to very poor
clients; indeed, many recent articles claim (without much solid evidence) that group-
based lending is less attractive than individual lending methodologies. Instead, village
banking (as a rather efficient form of group-based lending) may simply keep costs low
enough to facilitate delivery of credit and other services to rural areas that are too costly
for other methodologies to reach. In short, village banking may enhance supply to rather
than stimulate demand from the very poor.

A recent review9 of four successful village banking programs in Latin America seems to
refute this conclusion. It concluded that village banking is not more efficient than
individual lending, because loan officer productivity (in terms of number of borrowers
per loan officer) of financially sustainable village banking institutions is lower (286) than
of financially sustainable individual lending institutions (422). However, the data base is
from an IDB/CGAP inventory of Latin American microfinance institutions, which are
predominantly urban, even the village banking institutions. If the comparison had been
able to control for rural vs. urban residence and for the general poverty level of clientele
of the institutions, it is reasonable to expect that the result would be reversed for
institutions focused on rural outreach – group-based lending would likely be more
efficient. However, it is clear that more careful research is needed before we can
conclude that village banking is superior for sustainable outreach to rural populations.

The Latin American review also concluded that the principle value of village banking is
as a vehicle for offering non-financial services (as in the Credit with Education design).
This may be especially true for very poor women in rural areas, given all their non-
financial needs that constrain successful use of credit and savings services. Impact
research provides clear evidence of impacts on child health and nutrition that would not
occur without education added to the credit and savings services of village banking.
However, there is as yet little evidence of how offering this or other non-financial
services may enhance the bottom line of the local financial institutions. Good evidence
of impacts on client recruitment and retention and on portfolio quality and efficiency is
needed to gain and maintain the commitment of local financial institutions to provide
non-financial services.

9
“A Tale of Four Village Banking Programs: Best Practices in Latin America” by Glenn D. Westley (June
2004). Inter-American Development Bank, Sustainable Development Department, Best Practices Series
(Washington, DC).
VI. Contact information/ sources of information

For further information, please contact Chris Dunford, Freedom from Hunger, 1644 Da
Vinci Court, Davis, CA 95616 USA. Phone: 1-530-758-6200 x35. E-mail:
cdunford@freefromhunger.org. Also see the attachment for contact information for
the local financial institutions cited in this case study.