Journal of International Development: Vol. 8, No.

2,145-152 (1996)

SUSTAINABLE BANKING WITH THE

POOR
LYNN BENNETT AND CARLOS E. CUEVAS
The World Bank

Abstract: This paper serves as an introduction to the collection of selected papers

from the Conference on Finance Against Poverty, held at Reading, England, March
1995, sponsored by the University of Reading, the University of Manchester, the UK
Overseas Development Administration, the Norwegian International Development
Authority, and the World Bank. The papers in this collection represent only a small
fraction of the more than 45 papers presented by scholars, practitioners and donor
agencies at the Conference. They have been selected in an effort to give a sense of
the richness and variety of the conference deliberations-and as expressing some of
the key themes and concerns which emerged. In this introduction-as at the conference-the importance of building sustainable financial systems for poor men and
women is emphasized. The main themes point to recognizing the heterogeneity of the
poor and its implications for program and institutional design, evaluating the limitations imposed by the policy and regulatory environment, and solving the challenges
posed by institution building.

Building sustainable financial services systems for poor men and women is of critical interest from three perspectives: first, from the point of view of financial sector
development, people who have not been integrated into the formal financial sector
because of low incomes, gender, ethnic identity or remote location often represent
a large and potentially profitable market for institutions that can develop ways to
reduce the costs and risks of serving them. Second, from the standpoint of enterprise formation and growth, the availability of stable sources of funding and
deposit services contributes to successful start up and operations of micro and
small enterprises. Third, from the perspective of poverty reduction, access to reliable, monetized savings facilities can help the poor smooth consumption over periods of cyclical or unexpected crises, thus greatly improving their economic
security. Once some degree of economic security is attained, access to credit can
help them move out of poverty by improving the productivity of their enterprises
or creating new sources of livelihood.
All three perspectives are reflected with diverse emphasis and approaches in the
papers included in this issue. We review here the main themes these papers
address, highlighting the areas of consensus as well as those of controversy, and
stressing those in which the discussions at the conference added the most value to
the state of the arts in the field.
0954-1748/96/02014548
0 1996 by John Wiley & Sons, Ltd.

146 L. Bennett and C. E. Cuevas

ACCESS AND SUSTAINABILITY

There is growing consensus on the premise that, once the start-up costs have
been incurred, financial services can be sold to the working poor without recurrent
subsidies under conditions that allow the financial intermediary to become selfsustainable. What conditions favour, or deter, the attainment of self-sustainability
and effective outreach is the central question guiding the work of many
researchers, policy makers and practitioners in the field. A key question in this
regard is how to move from a one-way flow of grant funds to project beneficiaries
(finance as charity) to reciprocal contracts between institutions and clients who
buy financial services and must agree to pay for them (finance as business).
In addition to the challenge of clearly distinguishing business from welfare,
there may be instances where barriers created by remoteness, poor infrastructure,
a stagnant economy, illiteracy or social factors like caste and gender render selfsustainability unattainable in a reasonable time frame. The role and rationale of
subsidies, recurrent or time-constrained, emerge as central questions demanding
response.
FINANCIAL AND SOCIAL INTERMEDIATION

Another subject of current debate is that overcoming the many barriers that have
prevented large potentially productive segments of the population from access to
formal financial institutions may require more than conventional financial intermediation. Integrating under-served groups into the formal financial markets may
entail some measure of up-front investment to develop the human resources (confidence, knowledge, skills and information) among the clients, and often to build
local structures that help them link with financial institutions. It also involves
investing in changing the skill mix and operating procedures of the financial institution seeking to expand its outreach. This process of developing new markets
among the working poor is thought of as social intermediation.
Social intermediation is distinct from the provision of social welfare services in
that social intermediation enables beneficiaries to become clients able to enter into
a contract involving reciprocal obligations. The level, nature and time horizon of
the investment required for social intermediation varies with the barriers facing a
given target group. It is also likely to depend on the level of responsibility in financial
intermediation that the client group is required or willing to acquire.
DEFINING THE TARGET GROUP THE POOR AND THE POOREST

Recognizing the heterogeneity of the poor is of crucial importance to properly

identify best practice design features for poverty-alleviation programmes. Programmes and institutions that may be judged successful in helping households
rapidly climb above the poverty line and increase their incomes from successive
loans, may be considered failures if the standards of evaluation are set in terms of
raising and protecting the incomes of the poorest (Hulme and Mosley, 1996).
See the excellent discussion on this subject in Hulme and Mosley (19%).

Sustainable Banking with the Poor 147

The distinction between the working poor and the very poor in Robinsons
terminology.*or the poor versus the core poor in Hulme and Mosleys, is found
explicitly or implicitly in several of the papers included in this selection. Kimanthi
Mutua refers to this distinction when analysing the evolution of K-REP (Chung,
1996), recognizing the difficulties of lending to, and collecting from, households
that would be more appropriately served as welfare recipients of transfer payments,
instead of as bankable-poor clients. Likewise, Ghate et al., (1996) discuss the differences in behaviour and response between subsistence (livelihood) enterprises
and the more commercial microenterprises they studied in the Philippines.
The implications of adequately defining the target clientele are not only a matter
of using the correct standards of performance for programmes and institutions,
but obviously affect the selection of appropriate instruments and mechanisms in
poverty alleviation and income enhancement efforts. While there are now many
examples of programmes and institutions serving the working poor with financial
services in a self-sustainable manner, the very poor, the destitute and the disabled ought to be beneficiaries of transfer programmes that do not entail creating
an additional liability for the recipient (Robinson, 1996; Hulme and Mosley, 1996).
A first question that emerges from this target-group definition is where to draw
the line between the viable and the non-viable. The answer offered by Robinson
(1996) is the ability to repay, i.e., a practical response based on the ability of
clients to reveal their viability by meeting their contractual obligations. The targetgroup definition becomes, for the institution, a matter of anticipating or, predicting that ability, and adjusting or diversifying its portfolio as more is learned about
the client population in the course of its operations.
The findings presented by Hulme and Mosley (1996) suggest that successful
institutions contributing to poverty reduction are particularly effective in improving
the status of middle and upper income poor. Furthermore, their impact on the
clients income seems to be directly related to the level of income, which would
reinforce the tendency for these programmes to concentrate in that segment of the
poor in order to preserve their viability. A related consequence is that refinements
and improvements in finance-for-the-poor technologies remain focused on the
middle and upper segment of the poor, leaving the poorest behind.
The recognition of the heterogeneity of the poor should lead to a further phase
of institutional innovation and experimentation, as Hulme and Mosley advocate,
to possibly deepen the downward reach of financial services. On the other hand,
there is still a large unsatisfied demand for financial services among the bankable
poor which could be met through mainstreaming the known successful
approaches. There is much to be accomplished in properly understanding, and
then replicating, adapting and adjusting, models of sustainable provision of financial
services to poor clients.
OVERCOMING AND REFORMING THE POLICY ENVIRONMENT
A range of macro-policy issues including depoliticization, ownership and governance, in addition to regulatory issues ought to be addressed, Ramola and Mahajan
Robinson (1996).

148 L. Bennett and C. E. Cuevas

argue, before workable and sustainable approaches can be developed to improve
the access of the rural poor to financial services? Indeed, whether there are absolute
preconditions for successful financial intermediation with the poor may still be a
matter of debate. There is little doubt, however, that a conducive policy and regulatory environment will greatly facilitate the emergence and improve the effectiveness of programmes and institutions servicing low-income clients.
While it has been found that microfinance institutions are able to operate successfully under a wide range of circumstances (Christen et al. 1994), this finding
cannot be interpreted to mean that successful performance is environmentneutral. As Pederson (1996) correctly points out, the performance of the same
institutions in a less (or more) favourable scenario is unobservable, hence a judgement as to the relevance of the policy and regulatory environment is not possible
based solely on the presence of seemingly effective institutions in a variety of
situations.
The policy reforms, especially interest-rate liberalization, that preceded the
emergence of the BRI Unit Desas in Indonesia have been well documented. Likewise,
for microfinance institutions entering the regulated financial sector, there seems to
be a set of necessary conditions encompassing interest-rate liberalization, the
elimination of barriers to entry, and the establishment of adequate supervisory
and regulatory agencies and rules for these specialized institutions?
The remaining questions on this subject refer to the degree to which the policy
and regulatory environment impinge upon the performance of microfinance institutions not necessarily operating as regulated financial institutions. The ability to
function in a negative environment may come at considerable costs for clients,
institutions and sponsors. Circumventing regulations and substituting for non-existent markets, institutions and contracts involve substantial transaction costs, and
often result in rationing out sectors of the client population which the institutions
and programmes want to serve. Consensus seems to exist on the need for careful
identification and analysis of the environmental features which impact the most on
the outreach and sustainability of institutions and programmes working with the
poor.

THE CHALLENGES OF INSTITUTION BUILDING

The emphasis on sustainability has brought in its train a much greater attention to
the importance of institution building and this is evident in the papers assembled
here. It is now well recognized that it is not sufficient just to reach the poor with
one or two doses of credit-to provide them with an asset that can generate sufficient income to move them out of poverty. This was the logic of Indias massive
Integrated Rural Development Programme (IRDP), an effort critiqued by several
of the presenters at the conference: and one widely recognized as having greatly
weakened Indias commercial banking system by mixing charity (and political
patronage) with business, undermining client repayment discipline and completely
Ramola and Mahajan (19%).
4Cuevas(1996).
Copestake (1995); Ramola and Mahajan (1996).

Sustainable Banking with the Poor 149

neglecting the institution building dimension. As the paper by Ramola and Mahajan
(1996) documents, after more than 15 years of IRDP, the poor in India still have
no reliable access to formal financial services that meet their demands (for savings
and consumption-smoothing loans rather than just loans for productive assets).
They still face high transaction costs and rationed access, and most of the commercial banks are no closer to understanding the poor as customers or having appropriate products and processes available than they were when IRDP
began-though with collection performance for IRDP loans at between 20 and 30
per cent, many of them are much closer to insolvency.
The shift from transferring resources to the poor to an emphasis on building sustainable institutions that will be there to serve the poor long after donor fashions
have changed or government exchequers have run dry is certainly a healthy one.
However, as the paper by Montgomery6 points out, the emphasis on sustainability
can produce many different institutional outcomes-and not all of them are positive. His comparison of the SANASA Thrift and Credit Co-operative Societies in
Sri Lanka with BRACs Rural Development Programme in Bangladesh reveals
two contrasting approaches to group-based lending and the use of peer pressure
that grow out of two very different institutional structures. Both institutions have
good repayment performance. But SANASA is highly decentralized with most of
the power and responsibility for financial management vested in the groups themselves, while the BRAC Village Organizations (VO) are controlled by the NGOs
staff-whose performance is evaluated on the basis of the VO repayment
performance.
In addition, SANASA is structured in such a way as to allow the local societies
to develop financial products which suit their needs-which often include access
to short-term loans to tide them over the sometimes sharp fluctuations in income
faced by the poor. Hence, a wide range of options are available to SANASA
members who can avail of various types of savings instruments in addition to
credit for both production and consumption purposes and instant loans
(approved overnight) for household emergencies. This is in sharp contrast to
BRAC where the main focus is on credit for productive purposes, where members
have no immediate access to savings and where even loans from the Group Trust
Fund (built up from member savings) are controlled by BRAC staff and can only
be accessed after lengthy procedures. BRAC also allows only weekly repayments
while SANASA offers a variety of term structures and repayment plans. The
absence of flexibility or what the author calls protective mechanisms for the poor
in BRACs approach has led to a situation of institutionalized suspicion and
strong incentives for the staff to exclude the poor whose vulnerability to income
shocks make them more likely to miss weekly repayments. This contrasts with
SANASA where the range of financial options available actually reduces the risk
of admitting poor members and permits an atmosphere of mutual trust and support.
As an institutional form, group-based approaches received much attention at
the conference and the variety of these approaches reveals that practitioners have
6Montgomry (1996).
Chung (1996). See in this issue Chung; Schmidt and Zeitinger: Bennett er nl.. Also the 1995 conference
papers by Mosley; Jazayeri; Armendariz de Aghion; Harper; Blowfield and Kimila; Ryan: Dave1 and
Wilson.

150 L. Bennett and C. E. Cuevas

moved beyond simply replicating a few well known models to experiment with a
range of institutional arrangements involving groups. Almost all of these arrangements include a major role for some type of an NGO as social intermediary to
identify existing affinity groups or help communities to form their own self
selected groups. However, as the Montgomery paper shows, there are important
differences in the way NGOs see this role and these differences appear to have
significant effects on group financial-and social-performance.
These differences in NGO self-concepts and the way they play out in the allocation of risk and responsibility between the group and the NGO are the subject of
the paper by Bennett et al. (1996). This paper explores another important variable:
the source of lending capital. Does it come from group member deposits (at least
in a substantial proportion)? From a bank (on commercial terms)? From a donor?
From the government? The answer to this question helps to define the role of the
NGO vis d vis the group- and also appears to have a significant impact on the
financial performance of the group. When the donor and government sources predominate, the primary locus of risk in the intermediation system is with the donors
or the government. Despite the ideology of group liability, in most cases it is either
the donor agency or the government which loses money in cases of default. Hence,
the NGO which plays the role of social (but not financial) intermediary for these
funds tends to feel accountable to either the donors or the government. As Von
Pischke (1996) points out, the NGOs reporting system in such cases tends to
report on what the funders care about (the smiling faces of poor women borrowers)
rather than what a genuine financial intermediary would need to know (liquidity,
solvency, profitability and efficiency) to maintain and improve its performance.
In contrast, when the primary source of lending capital comes from either member savings or formal financial institutions (at market rates) or some mix of the
two, then the locus of risk is proportionately shared by the group members and/or
the banks. The NGO in this case may play the role of financial intermediary
between the banks and the groups or it may simply facilitate the linkage and allow
the groups to function as the intermediary between their members and the banks.
But in all of these cases, the role of the NGO and its sense of accountability is
likely to be very different and much more oriented to the bottom line. Of the
five group-based systems covered by the Bennett et al. (1996) study, the three that
relied primarily on donor/ government funds for lending capital showed extremely
poor financial performance with default rates of over 50 per cent and high lending
costs. The two systems that performed well (with repayment over 95 per cent and
much lower lending costs) were the two systems that relied on member savings for
loan capital and where the NGO supported the groups sense of ownership and
accountability for their own financial performance.
The increasing demand on NGOs to be more concerned about achieving financial sustainability-and some of the resultant paradoxes surrounding the role of
NGOs in banking with the poor-was the subject of a number of presentations.
Schmidt and Zeitinger based on their empirical study of 15 NGOs involved in
microfinance in Latin America, conclude that NGOs have no long-term role as
providers of microfinance and that their goal should be to transform themselves
into banks-on the model of the successful metamorphosis of Prodem into
Robinson (1996);Schmidt and Zeitinger (1996); Von Pishke (1996); Dichter (1996).

Sustainable Banking with the Poor 151

Bancosol in Bolivia. Von Pischke is less rigid in his judgment on NGOs, seeing
room in the microfinance field for a variety of players besides banks-as long as
all institutions offering financial services make the effort to live up to the standards of transparency and accountability in reporting which he outlines.
At the other end of the continuum is Dichter, who questions the current donor
fascination with sustainability as a primary goal for microfinance NGOs. He
argues that, if the ultimate goal is sustainability, then the commercial institutions
are far better placed to achieve this goal than the NGO, because it is compatible
with their corporate mission and world view. NGOs should not be forced to forsake their basic goal of assisting the poor when it is not compatible with the full,
level 4 financial sustainability. Even more important, they should not be led into
deluding themselves and their donors that they can, in all cases, in all settings and
with even the poorest clients, achieve the brass ring of sustainability without fundamental compromises to their social outreach goals. More than any of the other
authors in this volume, Dichter unveils the tensions and contradictions which currently confront the microfinance field and exposes the conflicting paradigms (compassion versus capitalism) with which NGOs working in this field are struggling to
come to honorable terms.
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152 L. Bennett and C. E. Cuevas

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