Community-Based Financial Organizations - A Solution to Access in Remote Rural Areas
Access to financial services is important for poor people, enabling them to better manage risk and take advantage of opportunities. The availability of financial services for poor households also affects the ability of countries to achieve the Millennium Development Goals: access to financial services reduces vulnerability and helps poor people increase their income, so families are able to improve their well-being, including access to better nutrition, health care, and education. Thus, improving access to financial services has become an important part of many World Bank development initiatives that seek to reduce poverty and improve the social and economic security of the poor.
The characteristics of demand for financial services, as well as the costs of providing those services, influence the types of financial services providers that can operate profitably in a given area. At one end of the spectrum, effective demand for financial services is low, with smallholder households mainly producing crops for consumption and few opportunities for off-farm economic activities. These characteristics produce a need for low-cost organizations that can cover the costs of intermediating small pools of capital for large numbers of customers with small transactions that satisfy their household cash management needs. At the other end of the spectrum, better and more diverse economic opportunities lead to a higher demand for financial services, which can be serviced profitably by higher-cost organizations intermediating larger pools of capital for a smaller number of customers who make larger transactions.
These characteristics of demand and cost are the principal reasons that banks and professionally operated microfinance institutions (MFIs) are not able to reach the majority of people living in the sparsely populated rural areas of many countries. Even MFIs with methodologies that enable them to reach the poor are seldom able to serve clients living in villages located far from secondary towns because transaction costs are too high relative to the small size of most transactions. Technologies such as mobile banking and point-of-sale devices in rural shops can deepen the reach of financial institutions that have a mandate or see a business opportunity in the provision of financial services to the rural poor but they are only emerging now and may not prove to be a universal solution.
In response to these realities, many development agencies including the World Bank have sought to develop Community-Based Financial Organizations (CBFOs) that could cost-effectively provide financial services to a clientele at the “low demand” end of the spectrum. Many projects provide grants to CBFOs to establish revolving loan funds (RLFs) to support the development
of rural livelihoods; it is expected that these funds will be repaid by initial recipients and then be recycled to other members. The experience has been that such funds usually decapitalize, benefiting few people and encouraging a culture of default. In recent years, however, several models of savings-led community finance have emerged that seem to offer better prospects for longterm sustainability than the credit-led RLF model. Savings-led CBFOs are those that initiate their financial intermediation activities with members’ savings and access external funds from bank-linked or donor-funded RLFs only after members have gained experience managing the lending of their own savings. In some cases, there is no external funding.