MICROBANKING BULLETIN - Microfinance Information Exchange

FEATURE ARTICLESA Business Model for Going Down Market:Combining Village Banking and Credit UnionsKathleen Stack and Didier ThysFew microfinance institutions consider going downmarket (serving poorer clients) as a good businessopportunity. Instead, they broaden services toreach a better-off clientele, or they say financialviability must be compromised to reach the poorest,or they reason that microfinance cannot help thevery poor, who need different types of socialservices. Even those who argue that breadth anddepth of outreach are compatible (with a fewnotable exceptions) have yet to demonstrate thatlarge numbers of the truly poor can be reachedviably.But what if there was a strategy that could reachvast numbers of the poorest and make goodbusiness sense? This paper presents a businessmodel for profitably serving the poorest segments ofthe microfinance market, along with someencouraging preliminary results.Recent Trends in Reaching the PoorestThe trend in the microfinance industry is towardcommercialization to ensure long-termsustainability. Unfortunately, this trend is coupledwith movement away from serving the very poor.This is because, in the search for financial viability,institutions are going up market. They have either:1) increased average loan sizes by growing withtheir customers; and/or 2) developed new, largeloanproducts for new markets.Using average loan size as a proxy for depth ofoutreach, microfinance success stories, such asBRI and BancoSol, are not serving particularly poorclients. The average loan size of each of theseinstitutions is more than US$500. In fact,BancoSol’s average outstanding balance has beencreeping up over the years so that as of 1998, itstood at US$914. 7Some might say that these large, financiallysustainable institutions are still reaching asignificant number of poor borrowers. But a studyof five Bolivian MFIs found that this is not so. 8 Only3 percent of BancoSol’s borrowers—900 people—7 The data are from a recent unpublished study on cooperativesand microfinance, Jeffrey Ashe et al. USAID, 1998.8 Navajas, Sergio, Mark Schreiner, Richard L. Meyer, ClaudioGonzalez-Vega and Jorge Rodriquez-Meza, “Microcredit and thePoorest of the Poor: Theory and Evidence from Bolivia", WorldDevelopment 28(2): 333-346 (1999).were considered to be among the poorest andindigent, and the total number of very poor reachedby all five institutions in the study was 2,600.The StrategyFreedom from Hunger, a US-based microfinancesupport organization, designed Credit withEducation to serve poorer segments of the marketsustainably. This integrated financial andeducational product is intended to be financiallyviable while reducing the causes of chronic hungerand malnutrition in rural households. It combines:1) group-based lending and savings services(village banking) for poor women with 2) low-cost,high-impact education sessions in nutrition, healthand better business.To achieve large-scale outreach with a financialproduct designed for very poor people, Freedomfrom Hunger has partnered with credit unions inseveral countries. We decided to collaborate withcredit unions for the following reasons: Outreach: Credit unions supply more lendingand savings services than any other type offinancial institution with the exception of banks.They are widespread, particularly in rural areas,and often have regional and national creditunion networks that can promote efficientproduct dissemination. Mission and Ownership: Credit unions werecreated to improve the welfare of their membersand communities through financial services. Asmember-owned institutions, credit unionsmaintain a commitment to both social andfinancial goals. Financing: They have the capacity to financenew products from internally generatedresources (savings). The savings-firstapproach of the credit unions is an attractivelong-term, self-financing feature. Multiple Products: Credit unions offer multipletypes of loan products. This product menumitigates against the risk of portfolioconcentration that occurs with MFIs that offeronly one or two types of loans. Also, as a creditunion client, a poor member can graduate froma group-based product to other credit unionproducts when and as the need arises.MICROBANKING BULLETIN, SEPTEMBER 2000 9