A Tale of Four Village Banking Programs

Village Banking (VB) has proven to be one of the best practices in micro-finance for rural areas, not only in terms of its assistance to the rural poor, but also in terms of sustainability. A study carried out by the Inter American Development Bank (IADB) in Latin America in 2004 confirms this. This publication summarises the results of this study, compiling best practices in village banking through the analysis of four case studies in Nicaragua, Mexico and Bolivia.

Village banking was introduced in Bolivia in the 1980s as a very rigid model. It involved fixed loan terms and initial loan sizes, mandatory weekly repayment meetings, working capital loans only, forced savings at a prescribed pace, no interest on savings, no access to savings for clients who remained in the village bank and graduation of the entire village bank after three years. Since that time many of these rigid characteristics have been relaxed as village banking institutions have increased their drive towards greater sustainability and scale while maintaining their focus on poverty.

Although village banking has relaxed many of its original rigidities, it still has not gone far enough. This paper examines each major element of the village banking technology and how it has been liberalised so far. It then analyses how this liberalisation process may be usefully carried forward in the future and makes numerous recommendations relating to practice and policy to achieve this.

The final chapter examines the role of non-banking services in village banking and suggests that providing such services is not incompatible with financial sustainability. It also concludes that governments and donors looking to strengthen rural financial systems should consider the village banking model very seriously. Although village banks may not overtly give credit for farming, CRECER in Bolivia estimates that 40% of its clients engage in at least some agricultural activities and that 20-30% engage exclusively in these activities. Hence village banks do reach farm families.

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