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Community-based Financial Organizations: A Solution to Access in Remote Rural Areas? - English

Community-based Financial Organizations: A Solution to Access in Remote Rural Areas?

This paper begins from the premise that access to financial services is important for poor people, enabling them to better manage risk and take advantage of opportunities. It also assumes that the availability of financial services for poor households will affect the ability of countries to achieve the Millennium Development Goals, since access to financial services reduces vulnerability and helps poor people increase their income. This enables them to improve their well-being, including access to better nutrition, health care, and education.

However, the paper stresses that in many countries today, the rural poor are still left out of formal markets for financial services and frequently rely on informal mechanisms at the village level, such as moneylenders, supplier credit, and small savings and credit groups. A poor regulatory environment or policy framework, deficient financial infrastructure, including financial institutions, and a lack of institutional know-how contribute to the dearth of rural financial services. Even when an appropriate enabling environment exists, however, it may be difficult for financial institutions to achieve scale economies and to cover their costs when they are providing financial services to poor clients who are spread out across large distances.

This paper reviews the evidence to date on the sustainability of Community-based Financial Organzations (CBFOs), with a view toward determining whether they are a viable option for the provision of financial services to the rural poor. CBFOs are defined here as autonomous organizations owned and managed by members of a particular community. The paper states that they differ from the “village banks” in Latin America and the “solidarity groups” in countries such as Bangladesh in that such groups are usually not autonomous; they have been set up by MFIs as a cost-effective way to provide services to the poor.

Furthermore, that paper notes that the membership of CBFOs varies from small groups with as few as five members to entities with hundreds, or even thousands, of members. They may be informal, registered as associations or cooperatives, or part of a larger village organization, such as a company or women’s organization. The central characteristics of these entities, which drive their governance and management, are their financial and institutional independence, and mobilization and management of their own resources. The paper suggests that for CBFOs located in remote rural areas, lack of professional management can be a defining characteristic, because such groups are rarely able to employ staff who are skilled in the management of a financial organization.

The paper begins by discussing the objectives, key issues, and methodology used in its production before providing an overview of CBFOs. In its assessment of these organisations, the remainder of paper is based around the following themes: