Community-Driven Development and Scaling-Up of Microfinance Services: Case Studies from Nepal and India

This discussion paper from the International Food Policy Research Institute takes a close look at two important microfinance programmes, that of the Nirdhan Utthan Bank Limited (NUBL) in Nepal and the Self-Help Group (SHG)-Bank linkage program of the National Agricultural Bank for Agriculture and Rural Development (NABARD) in India. Both these institutions have a common basis in local community groups, and both are seeking to expand their operations. The paper concisely explores the progress of their scaling-up efforts. It will be of interest to managers of microfinance institutions (MFIs) as well as policy-makers in both non-governmental organisations and in governments who are gearing a part of their economic policy toward encouraging banks to lend to the rural poor.

Both NUBL and NABARD groups use self-regulation, including peer selection, peer monitoring, and peer enforcement of contracts, as ways of gaining access to services not otherwise available to them. Loan products are closely driven by client preferences, as shown by strong demand to join the program, high repayment rates, and very low dropout rates. Moreover, the process of organising clients into groups has a significant empowering effect, giving voice, and attendant bargaining power, to an impoverished class. The author identifies standardisation of rules of conduct and basic service delivery mechanism, and, in the case of NUBL, standardisation of financial products themselves, as essential to swift replication in both India and Nepal. There are, however, significant differences between the NUBL groups and the NABARD groups: in Nepal, NUBL decided to provide financial services directly as there was a low density of pre-existing commercial banking services, while in India, NABARD adopted a “linkage” model connecting groups of women to pre-existing commercial banks, recognising that India’s commercial banking density is very high, with 99% of the population within five kilometres of a bank branch. NABARD is a government-led initiative, while NUBL was conceived as an alternative to state intervention. However, whether tied explicitly to government or not, both models benefit heavily from government financial policies which required banks to invest certain amounts in rural “priority sectors”. If this mandatory investment is removed, the basis of both the NUBL and NABARD groups will be seriously shaken, so it cannot be said that the two systems are independent of government measures.

Scaling-up services has been difficult in Nepal because of the difficulty of reaching the more remote regions, with similar problems in northeastern India. Not only that, but the ongoing Maoist insurgency in Nepal limits NUBL’s expansion and is explicitly directed against, at least in part, repayment of loans by the rural poor. A more supportive environment in India has enabled unprecedented expansion for the NABARD-supported groups. The author suggests that group federations, collections of self-help groups, be developed, so that they can become self-financing and self-regulating. Such federations have already been proven successful in other parts of India and could provide the means to free these groups from dependence on government subsidies both explicit and hidden.

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