Strategic Alliances to Scale Up Financial Services in Rural Areas

This publication investigates two methods that rural finance institutions (RFIs) use for expanding financial services in rural areas, namely, strategic alliances and development partnerships. Both strategic alliances and development partnerships involve a relationship between a RFI and a more formal institution such as a bank, business, or NGO. A strategic alliance is essentially a business relationship between two firms, in which both partners share in the benefits and costs. Development partnerships on the other hand, involve one partner providing a benefit for another partner, without reciprocation. RFIs use both strategic alliances and development partnerships to achieve objectives such as effectively managing costs, overcoming resource and technology constraints, and enhancing competitive position.

The study focuses on the experiences of RFIs in Guatemala, Philippines, India and Ghana, in employing strategic alliances and development partnerships to overcome obstacles to market expansion and the introduction of new products. The experience of five types of institutions which developed strategic alliances with various up market financial institutions is reviewed, i.e. credit unions and cooperatives, rural banks, non-bank rural microfinance institutions, postal financial networks and umbrella/apex institutions.

Following an extensive executive summary and outline of the objectives and constraints facing the rural finance sector, a framework for understanding and assessing strategic alliances by applying a business world mentality to rural finance is elaborated. This perspective sees strategic alliances as ways to gain a financial benefit or marketing goal by relieving constraints due to resources, market presence or technology, reducing transaction and operating costs, or gaining a competitive advantage. With these objectives in mind, the study analyzes the following cases:

  • Strategic Alliances to Introduce New Products: International Remittances: Guatemala: FENACOAC Credit Unions as the delivery service institutions under the WOCCU IRnet international remittance program and Mexico: Caja Popular Mexicana
  • Strategic Alliances to Introduce New Products: Micro-insurance: Marketing yield-risk, property-loss and life insurance products in rural areas in India (Basix), and Gemini Life Insurance Company (GLICO), Rural and Community Banks and ARB Apex and Care-Ghana
  • Strategic Alliances to Expand an Existing Menu of Financial Services: The Philippines: TSPI Development Corporation and multiple alliances and Guatemala: planned merger between Genesis Empresarial and BancaSol
  • Development Partnerships: Guatemala: Development-oriented Partnerships Between Cooperative for Rural Development of the Western Region (CDRO) and Banco de Desarrollo Rural (Banrural), and the Philippines: Development Partnerships of New Rural Bank of San Leonardo

The findings of this study include:

  • Two manners in which RFIs can scale up access to financial services are by introducing new products and expanding the existing menu of services to a larger client base.
  • Rural markets need access to a variety of non-credit financial services which often only licensed banks, insurance companies, and regulated entities are permitted to provide.
  • With the increase in international migration and the accompanying dramatic increase in remittances, RFIs such as credit unions, rural banks, and non-bank-MFIs have seized the opportunity to form strategic alliances.
  • Strategic alliances with licensed insurance companies has allowed RFIs to overcome resource, technology, and regulatory constraints in order to gain this service both for their own operations and for their clients.
  • Development partnerships may be crafted between RFIs and formal sector banks to establish commercial feasibility of a future formal strategic alliance, while also exchanging knowledge about the dynamics and characteristics of administration of rural finance vs. formal sector finance.
  • Even fully licensed rural financial institutions can benefit from development partnerships with down market, typically informal financial organizations such as SHG, ROSCAS, FSAs, etc., to more quickly achieve critical mass in client base and scale of operations.

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