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The New Microfinance Handbook : A Financial Market System Perspective


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Casual labor
Harvest
Sale of livestock
Remittance
School fees
House repairs
Agricultural inputs
Medical expense
Loan repayment
The New 
Microfinance
Handbook

On microfinance and The New Microfinance Handbook
“Financial services help to smooth cash flows, build assets, invest productively, and, importantly, man-
age risks. Increasing the outreach of financial services that are affordable and meet the varied needs of 
poor women and men can contribute significantly to economic development and overall quality of life, 
key objectives of practitioners and policy makers alike.”
—Maria Otero, former CEO, Accion International
“The journey from microfinance to financial inclusion began in earnest when we understood that cli-
ents need diverse services such as savings, payments, and insurance, as well as loans. The New 
Microfinance Handbook reflects a lesson we learned many years ago—that sharing knowledge and best 
practices is so important to help providers, policy makers, and others to continue to innovate, adapt, 
and scale financial services in order to add real value to customers in a responsible way.”
—H.R.H. Princess Máxima of the Netherlands, The UN Secretary-General’s Special Advocate for 
Inclusive Finance for Development (UNSGSA)
The New Microfinance Handbook fills a critical gap in the current literature on financial inclusion. I am 
particularly pleased with the explicit focus on consumers and their needs—this, together with the 
onset of technology-based delivery models, has been the most important shift in the microfinance field 
over the past 15 years. I am sure that by taking the financial ecosystem approach and compiling all the 
current trends into one volume, this book will serve as a reference for the large and growing financial 
inclusion community for years to come.” 
—Brigit Helms, author of Access for All
“Financial services that support asset building, investment, and risk management are critical for people 
of all ages in frontier and postconflict environments. In The New Microfinance Handbook, the authors 
highlight the importance of understanding client needs and the need for a more inclusive financial 
sector. This work provides an excellent resource for navigating a diverse and rapidly changing micro-
finance sector.” 
—President Ellen Johnson Sirleaf, Liberia
“Poor people’s lives are complex; the goods, services and amenities that they need to escape from 
poverty— and the means by which they get them—are equally diverse. One-size-fits-all solutions are an 
illusion. Our challenge as development policy makers, researchers, and practitioners in all fields—be 
that in finance, agriculture, health or education—is to understand and respond to this complexity in 
ways that help build diverse, resilient socioeconomic systems that are able to serve the needs of the 
poor, sustainably and at scale. 
The New Microfinance Handbook reflects this challenge. It moves beyond the original Microfinance 
Handbook’s focus on retail microfinance to deal with the imperative of understanding and strengthen-
ing the wider financial ecosystem, which is essential to making financial markets genuinely work 
 better—inclusively and responsibly—for poor men and women. This shift has significant implications 
for development agencies, requiring ‘smarter’ subsidies, different types of partners, and more facilita-
tive or catalytic interventions.”
—Robert Hitchens, Director, Springfield Centre, United Kingdom

The New 
Microfinance
Handbook
A Financial Market System Perspective
Edited by Joanna Ledgerwood 
with Julie Earne and Candace Nelson


© 2013 International Bank for Reconstruction and Development / The World Bank
1818 H Street NW, Washington DC 20433
Telephone: 202-473-1000; Internet: www.worldbank.org
Some rights reserved
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This work is a product of the staff of The World Bank and external contributors. Note that The World Bank does not necessarily own 
each component of the content included in the work. The World Bank therefore does not warrant that the use of the content contained 
in the work will not infringe on the rights of third parties. The risk of claims resulting from such infringement rests solely with you.
The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board 
of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this 
work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the 
part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries.
Nothing herein shall constitute or be considered to be a limitation upon or waiver of the privileges and immunities of The World 
Bank, all of which are specifically reserved.
Rights and Permissions
This work is available under the Creative Commons Attribution 3.0 Unported license (CC BY 3.0) http://creativecommons.org/licenses/
by/3.0. Under the Creative Commons Attribution license, you are free to copy, distribute, transmit, and adapt this work, including for 
commercial purposes, under the following conditions:
Attribution—Please cite the work as follows: Ledgerwood, Joanna, with Julie Earne and Candace Nelson, eds. 2013. The New 
Microfinance Handbook: A Financial Market System Perspective. Washington, DC: World Bank. doi: 10.1596/978-0-8213-8927-0. 
License: Creative Commons Attribution CC BY 3.0
Translations—If you create a translation of this work, please add the following disclaimer along with the attribution: This translation 
was not created by The World Bank and should not be considered an official World Bank translation. The World Bank shall not be liable 
for any content or error in this translation.
All queries on rights and licenses should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, 
DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org.
ISBN (paper): 978-0-8213-8927-0
ISBN (electronic): 978-0-8213-8928-7
DOI: 10.1596/978-0-8213-8927-0
Cover Image: Embroidery by Kaross Studio, Letsetele, South Africa. Used with permission from Gerhard Coetzee, who commis-
sioned the artwork. Non-English terms in the image and their translations are as follows: ABSA: Bank; KAART: Card game; LOBOLA: 
Negotiated payment before a wedding; SAB: South African Breweries; STOKVELA: ROSCA (Rotating Savings and Credit 
Association).
Cover design: Naylor Design
Library of Congress Cataloging-in-Publication Data
The new microfinance handbook : a financial market system perspective / edited by Joanna Ledgerwood, with Julie Earne and 
Candace Nelson.
  p. cm.
 Includes bibliographical references
 ISBN 978-0-8213-8927-0 (alk. paper) — ISBN 978-0-8213-8928-7
 1. Microfinance. 2. Financial institutions. 3. Poor–Finance, Personal. I. Ledgerwood, Joanna. II. Earne, Julie. III. Nelson, Candace. 
IV. World Bank.
 HG178.3.N48 2012
 332—dc23
2012035606

CONTENTS
Foreword xv
Preface xvii
Acknowledgments xix
About the Authors 
xxi
Abbreviations xxiii
Introduction 1
PART ONE.  UNDERSTANDING DEMAND AND THE  
FINANCIAL ECOSYSTEM 

13
Chapter 1. The Evolving Financial Landscape 
15
Joanna Ledgerwood and Alan Gibson
Chapter 2. Clients 
49
Stuart Rutherford, Daryl Collins, and Susan Johnson
Chapter 3. The Role of Government and Industry in  
Financial Inclusion 

71
Stefan Staschen and Candace Nelson
Chapter 4. The Role of Donors in Financial Inclusion 
97
Mayada El-Zoghbi and Barbara Gähwiler
Chapter 5. Measuring Financial Inclusion and  
Assessing Impact 

113
Joanna Ledgerwood
Contents 
v

PART TWO.  FINANCIAL SERVICE PROVIDERS 
147
Chapter 6. Community-Based Providers 
149
Candace Nelson
Chapter 7.  Institutional Providers 
171
Joanna Ledgerwood
PART THREE.  FINANCIAL SERVICES AND DELIVERY  
CHANNELS 197

Chapter 8. Savings Services 
199
Joanna Ledgerwood
Chapter 9. Credit 
213
Joanna Ledgerwood and Julie Earne
Chapter 10. Agricultural Finance 
231
Calvin Miller
Chapter 11. Insurance 
249
Craig Churchill
Chapter 12. Payment Services and Delivery  
Channels 271
Joyce Lehman and Joanna Ledgerwood

Chapter 13. Beyond Products: Building Integrated  
Customer Experiences on Mobile Phones 

299
Ignacio Mas
PART FOUR.  INSTITUTIONAL MANAGEMENT FOR  
SCALE AND SUSTAINABILITY 

319
Chapter 14. Monitoring and Managing Financial and  
Social Performance 

321
Joanna Ledgerwood, Geraldine O’Keeffe, and Ines Arevalo
Chapter 15. Governance and Managing Operations 
351
Peter McConaghy
vi 
The New Microfinance Handbook

PART FIVE.  SUPPORTING FINANCIAL INCLUSION 
377
Chapter 16. Funding 
379
Julie Earne and Lisa Sherk
Chapter 17. Regulation 
413
Kate Lauer and Stefan Staschen
Chapter 18. Infrastructure and Outsourced Support Services 
437
Geraldine O’Keeffe, Julie Earne, Joakim Vincze, and Peter McConaghy
Chapter 19. Building Inclusive Financial Markets 
459
David Ferrand
Index 479
Boxes
I.1 

A Market This Big Needs Many Types of Providers  5
I.2 
Latest Findings from Randomized Evaluations of Microfinance  6
1.1 
From Microfinance to Financial Inclusion  17
1.2 
Youth Financial Services: An Opportunity for the Future  18
1.3 
 Gambian Family Structure and Impact on Financial Behavior  
and Demand  19
1.4 
The Financial Service Needs of the Poor in Mexico  21
1.5 
Reaching the Poorest: Lessons from the Graduation Model  22
1.6 
Religion and Caste in India  23
1.7 
 The Embeddedness of Financial Service Use in Gender Norms  
in Kenya  24
1.8 
Understanding the Financial Market System  28
1.9 
The Range of Providers in Sub-Saharan Africa  30
1.10 
Savings-Led Financial Services in Bangladesh  31
1.11 
Key Rules and Supporting Functions for Savings Services  33
1.12 
Formal and Informal Rules  34
1.13 
Understanding Informal Rules through Financial Landscapes  35
1.14 
Potential of Mobile Banking  42
1.15 
New Branchless Banking Business Models  43
2.1 
Income Volatility, Week-by-Week and Year-by-Year  53
2.2 
Cash Flow Management Given Volatile Seasonal Income  55
2.3 
Ramna’s Top-Ups   56
2.4 
Enayet’s Foot  57
2.5 
Building a Home Little by Little  60
Contents 
vii

2.6 
How MFI Loans Are Used in Bangladesh  62
2.7 
Daisy’s ROSCA  65
3.1 
Bank and Retail Network Partnership   73
3.2 
Encouraging Stakeholders to Adopt New Rules  76
3.3 
Policy for Microinsurance  76
3.4 
Financial Capability Strategies  77
3.5 
Financial Literacy in the Russian Federation  77
3.6 
Financial Inclusion in Mexico  78
3.7 
Financial Inclusion in India  80
3.8 
 Negotiating a Special Microfinance Law in Uganda:  
The Outcome of Competing Interests  83
3.9 
The Maya Declaration  84
3.10 
The G-20 Principles for Financial Inclusion  85
3.11 
SEEP’s Toolkit for Policy Advocacy  87
3.12 
Battling Over-Indebtedness in Azerbaijan  90
3.13 
Financial Education as Part of the Business Model  92
4.1 
 Shaping Intervention from an Understanding of the Market  
System 105
4.2 
Financial Sector Deepening Kenya (FSD Kenya)  106
5.1 
Using Data to Increase Financial Inclusion  114
5.2 
Evidence of Over-Indebtedness through Research  116
5.3 
Microfinance Information eXchange  118
5.4 
Savings Groups Information Exchange  120
5.5 
Who Uses Landscape Supply Data?  121
5.6 
Core Indicators of Global Findex  122
5.7 
FinScope Surveys  123
5.8 
Interpreting Financial Access Strands  125
5.9 
Cash-In, Cash-Out: Financial Diaries in Malawi  127
5.10 
Financial Landscapes in Kenya  129
5.11 
Livelihood Landscape Studies  130
5.12 
Measuring Outcomes of Facilitating Savings Groups  131
5.13 
The Changing Focus of Impact Assessment  132
5.14 
Participatory Rapid Assessment   135
5.15 
The Difficulty of Proving Causation  137
6.1 Ghana’s 
Susu Collectors 152
6.2 
Beyond Carrying Cash: Informal Money Transfer Systems  153
6.3 
Rural ASCAs in India  155
6.4 
Savings Groups and Other Activities  159
6.5 
Paths to Savings Group Replication  160
6.6 
Fee-for-Service: Variations on a Theme  161
viii 
The New Microfinance Handbook

6.7 
Bank Linkages through Mobile Phones  162
6.8 
Banks as Facilitators  163
6.9 
Individuals as Facilitators  164
6.10 
Self-Help Groups: A Holistic View  166
6.11 
Financial Service Associations in Kenya  167
7.1 
Reflections on Member-Owned Financial Service Provision   176
7.2 
Transformation from an NGO to a Deposit-Taking Institution   179
7.3 
NBFIs in India   180
7.4 
Grupo Elektra and Banco Azteca in Mexico   181
7.5 
 Patrimonio Hoy: Housing Microfinance That Addresses Market  
Opportunities   182
7.6 
Rural and Community Banks in Ghana   183
7.7 
Post Office Banks in India   184
7.8 
Increased Financial Inclusion through Postal Savings Banks   185
7.9 
Privatization: The Experience of Khan Bank in Mongolia   187
7.10 
Bank Rakyat Indonesia   187
7.11 
Subsidiary Model in Practice: ACCION-Ecobank Partnership   188
7.12 
Microfinance Networks and Commercial MFIs   189
7.13 
Linking Different Types of Institutions   191
7.14 
Allianz in West Africa   193
7.15 
Western Union and MoneyGram   194
8.1 
Savings Patterns in India  201
8.2 
 Savings Constraints and Microenterprise Development: Evidence 
from Kenya  202

8.3 
Inspiring Trust  204
8.4 
Savings Services—Not Only about Products  206
8.5 
Saving for Education  208
8.6 
Borrowing to Save  208
8.7 
Nicaragua—Promoting Agriculture Savings  209
8.8 
Grameen’s Deposit Pension Scheme (GPS)  210
9.1 
Islamic Finance in Practice  216
9.2 
The Flat-Rate Method  219
9.3 
Declining Balance Method  220
9.4 
Equating Declining Balance and Flat-Rate Methods  221
9.5 
The Effect of a Change in Loan Fees and Loan Terms  223
9.6 
Financing Education through Human Capital Contracts  225
9.7 
Cow Leasing  226
9.8 
Affordable Housing in Ghana   228
10.1 
The DrumNet Project  238
10.2 
Factoring to Support Agriculture  240
Contents 
ix

10.3 
Warehouse Receipt Systems: Lessons from Niger  242
10.4 
Crop Receivables  244
10.5 
Heifer International  245
10.6 
FONDECO: Microfinance Innovations along the Value Chain  246
11.1 
Key Insurance Terms  251
11.2 
 AKAM’s Experience with Village-Based Health Microinsurance  
in Pakistan  253
11.3 
IFFCO-Tokio’s Bundled AD&D Coverage  255
11.4 
Collaborating with a Utility Company in Colombia  257
11.5 
Savings Completion Insurance Offered by TUW SKOK  262
11.6 
Microfund for Women’s “Caregiver” Product  263
11.7 
Public-Private Partnerships and Health Microinsurance in India  264
11.8 
 Index Insurance and Technology: The Case of Kilimo Salama, 
Kenya 265

12.1 
Trends in the Average Cost of Remittance Services  273
12.2 
Mobile Money Innovations in Microinsurance in the Philippines  274
12.3 
Mobile Money in Papua New Guinea  275
12.4 
Glossary of Terms Related to Alternative Delivery Channels  276
12.5 
Expanding Rural Finance in Sri Lanka  279
12.6 
World Food Programme Card Pilot, 2009  281
12.7 
Cardless ATM Transactions  281
12.8 
Payment Terminals in the Russian Federation  282
12.9 
 Urwego Opportunity Bank’s Mobile Bank and Open  
Sky System  283
12.10  M-PESA Reaching Scale with Mobile Money  285
12.11  Banking with a Mobile Phone: The Customer Experience  286
12.12  Third-Party Providers: New Business Models  289
12.13  bKash Ltd.  290
12.14  Branchless Banking in Brazil  291
12.15  From Payment Terminals to Multiple Services  292
12.16  Cost of Managing Agent Liquidity  293
13.1 
IFMR Trust in India  303
13.2 
What Are the Attributes of Success in Adjacent Sectors?  305
14.1 
Performance Monitoring of Savings Groups  323
14.2 
Software Application Controls  327
14.3 
Universal Standards for Social Performance Management   341
14.4 
Social Audit Tools   346
15.1 
 Board Consideration for NGO MFIs Transforming into  
Regulated Institutions   353
15.2 
Principles of Well-Designed Incentive Schemes   357
x 
The New Microfinance Handbook

15.3 
Client-Focused Product Design in Practice   359
15.4 
Microfinance Opportunities’ Listening to Clients Series   360
15.5 
The Cost of Failure: Equity Bank’s Painful Lesson   361
15.6 
IT Disaster Recovery and Business Continuity Management   370
15.7 
Audits Performed by the Internal Audit Department   372
16.1 
Glossary of Funding Terms  380
16.2 
Institutional Investors in Microfinance  388
16.3 
Commercial Bank Investment in Microfinance  389
16.4 
Aggregating Data on MIVs  390
16.5 
The Changing Character of Structured Funds  393
16.6 
Funding Concentration   396
16.7 
Subordinated Debt and Regulatory Capital  399
16.8 
Bond Issuance in Financial Services for the Poor  400
16.9 
Quantifying Foreign Exchange Risk for Currency Mismatch  401
16.10  Specialized Currency Funds  402
16.11  Microcredit Securitization  404
16.12  Access to Capital Markets  407
16.13  Responsible Investor Principles  408
16.14   Microfinance Institutional Rating versus Mainstream Credit  
Ratings 409
16.15  Ratings for MIVs and Funds  410
17.1 
Regulatory Impact Assessment  418
17.2 
Examples of Tiered Approaches  420
17.3 
Certain Prudential Requirements  421
17.4 
 Adjustments to Prudential Requirements to Accommodate  
Microfinance Activities  423
17.5 
Financially Inclusive Ecosystems  426
17.6 
 Making Insurance Markets Work for the Poor—Emerging Guidelines 
for Microinsurance Policy, Regulation, and Supervision  428

18.1 
Lighting Africa  438
18.2 
IRnet for Credit Unions  440
18.3 
Regional or National Switches   441
18.4 
Payment Integrators  442
18.5 
The Evolution of Credit Reporting in Ecuador  446
18.6 
 Modern Credit Databases: Transforming Low-Income Financial 
Services in South Africa  447

18.7 
India’s New Unique Identification System  449
18.8 
Training Courses for Capacity Building  451
18.9 
 Making Microfinance Work: The ILO’s MFI Management Training 
and Trainer Accreditation Program  452

Contents 
xi

18.10  Call Center at the First Microfinance Institution Syria  454
18.11  In Practice: Paraguay Financiera El Comercio  455
Figures
I.1 

Financial Access Strands—Country Comparisons (July 2012)  4
1.1 
Financial Service Needs for Different Livelihood Segments  20
1.2 
Stylized View of the Financial Ecosystem  27
1.3 
The Range of Financial Service Providers  29
B1.9.1   Number of Clients, Loans, and Deposit Accounts in Africa, by Type 
of Provider  30
1.4 
Market System Players and Facilitators  37
1.5 
 Evolution of Intervention Focus from Financial Institutions to 
Financial Systems  39

B2.1.1   Revenues and Inventory Expenses of a South African Small  
Businesswoman, Daily Cash Flows Aggregated Fortnightly  54
3.1 
Financial Inclusion Strategies and Responsible Finance  80
3.2 
Responsible Finance: A Multiple-Stakeholder Approach  86
4.1 
 The Role of Donors in Financial Market System  
Development 98
4.2 
Stylized View of the Financial Market System  100
4.3 
The Purpose of Donor Commitments   102
5.1 
FinScope Financial Access Strand: Definitions  124
5.2 
FinScope Access Frontier  124
B5.8.1  Access Strand Analysis  125
B5.8.2  Service-by-Service Analysis  126
5.3 
Logic Model Definitions  130
B5.15.1  The Spectrum of Evidence  137
6.1 
The Range of Financial Service Providers  150
7.1 
The Range of Financial Service Providers  172
8.1 
How Savings Can Improve the Lives of the Poor   200
10.1 
Using the Value Chain for Agricultural Financing  237
10.2 
The Warehouse Receipts Financing System  241
12.1 
 Relationship between the Customer, the Agent, and a Bank in 
Conducting a Mobile Banking Transaction  287

12.2 
 Monthly Costs in Dollars Associated with an Illustrative  
Transaction Account  294
13.1 
A Platform Perspective  307
13.2 
Transactions in Space and Time  311
13.3 
Channel Mix  316
14.1 
 The Social Performance Process, Indicators, and Assessment 
Tools 343

xii 
The New Microfinance Handbook

15.1 
Traditional Cost Allocation versus Activity-Based Costing   363
15.2 
 Relationship between Risk Management and Internal  
Control   366
15.3 
Components of Internal Control   367
16.1 
Sources of Microfinance Funding  385
B16.4.1  Source of MIV Funding  391
B16.5.1  REGMIFA’s Structure and Flow of Funds  393
16.2 
Three Main Stages in the Processing of Large Public Issues  406
19.1 
Variation of Credit Provision with GNI per Capita  460
19.2 
Variation of Formal Financial Inclusion with GNI per Capita  461
19.3 
Financial Frontiers  469
Tables
1.1  Gender-Based Obstacles in Microfinance and Microenterprise 25
1.2  Illustrative Solutions to Household Financial Management  
Needs 32
1.3 Key Characteristics of Facilitators and Providers in the Financial 
Market System  38
3.1 
 Potential Barriers to Effective Consumer Protection through  
Standards and Guidelines  91
4.1 
 Spectrum of Donors in Financial Inclusion and the Way  
They Operate  99
5.1 
Research Methods and Their Usefulness  139
5.2 
 Main Poverty Assessment Tools Available for Microfinance  
Practitioners 140
6.1 
 Characteristics of Community-Based Financial Service Providers: 
Indigenous Groups  151

6.2 
 Characteristics of Community-Based Financial Service Providers: 
Facilitated Groups  157

7.1  Characteristics of Institutional Financial Service  
Providers 173
11.1 
Two Long-Term Insurance and Savings Products in India  261
B14.1.1  Key Indicators of Performance for Savings Group  
Facilitation 323
14.1 
Efficiency and Productivity Ratios (MFRS)  335
14.2 
Profitability Ratios (MFRS)  336
14.3 
Asset Quality (Portfolio Quality) Ratios (MFRS)  337
14.4 
Capital Ratios (MFRS)  338
14.5 
Liquidity Ratios (MFRS)  339
14.6 
Balanced Performance Management  342
14.7 
Indicators in the Social Performance Standard Report  344
Contents 
xiii

15.1 
Roles and Responsibilities for Risk Management  365
16.1 
Public and Private Funders  384
16.2 
Holding Company Investment Examples  394
17.1 
Regulatory Objectives for Microfinance  417
18.1 
 Implications of Telecommunications Connectivity for the  
Provision of Branchless Financial Services  443
xiv 
The New Microfinance Handbook

FOREWORD
When first published in 1998, Joanna Ledgerwood’s Microfinance Handbook was 
an indispensible guide for donors, policy makers, and practitioners who were 
working to expand access of the poor to microfinance. In the intervening years, the 
opportunities and pressures of commercialization have driven a reassessment of 
what microfinance is and whom it should serve. Today, in addition to building the 
capacity and ensuring the sustainability of institutions, the larger microfinance 
community is taking a closer look at the diverse needs of clients, the broader finan-
cial ecosystem, and the transformational nature of technology. This reassessment 
has become a regular fixture of global conversations about poverty alleviation. 
The New Microfinance Handbook, then, is timely. The microfinance sector now 
reflects the multidisciplinary intersection of finance, technology, and develop-
ment, where new ideas are changing the art of what is possible. The actors reflect 
this diverse ecosystem and include everything from mobile operators to microfi-
nance institutions to community networks. This book has brought an impressive 
array of the field’s experts to an area of practice in constant change. 
We are pleased that this book asks the hard questions about what people living in 
poverty really need. This means moving the conversation beyond the walls of insti-
tutions and into the complex worlds of clients. The needs of a rural farmer are differ-
ent from those of an urban microbusiness owner. A young woman embarking on a 
life after school has different priorities than a mother seeking to protect the assets of 
her family. For microfinance to deliver on its original promises, we need to put the 
needs of persons living in poverty at the center of this work.
It is time for us to take stock of what we have learned as we move forward. The 
New Microfinance Handbook will play an important role, helping us to advance our 
understanding about how financial services can serve the diverse needs of the 
poor. 
Reeta Roy 
Tom Kessinger
President and CEO 
General Manager
The MasterCard Foundation 
Aga Khan Foundation
Foreword 
xv


PREFACE
Imagine a life without access to financial services: no deposit account, no debit card, 
no fire insurance, no college savings plan, no home mortgage. Life would be an 
incredibly stressful roller coaster ride, and most dreams would remain unfulfilled. 
The day you get paid for work would be good, the other days rough. Any accident 
would set your family back. Sending the kids to college? Too difficult. Buying a 
house? Forget it. Nobody can pay for such needs out of cash accumulated under the 
mattress. For us, life without access to financial services is unimaginable. 
Yet according to 2011 data from the World Bank, an estimated 2.5 billion  
working-age adults globally—more than half of the total adult population—have to 
do exactly that. They live a life without access to the types of financial services we 
take for granted. Of course, they cannot do without financial intermediation, so they 
rely on age-old, informal mechanisms. They buy livestock as a form of savings; they 
throw a village feast to cement local ties as insurance against a future family crisis; 
they pawn jewelry to satisfy urgent liquidity needs; and they turn to a moneylender 
for credit. These mechanisms are risky and often very expensive. 
Increasingly robust empirical evidence demonstrates how appropriate finan-
cial services can help to improve household welfare and spur small enterprise 
activity. Macro evidence also shows that economies with deeper financial inter-
mediation and better access to financial services grow faster and have less income 
inequality. Policy makers and regulators worldwide recognize these connections. 
They have made financial inclusion—where everyone has the choice to access and 
use the financial services they need, delivered in a responsible fashion—a global 
development priority. 
A powerful vision of responsible financial market development is  emerging—a 
vision that aims to bank the other half of the global working-age adult population 
by leveraging what we have learned from the microfinance story to date, using 
advances in technology to spur product and business model innovation, and 
encouraging new ways of thinking about how to create an enabling, risk- 
proportionate regulatory and supervisory environment.
Preface 
xvii

The New Microfinance Handbook reflects the current frontier of our collective 
thinking and experience. It starts with the need to understand the demand side. 
Poor households in the informal economy are producers and consumers. They 
need access to the full range of financial services to generate income, build assets, 
smooth consumption, and manage risks. The global financial inclusion agenda rec-
ognizes these broader needs. It also recognizes the importance of financial literacy 
that builds consumer financial capabilities and of consumer protection regimes 
that take into account the conditions and constraints of poor families in the infor-
mal economy. 
The Handbook also takes a broad look at the diversity of providers required to 
meet these needs and at the business model challenges of different products. The 
original microcredit revolution found an ingenious way to overcome the previous 
obstacle to providing credit for the poor. How do you manage credit risk and 
repayments at the local level when working with a segment of the  population that 
has no traditional collateral? The breakthrough was the joint- liability group loan—
social collateral to allow the poor to pledge for each other. But the business model 
challenges are different for other financial services. For small-denomination sav-
ings and remittances, transaction costs must be ultralow; for insurance, risks must 
be pooled and managed at an actuarially relevant scale; for pensions, micro contri-
butions must be invested in ways that  generate adequate long-term returns. 
Continued innovation in products and business models is needed so that we 
can reach more people with a broader range of products at lower costs. No one 
type of provider will be able to overcome the very different business model 
 challenges of all products. What is needed instead is a variety of financial service 
providers that come together in a local-market ecosystem that works for the poor 
at the base of the economic pyramid. 
Lastly, the Handbook  takes a fresh look at the enabling infrastructure and 
 regulatory environment. The infrastructure requirements range from a larger num-
ber of low-cost, physical access points in harder-to-reach geographic areas to 
nationwide unique financial identities that facilitate consumer enrollment and pro-
tection. On the regulatory side, policy makers are recognizing that financial exclu-
sion poses a risk to political stability and impedes economic advancement, and they 
are increasingly willing to balance the ultimately mutually reinforcing needs for 
financial stability, financial integrity, and financial inclusion.
With a better understanding of demand, ongoing innovation in products and 
business models to better meet that demand, and recognition of the need for a 
protective and supportive enabling environment, I believe we have the knowledge 
and the means to achieve full financial inclusion in our lifetime. Read on to learn 
how this is already happening and what more is needed.
Tilman Ehrbeck
CEO
Consultative Group to Assist the Poor (CGAP)
xviii 
The New Microfinance Handbook

ACKNOWLEDGMENTS
The writing of this book has been a highly collaborative effort and there are many 
people we wish to acknowledge and thank for their support and contributions. 
First of all, our Advisory Committee, composed of David Ferrand, Steve Rasmussen, 
Tom Austin, Ann Miles, and Benoit Destouches, provided sound guidance and 
leadership for which we are very grateful. We also appreciate the significant effort 
and expertise of the contributing authors, without whom this book would not 
have been published: Ines Arevalo, Craig Churchill, Daryl Collins, Mayada 
El-Zoghbi, David Ferrand, Barbara Gähwiler, Alan Gibson, Susan Johnson, Kate 
Lauer, Joyce Lehman, Ignacio Mas, Peter McConaghy, Calvin Miller, Geraldine 
O’Keeffe, Stuart Rutherford, Lisa Sherk, Stefan Staschen, and Joakim Vincze. In 
addition, we are deeply grateful to Peter McConaghy, who conducted excellent 
research and provided significant draft material for a majority of the chapters. We 
also thank those who contributed to specific chapters, including Cheryl 
Frankiewicz, Liz Case, Alyssa Jethani, Linda Jones, Emilio Hernandez, and Ruth 
Dueck-Mbeba. 
For their insightful feedback, we thank our peer reviewers of which there were 
many: Elizabeth Berté, Anita Campion, Liz Case, Gerhard Coetzee, Monique 
Cohen, Christoph Diehl, Thomas Engelhardt, Laura Foose, Cheryl Frankiewicz, 
Martin Habel, Michel Hanouch, Tor Jansson, Susan Johnson, Kabir Kumar, Kate 
Lauer, Joyce Lehman, Ignacio Mas, Janina Matuszeski, Sitara Merchant, Ann 
Miles, Hanif Pabani, JR Rao, Steve Rasmussen, Rich Rosenberg, Adam Sorensen, 
Ingrid Stokstad, Joakim Vincze, Leah Wardle, Martina Wiedmaier-Pfister, and 
Kim Wilson. In particular we are extremely grateful to Bob Christen for reviewing 
the initial draft of the book and suggesting a significant new direction that, at the 
time, seemed like a very big task but was exactly what was needed; we appreciate 
his honesty and guidance. We are indebted to Ruth Dueck-Mbeba, who reviewed 
the entire book, providing excellent feedback and suggestions as well as a signifi-
cant portion of chapter 15.
We are very grateful to The MasterCard Foundation and the Aga Khan 
Foundation for the support provided throughout the making of this book, in 
Acknowledgments 
xix

 particular Reeta Roy, Ann Miles, Ruth Dueck-Mbeba, David Myhre, Tom Kessinger, 
Mike Bowles, Erin Markel, Sam Pickens, Helen Chen, Jayne Barlow, and especially 
Tom Austin. 
We greatly appreciate the efforts and patience of Paola Scalabrin for her persis-
tence in requesting this update, ensuring that the book was published, and her 
patience and advice during the process. We thank Aziz Gökdemir for a brilliant job 
managing the publication process and we extend our thanks to Elizabeth Forsyth 
and David Anderson for their excellent editing, as well as to Nora Ridolfi for dili-
gently overseeing the printing of the book. Thank you as well to Ellie Mendez and 
Alyssa Jethani for checking sources. 
Joanna would like to thank Alan Gibson for sharing his deep knowledge and 
experience of the market systems framework, David Ferrand for suggesting we use 
the framework and his guidance in doing so, and Steve Rasmussen for his thought-
ful and generous support. She also thanks Alyssa Jethani for taking on much of 
what needed to be done at the Aga Khan Foundation during the process of bring-
ing this book together, for her high level of productivity, and for being a wonderful 
colleague. She is grateful to her family, especially Joakim, and her parents, for 
their consistent support throughout. In particular, she thanks her father, Doug 
Ledgerwood, for his guidance and advice during this project and always.
Julie is grateful for the encouragement and technical guidance from her col-
leagues at the International Finance Corporation, in particular Jean Philippe 
Prosper for his strong support and endorsement of this book to the World Bank 
publication committee; Tor Jansson for his numerous reviews of chapters; and 
Barbara Sloboda and David Crush for always finding a solution. She would also like 
to thank her many clients in Africa who have provided years of inspiration through 
their hard work and success in some of the world’s frontier countries. Finally, Julie 
thanks the many friends who have supported her work on this book with every-
thing from advice, shelter, and a friendly ear; and gives a special thanks to her 
family for keeping her close despite how far away she lives. 
Candace has deep appreciation for several long-term colleagues who have done 
so much to cultivate and sustain her commitment to clients, including Paul Rippey, 
Monique Cohen, Kathleen Stack, Jeffrey Ashe, and Jennefer Sebstad. Seasoned 
professionals, they have inspired her with their intelligence, integrity, and passion. 
As ever, Candace is grateful to SEEP’s Savings-led Financial Services Working 
Group for its high degree of collaboration; she would especially like to thank the 
authors of the SEEP publication, Savings Groups at the Frontier, from which she 
drew extensively in writing chapter 6.
Joanna Ledgerwood
Julie Earne
Candace Nelson
xx 
The New Microfinance Handbook

ABOUT THE AUTHORS
Ines Arevalo is a consultant to the Aga Khan Agency for Microfinance. She holds 
an MA in Development Economics (University of Sussex) and focuses on client 
research and social performance management.
Craig Churchill is the head of the International Labour Organization’s Social 
Finance Programme, which supports the use of productive and protective financial 
services, particularly for excluded populations. He serves as the team leader of the 
Microinsurance Innovation Facility and the chair of the Microinsurance Network.
Daryl Collins is a Director at Bankable Frontier Associates, a niche consulting 
practice aimed at providing financial services to low-income people. She is also 
co-author of Portfolios of the Poor.
Julie Earne is a Senior Microfinance Specialist at the International Finance 
Corporation. She has worked extensively throughout Africa, investing in and 
enabling financial sector development in frontier countries for more than 15 years.
Mayada El-Zoghbi is head of CGAP’s office in Paris. She manages CGAP’s support 
to donors and investors as well as in the Middle East and North Africa Region. She 
holds a Master of International Affairs from Columbia University.
David Ferrand is Director of Financial Sector Deepening Kenya, a multidonor 
facility supporting market development. He holds a PhD from Durham University 
and has worked in the financial inclusion field for 20 years. 
Barbara Gähwiler is a microfinance expert at GIZ in Tunisia and previously 
worked with CGAP’s donors and investors team. She holds a Master of International 
Affairs from University of St. Gallen and Sciences Po, Paris. 
Alan Gibson is a Director of the Springfield Centre. He has been influential in 
developing the “making markets work for the poor” (M4P) approach and in sup-
porting its application in different spheres of development.
Susan Johnson is a Senior Lecturer in International Development at the 
University of Bath. She has extensive research experience in the microfinance 
field, in particular in impact assessment, gender, and the embeddedness of local 
financial markets in social relations.
About the Authors 
xxi

Kate Lauer is a policy advisor to CGAP and a Senior Associate with Bankable 
Frontier Associates. She has a JD from New York University and has written and 
worked extensively on legal and policy issues related to financial inclusion.
Joanna Ledgerwood is Senior Advisor at the Aga Khan Foundation, leading its 
financial inclusion initiatives in Africa and Central and South Asia. She is the 
author of the Microfinance Handbook and Transforming Microfinance Institutions 
with Victoria White.
Joyce Lehman is an independent consultant focusing on financial inclu-
sion. Previously Joyce was with the Bill & Melinda Gates Foundation, managing 
projects to support mobile payment platforms in Bangladesh and Pakistan. 
Ignacio Mas, an independent consultant, was Deputy Director of the Financial 
Services for the Poor team at the Bill & Melinda Gates Foundation, and Business 
Strategy Director at Vodafone Group.
Peter McConaghy is a Financial Sector Development Analyst in the Middle East 
and North Africa Region at the World Bank, with a focus on expanding financial 
inclusion in postrevolutionary countries through policy reform, provider down-
scaling, and demand-side research.
Calvin Miller is Senior Officer and Agribusiness and Finance Group Leader in the 
AGS Division, Food and Agriculture Organization of the UN (FAO). He has exten-
sive experience in agricultural and value chain finance and investment in develop-
ing countries.
Candace Nelson is a trainer, facilitator, researcher, and writer with 30 years of expe-
rience supporting microfinance, specifically financial education and Savings Groups, 
in Africa and Latin America. She is the editor of Savings Groups at the Frontier
Geraldine O’Keeffe is the Chief Operating Officer of Software Group, an informa-
tion technology company focused on the provision of solutions to the financial 
sector. She has over 12 years of experience working with technology for microfi-
nance, primarily in Africa.
Stuart Rutherford is a microfinance practitioner and researcher. He is the 
founder of SafeSave, a Bangladeshi MFI, and cowrote two studies of how poor 
people manage money: The Poor and Their Money and Portfolios of the Poor
Lisa Sherk is an independent consultant based in Amsterdam. She specializes in 
microfinance investment fund management, focusing on financial and social per-
formance assessments of microfinance institutions globally.
Stefan Staschen is an economist specializing in regulation of inclusive financial 
sectors. He works as a consultant for CGAP, Bankable Frontier Associates, and 
others. He holds a PhD from the London School of Economics.
Joakim Vincze is a consultant specializing in sustainable use of technology for 
development, focusing on providing affordable broadband Internet to rural areas. 
He holds an engineering degree and an MBA from the University of Western Ontario.
xxii 
The New Microfinance Handbook

ABBREVIATIONS
AFI 
Alliance for Financial Inclusion
COSO 
 Committee of Sponsoring 
AKAM 
 Aga Khan Agency for 
Organizations of the Treadway 
Microfinance
Commission 
DFI 
 development  finance   
ALM 
asset-liability management 
institution
AML anti-money-laundering 
EFT 
electronic fund transfer
APR 
annual percentage rate 
EIR 
effective interest rate 
ASCA 
 accumulating savings and credit  FAS 
Financial Access Survey, IMF
association 
FATF 
Financial Action Task Force 
ATM 
automated teller machine
FinDex 
 Global Financial Inclusion 
B2P business-to-person
database
BCBS 
 Basel Committee on Banking 
FIU 
financial intelligence unit
Supervision 
FSD Kenya   Financial Sector Development 
CAR 
capital adequacy requirement
Kenya
CBS 
core banking system
FSP 
financial service provider
CDD 
consumer due diligence
G2P government-to-person 
CDO 
collateralized debt obligation
GDP 
gross domestic product
CFT 
 combating the financing of 
GNI 
gross national income
terrorism
GPRS 
general packet radio service 
CGAP 
 Consultative Group to Assist the  GSM 
Global System for Mobile
Poor 
IAIS 
 International Association of 
CLO 
collateralized loan obligation
Insurance Supervisors 
Abbreviations 
xxiii

ID identification
PSP 
payment service provider
IMF 
International Monetary Fund
RCT 
randomized control trial
IPO 
initial public offering
RIA 
regulatory impact assessment
IT 
information technology
ROSCA  
 rotating savings and credit 
IVR 
interactive voice response
association 
KfW 
Kreditanstalt für Wiederaufbau
RTGS 
real-time gross settlement
KYC 
Know Your Customer
SaaS 
software as a service
MDB 
multilateral development bank
SACCO 
savings and credit cooperative 
MDI 
 microfinance  deposit-taking 
SAR 
Special Administrative Region
institution
SAVIX 
 Savings Groups Information 
Me2Me 
me-to-me (payment)
Exchange 
MFI 
microfinance institution
SEEP 
 Small Enterprise Education and 
Promotion
MFRS 
 Microfinance  Financial 
Reporting Standards 
SG 
Savings Group
MII 
 microfinance  investment 
SHG 
Self-Help Group
intermediary
SIM 
subscriber identity module
MIS 
management information system SMART 
 specific, measurable, achievable, 
MIV 
microfinance investment vehicle
realistic, and time-bound
MIX 
 Microfinance  Information 
SMS 
short messaging service
eXchange
SPV 
special purpose vehicle
MNO 
mobile network operator
SRI 
socially responsible investing
NBFI 
non-bank financial institution
STK 
SIM Tool Kit
NGO 
nongovernmental organization
SWIFT 
 Society for Worldwide Interbank 
P2B person-to-business
Financial Telecommunication 
P2P person-to-person
TCP 
transmission control protocol
PAT 
poverty assessment tool
USAID 
 U.S. Agency for International 
Development
PCG 
partial credit guarantee
USSD 
 unstructured  supplementary 
PIN 
personal identification number
services data
POS point-of-sale 
VPN 
virtual private network
PPI 
Progress out of Poverty Index
WSBI 
World Savings Banks Institute 
PRA 
participatory rapid assessment 
WOCCU 
World Council of Credit Unions
xxiv 
The New Microfinance Handbook

Introduction
Microfinance in 2013 
widespread concern for “financial inclusion”5 is 
directing attention to the broader “financial eco-
It has been 15 years since the original 
  system” and how to make financial markets work 
Microfinance Handbook (Ledgerwood 1998) was  better for the poor. For example, a recent CGAP 
written, and much has changed since then.  Focus Note looks at the financial ecosystem 
Microfinance is now a household term with   within the context of the supply of financial ser-
frequent articles in the media about its growth,  vices: “Different products present different risks 
innovation, and impact. The industry has grown  and delivery challenges, and it is unlikely that a 
exponentially, in terms of both the number of cli-
single class of service providers will effectively 
ents as well as the number and type of providers  provide all the products poor people need. A key 
and products.1 The focus is no longer only on credit  challenge is how to create the broader intercon-
for investment in microenterprises: Today there is  nected ecosystem of market actors and infra-
broad awareness that poor people have many and  structure needed for safe and efficient product 
diverse financial service needs, which are typically  delivery to the poor” (Ehrbeck et al. 2012, p. 1). 
met by a variety of providers through multiple 
To this end, policy makers have begun to 
financial services. We know this because data have  address financial inclusion in their economic 
much improved in the past 15 years,2 allowing us to  agendas with the belief that access to financial 
better understand barriers to access and use, and  services improves the ability of consumers to 
we are beginning to examine impact.3 
access markets, which contributes to monetizing 
Over the years, the discourse has shifted  the values of products and services, enables risk 
from “microcredit” to “microfinance,”4 and now  pooling, and allows value storage, thus affecting 
Introduction 
1

economic growth and the overall stability of the  expected increase in financial inclusion resulting 
system.
from the gradual substitution of donor funding 
Increasingly, best practice in microfinance is  with private sector capital has yet to happen. The 
responsible finance, defined as the delivery of retail  majority of poor people remain outside the main-
financial services in a transparent, inclusive, and  stream financial sector, and many MFIs continue 
equitable fashion (BMZ, CGAP, and IFC 2011).  to depend on subsidies. 
Consumer protection and financial capability are 
Looking forward, it appears likely that tech-
now seen as important policy objectives, particu-
nology will enable customer touch points to pro-
larly in a context of new providers, more sophisti-
liferate among nontraditional service providers. 
cated products, and technology- enabled delivery  The technology drivers of financial inclusion will 
channels. Recent media attention to the significant  come from innovations in mobile money, biomet-
profits made through initial public offerings of  ric identity systems, smart phones, and wireless 
microfinance banks6 have highlighted the need for  broadband Internet access. At the same time, 
transparent pricing and appropriate interest rates.  however, much remains to be learned to effec-
Unlike 15 years ago, funding for microfinance  tively increase outreach in a substantial way, 
today is no longer the purview of donors alone. As  including, for example, developing appropriate 
of 2011 more than 100 microfinance investment  regulatory frameworks for branchless banking 
vehicles were managing close to US$7 billion  models (Alexandre 2010). Further, it is vitally 
(Symbiotics 2011), making private and quasi-  important to better understand the social dimen-
private sector capital readily available. With the  sions of how households manage financial 
recognition that grant funding crowds out the  resources, particularly in the informal sector, and 
 private sector, responsible donors have shifted  the role of technology to work within these social 
from providing funds for loan capital and operat-
dynamics (Johnson 2012).
ing subsidies to more of a facilitation role 
Thus, the well-documented and widely 
 supporting the development of enabling environ-
applauded achievements of microfinance are 
ments, provision of information, and financial  increasingly coupled with recognition of its lim-
infrastructure. 
itations and the need to take a more holistic view. 
Although significant investments have been  Concerns include the following: 
made to reform regulatory systems to accommo-
date microfinance and transform microfinance  • Outreach—In many countries outreach 
institutions (MFIs) into regulated institutions 
remains a small percentage of the population; 
complete with return-seeking investors, rela-
only 41 percent of adults in developing econo-
tively few MFIs can absorb a significant amount 
mies report having an account at a formal 
of capital. “However, the pool of investment-ready 
financial institution,8 8 percent report having 
MFIs is small and is not expanding at the speed of 
originated a new loan from a formal financial 
the supply of equity investment. Indeed, 52 per-
institution in the past 12 months, and 2 percent 
cent of all foreign debt is channelled to only 25 
report having personally paid for health insur-
MFIs, out of a total of 524 MFIs that receive for-
ance (Demirgüç-Kunt and Klapper 2012); 
eign debt finance. At the country level, foreign 
more than half the world’s adult population 
investment is, to a large degree, still focused on a 
does not use formal or semiformal services, 
small number of countries in LAC and ECA7 with 
nearly all of whom live in Africa, Asia, and 
only moderate levels of financial exclusion” 
Latin America (Chaia et al. 2009). 
(Reille et al. 2011, p. 10). Given the concentration  • Sustainability—Although figures are not pre-
of investment in relatively few institutions, the 
cise, many microfinance operations continue 
2 
The New Microfinance Handbook

to receive subsidies; commercial funding is  might challenge this assumption, and are thus 
highly concentrated in Latin America and  beginning to invest much more in assessing 
Eastern Europe, while most of the world’s  impact, if we just look at access figures, how has 
poor (less than US$2/day) live in Asia and  microfinance fared? Despite several decades of 
Africa (Wiesner and Quien 2010). Beyond  significant investments in the sector, access to or 
direct microfinance operations, many other  usage of formal financial services remains low, 
activities important in the microfinance sys-
particularly in Sub-Saharan Africa (SSA) (see 
tem (for example, training, product develop-
figure I.1). Data from the World Bank Global 
ment, and technical advice) are often  Findex database (Demirgüç-Kunt and Klapper 
subsidized. 
2012) shows that in SSA only 13 percent of indi-
viduals aged 15 years and older saved at a finan-
• Impact—Recent research based on random-
cial institution in the last 12 months, and only 5 
ized controlled trials (RCTs) has found the  percent received a loan from a financial institu-
impact of microcredit to be mixed. RCTs have  tion. Such low usage does not, however, indicate 
shown that increases in consumption and  weak demand; at the same time, 19 percent saved 
business investment do not always correlate  in a savings club, and 40 percent received a loan 
with measures of poverty reduction (O’Dell  from family or friends in the past year. In South 
2010). Furthermore, the distribution of gains  Asia figures are similar, with 11 percent saving in 
is uneven. The broader effect of microfinance  a financial institution in the last 12 months and 9 
on poverty is limited by low levels of usage  percent receiving a loan from a financial institu-
and persistent barriers to inclusion (Johnson  tion.10 And yet the massively popular Self-Help 
and Arnold 2011). 
Group movement in India counted 97 million 
households affected by March 31, 2010.11 But 
At the heart of these concerns over the efficacy  even this indication of participation is weak 
of microfinance is a better understanding of how  when compared to the potential market of the 
the poor need and use financial services. Research  900 million households in India that live on less 
(Collins et al. 2009; Demirgüç-Kunt and Klapper  than US$2 a day (Chen et al. 2010). 
2012) has revealed that the poor manage their 
One reason for low outreach is the traditional 
financial lives with complex strategies that utilize  microfinance business model itself, which is 
multiple forms of savings, lending, and bartering  based on generating revenue from primarily pro-
from a mix of formal and informal providers.  ductive loans and other fee-based services to 
Achieving financial inclusion for the poor thus  cover costs. Yet in microfinance, costs are high, 
cannot rely on MFIs alone; rather, it requires  and the revenue base is relatively low. This is 
improving the quality and frequency of services  especially true for the rural poor whose limited 
from a multitude of provider types and fully  investment opportunities and capacity for debt 
understanding client behavior and how it affects  translate into lower revenue for MFIs and banks 
financial service needs. 
who may lack the incentives, information, and 
sometimes ability to mitigate perceived risks of 
Measuring Progress
operating beyond urban markets or with very 
poor clients. Thus it is important to focus on low-
At the time of the original Handbook, a broadly  ering costs both for institutions to provide ser-
accepted assumption was that “increased  vices and for clients to use them. And although 
access” and a “willingness to pay” provided a  technology will continue to push this frontier, 
good proxy for impact.9 Although today we  access figures alone may offer a misleading view 
Introduction 
3

Figure I.1  Financial Access Strandsa—Country Comparisons (July 2012)
RSA'11
63
5
5
27
Namibia'11
62
3 4
31
Swaziland'11
44
6
13
37
Botswana'09
41
18
8
33
Lesotho'11
38
23
20
19
Ghana'10
34
7
15
44
Nigeria'10
30
6
17
47
Zimbabwe'11
24
14
22
40
Kenya'09
23
18
26
33
Uganda'10
21
7
42
30
Malawi'08
19
7
19
55
Rwanda'08
14
7
26
53
Zambia'09
14
9
14
53
Tanzania'09
12
4
28
56
Mozambique'09
12
1
9
78
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Banked
Other formal non-bank
Informal only
Excluded
Source: FinMark Trust.
Note: a. The formal sector is divided into a “banked” segment (the percentage of adults with a bank account), and a formal “other” 
segment (the percentage of the adult population with a formal financial product, such as insurance or a microfinance loan, but no 
bank account). Together, these two groups are defined as formally included. The informal sector comprises all the organizations that 
provide financial services but are not legally registered to do this business, for example, savings clubs, burial societies, and money-
lenders. The informally serviced category in the access strand represents the percentage of adults with an informal product but with 
no bank account or a product from another formal financial institution. It is necessary to add the informal segment to the formally 
included segment to derive the percentage of the adult population that is financially served. Anyone who is not financially served is 
financially excluded, which means they are not using financial products (formal or informal) to manage their financial lives; for exam-
ple, they may simply be using cash. See www.finscope.co.za. 
of benefits; increased access and more choice do  improvement in access does not develop in a 
not automatically translate into effective client  competitive manner, benefits may be restricted. 
use. For example, the major growth in access for  Clients with limited information and/or choices 
saving services through the Mzansi account in  may not be able to exert competitive pressure on 
South Africa disguised a large number of dormant  providers to improve services. 
accounts, opened but often unused, because cli-
Providers and other stakeholders need to take a 
ents either found better options for their needs or  more proactive approach that recognizes the diver-
were too poor to utilize the account.12 The path  sity of barriers to access, the heterogeneity of 
from uptake (that is, opening an account) to usage   consumers, and the variety of financial service 
is still an uncharted course.
needs among various lower income segments and 
Growth in access, especially if accompanied by  underserved or excluded groups. Looking for major 
access to more diverse services, may require cli-
impact from a single product or institution type 
ents with greater financial capabilities to ensure  risks overlooking the inherent complexity of liveli-
effective usage and benefits. As in any market, if  hoods and financial service needs (see box I.1). 
4 
The New Microfinance Handbook

Box I.1  A Market This Big Needs Many Types of Providers
Back in 1982, when Citi made its first loan to a 
 population is unbanked. This is too big a seg-
nongovernmental or ganization (NGO), the mi-
ment to cover with just one or two approaches 
crofinance world was much simpler. There  and institutional forms. We have the ultra- 
were the few global networks, and we were 
 poor and displaced people at one end of the 
still using the term “micro credit.” It was a  scale, and the very eco nomically active peo-
much more focused, smaller community. The 
ple who might even be employed on the other 
industry has grown tremen dously since then. 
end. Their needs are different. 
From a few mil 
lion clients in the 1980s, 
I get concerned with some of the ar-
microfi nance now reaches more than 190  guments that take place in microfi nance to-
 million families. We have seen tre mendous  day. It seems like there is an underlying as-
growth in the size of microfinance organiza-
sumption that there is only one type of 
tions and the scale of their operations, but we 
microfinance client and that client should be 
are also seeing that there is a price for grow-
served by only one type of institution—when 
ing too fast—in any industry. You can grow 
the opposite is true. There are many different 
only so fast before burning out the staff, or 
client segments in micro finance, and MFIs 
you cannot bring on well-trained new staff to 
would do better to focus on each segment to 
keep up with your growth. 
develop the best business models to serve 
Most of this growth has come from organi-
those clients. 
zations offering only one or two credit prod-
In the next few years, the innovation needs 
ucts. The demand, the need, and perhaps the 
to be in designing products that fit who clients 
model lent itself to consistent growth be-
are and what they want to become; we get 
cause it stayed very focused. However, fast 
there by get ting to know the clients, their 
growth of organizations using simi lar models 
needs, their cash flows and their aspirations 
and strategies in the same locations has led, 
much better. 
in some cases, to multiple loans to the same 
Within this microfinance ecosystem, we 
borrower and a breakdown of lending disci-
need some institutions to work with the very 
pline. We see these issues in Andhra Pradesh 
difficult-to-reach and vulnerable communities, 
in India where institutions’ client-base over-
delivering social output of a very high calibre, 
laps are putting a lot of pressure on  and they cannot then be devoted just to 
repayments. 
achieving scale and even full sus tainability. 
How do you provide financial access to the 
Their objective may never be to become a 
vast majority of the popula tion? It will take   finance company, yet they may use financial 
more than NGOs and commercial banks—we 
tools as one of the enablers toward progress 
need cooperatives, credit unions, and postal 
out of poverty along with health and educa tion 
savings banks. We need cell phone compa-
training. 
nies that can make loan payments. We see 
Even as one part of microfinance becomes 
opportuni ties for many different services and 
more commercial, we have to keep thinking 
types of providers. 
about the many vulnerable, underserved, 
In most of the countries where we work, 
compli 
cated communities that mainstream 
anywhere from 60 to 80 per 
cent of the  microfinance may not yet be able to reach.
Source: Bob Annibale of Citibank, writing in Reed (2011). Reprinted with permission.
Introduction 
5

Redefining Objectives
proposition (see box I.2). “While the language 
changed with insights and expanded horizons, 
At the time of writing the original Handbook, the  the underlying fundamental idea has remained 
predominant microfinance model was an NGO  the same: Help poor families in the informal 
MFI providing credit to microentrepreneurs for  economy realize their economic potential and 
investment in microenterprises. This model was  give them the financial services means to manage 
largely based on the belief that access to credit for  their lives that most of us in the North take for 
productive investment would support entrepre-
granted” (Ehrbeck 2012).
neurship and economic development, empower 
Greater financial inclusion thus requires 
women, and alleviate poverty by generating  addressing constraints and taking advantage of 
higher incomes and employment. However,  opportunities in the financial ecosystem. 
increasing evidence of the impact of microfi-
Stakeholders are now beginning to focus on the 
nance, particularly microcredit, indicates that it  diversity of clients (geography, income levels, 
has some effect on the expansion of business and  livelihoods, gender, life-cycle) and their needs 
increased profits, very little effect on women’s  (growth, cash management, risk mitigation), as 
empowerment, and virtually no effect on poverty  well as the wide range of financial services (credit, 
alleviation (O’Dell 2010).
savings, payments, insurance), financial service 
Fifteen years later, the shift to financially  providers (informal, MFIs, cooperatives, banks, 
inclusive systems, based in part on better under-
insurance companies), and delivery channels 
standing impact, appropriately broadens the  (branches, agents, mobile phones) to meet these 
objectives beyond economic development and  needs. They are paying attention to the effective-
poverty alleviation to include the ability of poor  ness (social performance/impact, transparency, 
women and men to better manage risks, smooth  and client protection) of financial services as well 
income, invest in productive activities, and build  as the knowledge and skills that clients need to 
assets. These broader objectives demand more of  use them (financial capabilities); the rules that 
stakeholders in terms of better understanding cli-
guide financial markets (regulations, standards, 
ents and, in turn, delivering an improved value  norms); the financial infrastructure (payment 
Box I.2  Latest Findings from Randomized Evaluations of Microfinance
“The overall message from this body of work 
that allow it to view poor customers as individ-
is that poor people face various limits, and  uals. Some of those individuals will leverage 
their ability to capitalize on opportunities var-
financial services to smooth consumption; 
ies greatly. … [N]ot all borrowers want to  some to manage risk; some to make invest-
grow a business. The variable results seen can 
ments they have the skill and resources to 
be as much a function of borrower intent as 
profit from; some will do all of the above. With 
borrower ability. A one-size-fits-all product will 
a view of serving all of these needs, microfi-
not bring benefit to the borrowers or profit to 
nance providers may evolve a new generation 
the providers. Instead, the microfinance in-
of improved services and products that reli-
dustry needs to continue to mature in ways 
ably and flexibly help poor people.” 
Source: Bauchet et al. 2011. 
6 
The New Microfinance Handbook

systems and credit bureaus) required to support  providers, students and academics, and consul-
well-functioning markets; and the information  tants and trainers. 
services necessary to inform all stakeholders to 
Although this book is in part an update of the 
better improve the system. This book attempts  original Handbook, the growth of the sector and 
to address all of these issues with the objective to  the complexity of the financial market system 
promote financially inclusive ecosystems that  have led to a perspective much broader than the 
work better for the poor. 
previous “financial and institutional perspective.” 
As a result, additional chapters have been added 
to address issues more relevant than when the 
About This Book
original  Handbook was written. To reflect this 
Given the importance of both understanding and  complexity, we invited a number of experts to 
appreciating the complexities of financial ser-
write many of the new chapters. In addition, 
vices for the poor, the New Microfinance Handbook  given that this book does not go into as much 
takes a different approach from its predecessor.  detail as the previous book did, a list of key 
In contrast to the “institutional” perspective  resources at the end of each chapter provides 
(supply side) of the original Handbook, this book  readers additional information on specific topics. 
considers first and foremost clients and their  Finally, although the title still uses the term 
needs (demand side) and how the market system  microfinance, the book very much addresses the 
can work better to meet these needs. It also  wider financial ecosystem, moving beyond the 
attempts to address the rules and supporting  traditional meaning of microfinance to inclusive 
functions required for financial markets to work  financial systems.
well and serve ever greater numbers of poor con-
sumers. The result is a book that is less of a  Book Structure and Content
“how-to” guide but rather a description of the 
financial market system and the functions within  The New Microfinance Handbook loosely follows 
it and how they work, or do not work, in serving  the framework of the original Handbook and is 
the needs of the poor. The objective is to provide  organized into five parts: 
a strategic guide to help assess the varied finan-
Part 
I:  
Understanding Demand and the 
cial service needs of poor people, and to then pro-
Financial Ecosystem
pose how a diversified financial sector can address 
these needs in an accessible and beneficial man-
Part II:  Financial Service Providers 
ner. Ultimately it is hoped the book will contrib-
Part III:   Financial Services and Delivery Channels
ute to greater access to and usage of financial 
products and services that genuinely meet the  Part IV:   Institutional Management for Scale and 
many needs of the poor through various sustain-
Sustainability
able market-based financial service providers. 
Part V:  Supporting Financial Inclusion
The New Microfinance Handbook provides a 
primer on financial services for the poor. It is 
Part I—Understanding Demand and the 
written for a wide audience, including practi-
Financial Ecosystem updates Part I of the original 
tioners, facilitators, policy makers, regulators,  Handbook and addresses big picture issues—the 
investors, and donors working to improve the  financial landscape, clients, and strategies to 
financial system, but who are relatively new to  achieve and measure financial inclusion. Given 
the sector. It will also be useful for telecommu-
the changing landscape of the financial services 
nication companies and other support service  sector, the book opens with Chapter 1—The 
Introduction 
7

Evolving Financial Landscape, written by Joanna  Providers, written by Joanna Ledgerwood, 
Ledgerwood and Alan Gibson, outlining three key  describes financial service providers that are 
influences in financial services for the poor that  more formal in nature. This grouping includes a 
are greatly affecting the way the sector is moving:  wide variation of provider types, differing in the 
a renewed focus on clients, acknowledgment of  services they provide as well as their ownership 
the wider financial ecosystem, and the potential  structures, regulatory status, geographic focus, 
of technology. Chapter 2—Clients builds on the  target markets, and objectives, but are similar in 
centrality of clients and financial management.  that they have a more concrete structure than 
Drawing from Portfolios of the Poor (Collins et al.  providers in the informal sector and are thus 
2009), authors Stuart Rutherford, Daryl Collins,  referred to as institutions. 
and Susan Johnson examine the financial service 
Parts I and II are the least technical parts of 
needs of poor people and how these needs are  the handbook; they require no formal back-
met.  Chapter 3—The Role of Government and  ground in microfinance or financial theory. They 
Industry in Financial Inclusion, written by Stefan  will be of most interest to donors, policy makers, 
Staschen and Candace Nelson, addresses how key   students, and those interested in understanding 
players promote financial inclusion, from the role  financial inclusion and the actors involved. 
of government as policy maker and legislator, to 
Part III—Financial Services and Delivery 
industry as it warms to responsible finance  Channels expands on the original Handbook’s 
through self-regulation and the need for coordi-
 discussion of savings and credit with new chap-
nation. Chapter 4—The Role of Donors in Financial  ters on agricultural finance, insurance, and pay-
Inclusion,  written by Mayada El-Zogbhi and  ment services. It also addresses the many 
Barbara Gähwiler, focuses on the changing role of  alternative channels that are beginning to show 
donors in microfinance and proposes ways to  promise and includes a thought provoking chap-
facilitate the market to work better for the poor.  ter on supporting the poor through financial plan-
Given that financial inclusion is on the agenda of  ning tools. Chapter 8—Savings Services, written by 
many policy makers, much attention has recently  Joanna Ledgerwood, considers the various sav-
been invested in measuring it and assessing the  ings products demanded by the poor and touches 
impact of using financial services. Supply and  on the institutional capacity required to offer 
demand-side studies, impact assessment, and  deposit services. Chapter 9—Credit, written by 
other rigorous research are addressed by Joanna  Joanna Ledgerwood and Julie Earne, looks at 
Ledgerwood in Chapter 5—Measuring Financial  pricing loans and types of credit products includ-
Inclusion and Assessing Impact
ing traditional working capital and fixed asset 
Part II—Financial Service Providers updates  loans, as well as newer products such as housing 
the original chapter 4 (The Institution), adding  loans and leasing. Chapter 10—Agricultural 
an additional chapter to acknowledge the numer-
Finance, written by Calvin Miller, acknowledges 
ous and varied providers in the informal sector.  the substantial need for financial services for peo-
Chapter 6—Community-Based Providers, written  ple working in the agricultural sector (the vast 
by Candace Nelson, describes indigenous infor-
majority of the poor) and the ways in which finan-
mal providers, for example, moneylenders,  cial products and delivery channels cater to meet 
deposit collectors, rotating savings and credit  these needs. Although in the original Handbook 
associations and mutual aid groups such as burial  insurance was only briefly mentioned, in this 
societies, and other providers such as Self-Help   edition, given the growing importance of micro-
Groups and Savings Groups that are facilitated  insurance in financial inclusion and acknowledg-
by external agencies. Chapter 7—Institutional  ment of the risk management needs of poor 
8 
The New Microfinance Handbook

women and men, Chapter 11—Insurance, written 
Part V—Supporting Financial Inclusion is new 
by Craig Churchill, looks at the demand for micro-
and includes four chapters that focus on the  
insurance, product characteristics, and delivery  roles and functions of various stakeholders sup-
mechanisms.  Chapter 12—Payment Services and  porting and promoting the overall financial eco-
Delivery Channels, written by Joyce Lehman and  system.  Chapter 16—Funding, written by Julie 
Joanna Ledgerwood, describes transaction ser-
Earne and Lisa Sherk, considers the significant 
vices such as money transfers and payments as  role investors play in providing capital to finan-
products in and of themselves, as well as the vari-
cial service providers. Given the growth in the 
ous channels for delivering financial services. In  number and diversity of providers, Chapter 17—
particular, this chapter considers the different  Regulation, written by Kate Lauer and Stefan 
ways in which clients access services through  Staschen, addresses the laws and regulatory 
branchless touch points and the significant role  frameworks in place to support proper oversight 
played by agent networks. Chapter 13—Beyond  and safety of the financial market system and the 
Products, written by Ignacio Mas, proposes the  various players. Chapter 18—Infrastructure, writ-
delivery of financial products as an integrated  ten by Geraldine O’Keeffe, Julie Earne, Joakim 
customer experience through mobile phones. 
Vincze, and Peter McConaghy, considers the sup-
Part III will be of most interest to practition-
porting functions required for well-functioning 
ers who are developing, modifying, or refining  financial markets such as credit bureaus, deposit 
their financial products, as well as donors or  insurance, clearing and settlement systems, and 
consultants who are evaluating financial ser-
unique identification systems. Outsourced ser-
vices for the poor and want to better understand  vices such as “software as a service,” training, and 
financial products and services and ways to  security are also described. Chapter 19—Building 
deliver them.
Inclusive Financial Markets, written by David 
Part IV—Institutional Management for Scale  Ferrand, uses the market system framework to 
and Sustainability includes two chapters and pro- discuss the roles development agencies can and 
vides an update of the original chapters on MFI  should play to contribute to financial systems 
management.  Chapter 14—Monitoring and that work more effectively for the poor, high-
Managing Financial and Social Performance,  lighting the different functions of market actors 
 written by Joanna Ledgerwood, Geraldine  (service providers with ongoing roles) and those 
O’Keeffe, and Ines Arevalo, addresses core bank- facilitating the market (donors and other devel-
ing systems and financial and social performance  opment agencies with a temporary role).
management.  Chapter 15—Governance and 
Part V will be of most interest to those either 
Managing Operations, written by Peter providing or supporting the development of 
McConaghy, looks at various facets of institu-
mesolevel functions in the financial ecosystem.
tional providers including governance, human 
resource management, product management, and 
risk management. Part IV is more technical than  Notes
previous parts of the Handbook. Although specific   1.  Total numbers are difficult to find, but David 
institutional performance is somewhat less 
Roodman in “Due Diligence—An Impertinent 
important given the client and financial system 
Enquiry into Microfinance” (2011, p. 67) 
focus of this book, Part IV is included for the ben-
estimates there were close to 180 million loans 
efit of practitioners and/or funders interested in 
outstanding and 1.3 billion savings accounts at 
the operations and performance of institutions 
“alternative financial institutions” in 2000 and 
providing financial services to the poor.
“microfinance has grown a lot since then.” 
Introduction 
9

 2.  For example, national-level FinMark Trust’s 
credibly) can be difficult and expensive. 
FinScope surveys, www.finmark.org.za, and 
Addressing this dilemma, there is a school of 
Global Findex databases, http://data.worldbank 
thinking that advocates certain ‘proxies’ for 
.org/data-catalog/financial_inclusion. 
impact. Otero and Rhyne have summarized 
 3.  For example, see Financial Access Initiative 
recent microfinance history by saying that 
(FAI), http://financialaccess.org; Abdul Latif 
there has been an important shift from 
Jameel Poverty Action Lab (J-Pal), http://
focusing on the individual firm or client of 
www.povertyactionlab.org/about-j-pal; and 
financial services to focusing on the 
Innovations for Poverty Action (IPA), http://
institutions providing services. This financial 
poverty-action.org.
systems approach ‘necessarily relaxes its 
attention to “impact” in terms of measurable 
 4.  Microfinance as defined by CGAP in CGAP 
enterprise growth and focuses instead on 
Occasional Paper 15, “The New Moneylenders: 
measures of increased access to financial 
Are the Poor Being Exploited by High 
services’ (Otero and Rhyne 1994).” 
Microcredit Interest Rates?” (Rosenberg et al. 
2009), “usually refers to the provision of 
10.  Account at a formal financial institution 
financial services to poor and low-income 
denotes the percentage of respondents with an 
clients who have little or no access to 
account (self or together with someone else) at 
conventional banks. The term is often used in a 
a bank, credit union, another financial 
more specific sense, referring to institutions that 
institution (for example, cooperative or 
use new techniques developed over the past 30 
microfinance institution), or the post office (if 
years to deliver microcredit—tiny loans—to 
applicable) including respondents who 
informal microentrepreneurs. The range of 
reported having a debit card (Demirgüç-Kunt 
services can include not only microcredit but 
and Klapper 2012).
also savings, insurance, and money transfers.”
11. www.shgportal.com.
 5.  The ACCION Center for Financial Inclusion 
12.  E-mail exchange with Gerhard Coetzee, April 
defines financial inclusion as “Full financial 
4, 2012, and Bankable Frontiers Associates 
inclusion is a state in which all people who  
(2009).
can use them have access to a full suite of 
quality financial services, provided at 
References
affordable prices in a convenient manner, and 
with dignity for the clients. Financial services  
Alexandre, Claire. 2010. “Policymakers Create 
are delivered by a range of providers,  
Room for Experimentation with Banking 
most of them private, and reach everyone  
beyond Branches.” Global Savings Forum, Bill & 
who can use them, including disabled,  
Melinda Gates Foundation, Seattle, WA, 
poor and rural populations” (www 
November.
.centerforfinancialinclusion.org).
Bankable Frontier Associates. 2009. “The Mzansi 
 6.  See http://www.economist.com/node/ 
Bank Account Initiative in South Africa, Final 
11376809 for information on the Compartamos 
Report.” Commissioned by FinMark Trust. 
Banco IPO. 
Somerville, MA, March. 
 7.  Latin America and the Caribbean (LAC) and 
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Starita, Jeanette Thomas, and Anna Yalouris. 
 8.  Defined as “a bank, credit union, cooperative, 
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post office, or microfinance institution” 
Evaluations of Microfinance.” Access to Finance 
(Demirgüç-Kunt and Klapper 2012).
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 9.  In chapter 2 of the Microfinance Handbook 
(Ledgerwood 1998, p. 49) Tom Dichter wrote, 
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“Doing impact analysis well (and therefore 
Responsible Finance for Greater Development 
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Impact: A Stock-Taking of Strategies and 
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Introduction 
11


PART I
UNDERSTANDING  

DEMAND AND THE  
FINANCIAL ECOSYSTEM


CHAPTER 1
The Evolving Financial Landscape
Joanna Ledgerwood and Alan Gibson

Historically, the promise of poverty alleviation  Many events have influenced the landscape for 
through microcredit was tied primarily to one  financial services for the poor, but three signifi-
product—the productive loan invested in a micro-
cant “big picture” influences warrant discussion 
enterprise—delivered primarily by one type of  and are the subject of this opening chapter.
provider—a microfinance institution (MFI). Yet 
The first has been a shift from a narrow focus 
reality belies the premise of this model: clients do  on the institution and its performance to a much 
not always use loans for productive purposes;  broader focus on clients—understanding their 
they have either limited capacity to use invest-
behavior, financial service needs, and how various 
ment credit or more pressing needs for products  providers can better meet these needs. This 
that support consumption or income smoothing.  shift  has been brought on by the recognition— 
Today, there is broad recognition that access to  supported by significantly better data and more 
capital is only one of the inputs required for eco-
robust research—that outreach and, perhaps 
nomic development and poverty alleviation.  more important, impact have not been as 
Furthermore, there is wide acknowledgment that  expected. This is also the result of a widening 
the poor, like anyone, require and use a variety of  view of microfinance. No longer limited to invest-
financial services for a variety of purposes. And  ing in microenterprises, microfinance now 
some of these services work better than others,  encompasses all financial services and how to 
for reasons we are just beginning to understand.
provide them in a way that improves the quality 
Since the original Microfinance Handbook was  of life of poor women and men. 
written, the field of microfinance has changed 
The second important shift, which greatly 
substantially, particularly in the last few years.  influences this book, has been from a narrow 
The Evolving Financial Landscape 
15

 supply-led view to a broader focus on the finan-
Focusing on clients is a welcome and neces-
cial ecosystem. In addition to a renewed focus  sary shift. However, the end game cannot simply 
on consumers (demand), proponents of the  be to develop new products or make adjustments 
 “systems” approach acknowledge the variety of  within institutions; an institutional response 
providers and services, including the substantial  alone is not enough. We need to understand con-
role of the informal sector. They also acknowl-
sumer behavior and how it influences financial 
edge the need for effective rules that govern the  service needs and use. While the ultimate solu-
system and supporting functions such as credit  tion may be a better product or service, an easier 
bureaus or payment systems. The result has been  way to access an account, or a lower-cost delivery 
a much more holistic view of the sector and a  option, to get there we need to appreciate the 
more coordinated effort by government and  nuances and contextual factors that affect how 
industry to focus on increasing financial inclu-
poor women and men behave and which financial 
sion and, ultimately, making markets work better  services are of most benefit to them, for what pur-
for the poor. 
pose, and why. For example, market research con-
The third shift has been the massive opportu-
ducted with MFI clients in Bolivia indicates that 
nity to expand outreach through new business  clients identify respect as their greatest priority; 
models based on branchless banking using tech-
product attributes are important, but they are not 
nology and agent networks. However, while the  the most important consideration (Perdomo 
opportunity seems vast, to date only a few branch-
2008).3 Clients want to preserve their dignity 
less banking applications have reached significant  when interacting with a financial institution, and 
scale. At the time of writing, this area of tremen-
they want to borrow without fear or humiliation. 
dous promise requires a lot more work and test-
To accomplish these goals, they need to under-
ing to understand and determine ways to take  stand the services they use and the contracts they 
advantage of the opportunities that technology  sign, and providers need to value and invest in 
presents. 
customer service. The solution is unlikely to be 
This chapter considers each of these influ-
simply new or more products.
ences and places the new landscape in context. It 
Understanding how consumer behavior trans-
will be of interest to readers seeking to under-
lates into financial service needs requires under-
stand some of the major influences in microfi-
standing the uniqueness and heterogeneity of 
nance today. Each of the topics is introduced here  clients and how life-cycle events, livelihoods, 
and elaborated in more detail in various chapters  geography, income levels, and gender influence 
that follow. 
their behavior. The following section discusses 
the characteristics that define and influence client 
Focus on Clients
behavior and financial service needs, while chap-
ter 2 provides an overview of how clients use 
Almost everywhere, people involved in microf-
financial services based on findings from Portfolios 
inance are talking about clients.1 As a result,  of the Poor.4
the language of microfinance is changing. 
Initially microcredit became microfinance with  Age, Life-Cycle, and Family Structure
the recognition of the need for savings services;  Financial needs and vulnerabilities change as 
today policy makers and industry players use  people move through the life-cycle—from 
 
terms like inclusive finance, access to finance,  dependence on family to independence and 
financial ecosystems, and financial inclusion  from school to work, marriage, family responsi-
(see box 1.1).2 
bilities, and retirement. Sons migrate in search 
16 
The New Microfinance Handbook

Box 1.1  From Microfinance to Financial Inclusion
Financial inclusion is a multidimensional, pro-
collection of loan payments collapsed in the 
client concept, encompassing increased  Indian state of Andhra Pradesh (Chen, 
access, better products and services, bet-
Rasmussen, and Reille 2010). These isolated 
ter-informed and -equipped consumers, and  crises serve as a warning that microcredit can 
effective use of products and services. Putting 
cause trouble for clients. Over-indebtedness 
this concept into practice requires more than 
can increase financial and social vulnerabil-
institutional expansion and portfolio growth,  ity as borrowers take new loans to repay old 
goals that drove early development of the  ones or resort to extreme measures to 
microfinance industry, when the original  make their payments, including reducing 
Handbook was written. Balancing clients’  their consumption of food and selling pro-
interests and providers’ viability, financial  ductive  assets. Such measures can lock bor-
inclusion incorporates effective policies, legis-
rowers into a downward spiral with severe 
lation, industry and consumer protection stan-
consequences.
dards, and financial capability. 
At the same time, innovation is bringing 
Several developments have converged to 
new customers and new service providers 
refocus thinking about best practice in finan-
into the market. Diversification of products 
cial services for the poor. Commercialization 
and services has already resulted in more 
of microfinance has raised concerns about  choices for consumers. However, although 
mission drift, eliciting calls for paying attention 
such diversity indicates a maturing industry, 
to social performance and the “double bottom 
increased access and more choice do not 
line,” which relies on strong financial perfor-
 
automatically translate into effective use. 
mance to fulfill a social mission. Further  Simply opening an account does not mean 
 concerns have emerged with regard to high 
that it will be used. Effective use is ham-
interest rates and private gains from public  pered by asymmetries of information as well 
offerings of MFI shares and the concentration 
as unsuitable product features or accessibil-
of investments in a small number of countries 
ity requirements (for example, minimum bal-
and institutions. Microfinance, as the “new  ances, age restrictions, regular contributions, 
asset class, may not be the newest emerging 
affordability, and distance to branch or cus-
market; relatively few MFIs can absorb a sig-
tomer service point). This can lead to an 
nificant amount of capital.
 imbalance of power between financial insti-
Furthermore, in some countries, client  tutions and poor consumers, an imbalance 
over-indebtedness is attributed in part to mar-
that grows as inexperienced and ill-informed 
ket saturation, with a narrow range of credit 
customers (for example, millions of unbanked 
products and competition among MFIs push-
owners of mobile phones who are potential 
ing lenders to make increasingly risky loans 
mobile banking customers) choose among 
and pursue harsh collection practices when 
increasingly sophisticated products without 
repayment has faltered. In the first decade of 
recourse to adequate protective or grievance 
the new century, delinquency rates rose dra-
measures (Cohen and Nelson 2011).
matically in some countries, and, in 2010, the 
Note: This box was contributed by Candace Nelson.
The Evolving Financial Landscape 
17

of more income; young mothers manage child-
acute vulnerabilities, including loss of produc-
birth expenses, health care, and nutrition; par-
tivity due to deteriorating health, physical 
ents struggle to educate their children. Widows  immobility, and the loss of family support as 
are threatened with loss of land and other assets  children become independent and develop their 
to their husbands’ relatives. Elderly clients face  own financial commitments (Hatch 2011). These 
Box 1.2  Youth Financial Services: An Opportunity for the Future
The 1.5 billion people between the ages of  most cases, the scope of the products has 
12 to 24 in the world today represent the larg-
expanded to include interventions to provide 
est number of youth ever on the planet. Of 
financial education, develop capacity, and 
these, 85 percent, or 1.3 billion people, live in 
build youth skills, knowledge, and capital, 
developing countries (World Bank 2011).  including life skills training, workforce training 
Although the “youth bulge” is declining in  (such as vocational education), and mentoring 
East Asia and Central Europe, the youth popu-
and internship or apprenticeship programs. 
lation is expected to grow in Sub-Saharan  Community-managed finance models, includ-
Africa for the next 40 years. In 97 developing 
ing savings-led groups and rotating savings 
countries, half of the population is 25 years of 
and credit associations (ROSCAs), have been 
age or younger. Worldwide, 47 percent of the 
adapted for youth and have shown promise.
unemployed are youth. Most young people in 
Some preliminary evidence suggests that 
developing countries do not have access to 
access to financial services has improved the 
the financial services and education that  ability of young people to manage their 
would help them to be productive, engaging 
finances and plan for their own futures. These 
citizens in their economies. 
results suggest that efforts are needed to 
This explosion of youth constitutes an  innovate and experiment with product design 
immense challenge and opportunity for human 
as well as bundled packages of services that 
development. Youth is an excellent time to  integrate financial with nonfinancial services. 
learn responsible habits and attitudes with  Together, these offerings support the develop-
regard to saving, borrowing, spending, using 
ment of a better-informed and financially 
insurance, and investing. Appropriate financial 
savvy generation. 
services, tailored to the unique needs and 
Youth financial services remain a niche field 
capabilities of youth, can help young  people to 
within the larger financial services industry, 
manage their finances better and potentially to 
driven mainly by a few donors, large interna-
start and expand microenterprises to support 
tional nongovernmental organizations (NGOs), 
themselves and their families.
and a few innovative providers. If we are to 
However, age restrictions, identification  meet the needs of this growing segment of 
requirements, and relatively low profitability  the population and ensure that they have the 
of small deposit accounts or loans can make it 
skills and resources to be economically active 
difficult for providers to meet the needs of  citizens, we need to mainstream youth finan-
young people. This nascent field has seen  cial services within the financial inclusion 
much innovation in the past few years. In  agenda—both nationally and globally.
Source: Nisha Singh, Small Enterprise Education and Promotion (SEEP) Network. Statistics are from http://www 
.photius.com/rankings/population/median_age_total_2008_0.html, compiled from CIA 2008. 
18 
The New Microfinance Handbook

changes result in the need for different financial  compound, often combining financial resources 
services at different life-cycle stages. 
in order to meet daily needs or respond to emer-
Other life-cycle events, such as celebrations,  gencies. Similarly, income is often shared among 
religious ceremonies, or building a home, require  the larger family. While saving may be difficult 
lump sums that are often hard to accumulate  for an individual, sharing income facilitates risk 
without adequate financial services. Financial  management in the absence of formal services 
exclusion is strongly influenced by age, with  (see box 1.3). 
youth facing significant hurdles  (Johnson and 
In many contexts, community elders control 
Arnold 2011; see box 1.2). To be relevant, finan-
assets and decide how they will be distributed 
cial service providers must modify products, ser-
throughout a given community. Thus an individu-
vices, and delivery channels to accommodate  al’s ability to access services may depend on his or 
differences in life-cycle and age. Providers can  her social position relative to that of more senior 
respond to differing needs by developing  members in the community. 
age-specific products, such as youth savings 
accounts or pension funds. 
Livelihoods, Geography, and Income Levels 
Family structure can also affect how financial  The financial pressures of managing inconsistent 
services are used. In many communities, the  income to cover daily expenses, unexpected 
concept of family extends well beyond spouses,  emergencies, and life-cycle events weigh heavily 
siblings, children, and grandparents. Cousins,  on the poor. Although millions of people—from 
distant relatives, and even neighbors are an  the poorest of the poor to the economically active 
integral part of a family. Polygamy further  poor to small business operators to salaried 
increases the size and complexity of the family   workers—face similar pressures, their responses 
structure. A large family may live together in one  and need for financial services vary depending on 
Box 1.3  Gambian Family Structure and Impact on Financial Behavior and 
Demand
A remittance landscape study conducted in 
and keep money away from male family 
The Gambia by Women’s World Banking  members. 
 provides insight into how family structure 
In addition to earnings from small-scale 
affects the demand for financial services  economic activities, women in The Gambia 
(Orozco, Banthia, and Ashcroft 2011). Women 
also depend heavily on international remit-
often live in polygamist households and play 
tances to feed the family, send children to 
central roles in managing the household  school, and pay for food and clothes for reli-
budget. For many Gambian women, the  gious events. In focus groups, many women 
financial goals of purchasing land or building 
said that remittance-linked savings accounts 
up savings often take a back seat to the  would help them to meet their financial goals, 
 day-to-day financial needs of the extended  but because of the financial needs of their 
 family. Women often save in informal com-
extended family and the cost and time of get-
munity-based savings clubs called ososus 
ting to a bank, consistent use of a savings 
because they are close at hand,  convenient, 
account would be challenging. 
Source: Banthia and McConaghy 2012. 
The Evolving Financial Landscape 
19

their livelihoods and where they live, which, in  products to address a multitude of financial ser-
turn, affect their income level. 
vice needs. 
Historically, microfinance has focused on 
Geography matters as well. For example, peo-
microentrepreneurs, with loan products designed  ple living in rural areas likely earn income from 
primarily for traders with daily or weekly cash  agricultural activities that generate very different 
flow and in need of short-term working capital.  cash flows than traditional “microenterprises.” 
However, by focusing on productive credit,  Financial services for smallholder farmers need 
microfinance providers may have missed serving  to suit their cash flows and consider the produc-
the majority of the potential market. As demon-
tion and marketing risks specific to a given crop 
strated in figure 1.1, of the 1.6 billion working  (see chapter 10). However, in general, it is more 
poor, less than 500 million are microentrepre-
expensive for providers to operate in rural areas, 
neurs or salaried wage workers; the rest earn  limiting clients’ choices and challenging provid-
their income, likely low and irregular, from  ers to reach scale, particularly where population 
farming, casual labor, fishing, and pastoral  density is low, access to markets or supplies is 
activities (Christen 2011). They, like anyone,  limited, and infrastructure is undeveloped. Rural 
need access to financial services to manage  areas often have higher covariance risk due to the 
their daily lives, and they need a variety of  lack of a diversified economic base and the risk of 
Figure 1.1  Financial Service Needs for Different Livelihood Segments
Livelihood segment sizing
Financial service needs
(millions of people)
80m fishermen &
pastoralists
Asset protection
100m unemployed
Payment and
180m micro–
transaction mechanisms
entrepreneurs
300m low
Catastrophic health
wage salaried
event protection
1.6 billion
working-age adults
Start-up
living on less than
370m casual
capital
US$2 a day
laborers
Consumption
smoothing
610m
small-holder
Risk
farmers
protection
Safe savings
Source: Wyman 2007. 
20 
The New Microfinance Handbook

crop failure or drought; in some rural areas, a his-
Over the years, we have learned that the eco-
tory of poorly designed rural credit programs  nomically active poor rather than the poorest of 
(subsidized and/or directed credit, no savings  the poor stand to benefit the most from access to 
mobilization) can affect people’s perceptions of  financial services (without other interventions). 
financial services.
“The majority of the world’s estimated 150 mil-
And while having a bank account may seem  lion microcredit clients are thought to live just 
more useful for an employee who receives regular  below and, more often, just above the poverty 
wages than for, say, a laborer who is paid in cash,  line” (Hashemi and de Montesquiou 2011, 1). 
farmers, wage earners, and laborers would all 
From the perspective of both the client and 
benefit from having access to a safe place to save  the provider, it is generally more expensive to 
for lump-sum expenditures or respond to an  transact in smaller amounts with greater fre-
emergency or new opportunity (see box 1.4).
quency. For providers, smaller transaction 
In addition to how consumers generate  amounts also result in a smaller revenue base—
income, the amount of income affects their access  for example, people with lower incomes gener-
to and need for financial services. To meet varying  ally have lower savings balances, less capacity to 
income levels, products and services need to have  take on debt, and fewer opportunities to gener-
characteristics—minimum balances, eligibility  ate income. Together, this makes it very difficult 
criteria, fees, and benefits—appropriate to each  to provide financial services to the extremely 
level. 
poor.
Box 1.4  The Financial Service Needs of the Poor in Mexico
Although the need to save and borrow is common across all groups of people, the ability to save 
and pay back debt is constrained by illiquidity. Ideally, financial services should help people to 
create liquidity and increase their financial assets:
• Formal salaried workers who earn a stable income would value a portfolio of savings
products that provide options to save with different terms, returns, and liquidity features, 
including simple savings products to help plan for both foreseen and unforeseen 
 expenses and commitment savings to achieve longer-term goals. They would also value 
having easy access to credit or savings for smoothing shortfalls and meeting emergency 
needs and to transactional services for putting away money temporarily or transferring it 
to others.
• Entrepreneurs who earn a variable income would value a portfolio of savings and credit
options that provide liquidity to respond to business opportunities and smooth out expenses 
across business cycles. 
• Seasonaloragriculturalworkershavethemostirregularincome,ofteninsufficientinitself.
These households usually engage in multiple endeavors to supplement income and group 
together in extended families to pool resources and share expenses. They would value sav-
ings services, insurance, and small loans for emergencies. Perhaps the most vulnerable, this 
group would benefit the most from broader financial planning and literacy.
Source: Faz and Breloff 2012. 
The Evolving Financial Landscape 
21

For the extremely poor, cash or asset transfers,  individuals may be  systematically denied access 
rather than microcredit, are often a better solu-
because they are from a lower caste or a different 
tion, at least initially. If possible, placing cash  religion (see box 1.6).
transfers into a bank account appropriate for the 
Islamic finance is possibly the best-known 
poor can also support financial inclusion (see  example of religion influencing financial transac-
chapter 3).
tions. Islamic finance is based on Islamic or sharia 
While the majority of providers serve the   law, but despite the term “law,” Islamic finance is 
economically active poor, an innovative model  based largely on cultural norms. According to 
for providing financial services to the poorest  Karim, Tarazi, and Reille (2008, 6), “Indeed, 
in Bangladesh, developed by BRAC, is being  sharia compliance in some societies may be less a 
 replicated in countries around the world (see  religious principle than a cultural one—and even 
box 1.5).
the less religiously observant may prefer sharia- 
compliant products.” 
Ethnicity, Caste, and Religion
A key overriding principle of Islamic finance is 
Building and maintaining a level of trust in all  the need to provide for the welfare of the commu-
circumstances can improve financial inclusion,  nity by prohibiting practices considered unfair or 
and it is particularly important when different  exploitative. Fundamental to the provision of 
ethnic or religious groups are involved. Caste,  Islamic financial services is the inability to give or 
while not solely an ethnic factor, can pose cul-
receive a fixed, predetermined rate of return. This 
tural barriers similar to ethnic differences. In  principle is banned based on two sharia precepts: 
countries where caste systems or religion are  money has no intrinsic worth, and providers of 
central to a community’s social organization,  funding must share the business risk (Karim, 
Box 1.5  Reaching the Poorest: Lessons from the Graduation Model
BRAC works in 70,000 rural villages and 2,000 
small loans to accelerate livelihood develop-
urban slums in Bangladesh, providing microfi-
ment. In less than 20 years, the program 
nance, schooling, health care, legal services, 
reached 2.2 million households. In 2002 BRAC 
and marketing facilities. Realizing that its  fine-tuned its approach, both through better 
microfinance programs were not reaching  identification of the ultrapoor (defined as peo-
many of the poorest, in 1985 BRAC partnered 
ple who spend 80 percent of their total expen-
with the government of Bangladesh and the 
diture on food without attaining 80 percent of 
World Food Program to add a graduation lad-
their minimum caloric needs) and through a 
der to an existing national safety net program 
set of more intensive, sequenced inputs.
that was providing the poorest households 
By 2010, BRAC had reached around 
with a monthly allocation of food grain for a 
300,000 ultrapoor households with this new 
two-year period. The graduation model is built 
approach, termed Challenging the Frontiers of 
on five core elements: targeting, consump-
Poverty Reduction/Targeting the Ultra Poor. 
tion support, savings, skills training and regu-
BRAC estimates that more than 75 percent of 
lar coaching, and asset transfers. BRAC  these households are currently food secure 
worked with beneficiaries, eventually adding 
and managing sustainable economic activities.
Source: Hashemi and de Montesquiou 2011.
22 
The New Microfinance Handbook

Box 1.6  Religion and Caste in India
The caste system describes a stratification in 
provides indispensable conditions for capital 
which social classes or subclasses of tradi-
accumulation: “In India, religious affiliation 
tional Hindu society are separated by distinc-
can govern the creation and protection of rent, 
tions of hereditary rank, profession, or wealth. 
the acquisition of skills and contacts, the 
Different castes engage in different produc-
rationing of finance, the establishment and 
tive activities according to their historical  defense of collective reputation, the circula-
 
connections. Skills are passed on through  tion of information, the norms that regulate 
apprenticeships gained through social net-
the inheritance and management of property, 
works based on kin, caste, and locality. Caste 
and those that prescribe the subordination of 
is least flexible where social disadvantage is 
women” (Harriss-White 2004). In addition, 
most entrenched and poverty is most pro-
religious groups provide insurance and last- 
found. Lower levels of technology are  resort social security. Jains, for example, are 
 relegated to lower castes—for instance, the 
often wealthy local merchants, moneylenders, 
dalits have to carry heavy loads on their heads; 
and pawnbrokers who have indirect power 
they cannot use wheelbarrows. Workers  over the local rural economy through webs of 
themselves may enforce caste stratification  credit. The Muslim traders of Pallavaram, in 
to protect their place in the labor market. 
contrast, are limited in their economic growth 
Studies in India have found that religion  by their lack of access to finance.
can supply a collective identity, which, in turn, 
Source: Harriss-White 2004, as summarized on microLINKS.
Tarazi, and Reille 2008). While these principles 
targeting a programme towards women. It 
reflect widely held beliefs, sharia-compliant reg-
means recognising the position of women in 
ulatory frameworks are just beginning to be 
relation to men as actors in society: in the con-
developed.
text of husbands and families; local community 
Religion and ethnicity can also affect the abil-
and authority; and more broadly their position 
ity of women to access services. For example, in 
in society at the national level as governed by 
some cultures women are home-bound for reli-
laws and custom. Then it is necessary to act to 
gious reasons and unable to meet with providers 
support women to overcome the obstacles they 
outside the home or to form groups with other 
face in these relationships which prevent them 
women. Similarly, some cultures prohibit male 
from using financial services to achieve what 
staff from visiting female clients. Gender-based 
they wish for themselves (Johnson 2000).
rules and norms can have a significant impact on 
both the financial service needs of women and 
Women often lack control over cash manage-
their ability to access and use services. 
ment within their household and may be depen-
dent on their husband to access financial services. 
Gender
Moreover, rules often prevent women from 
 owning assets or participating in wage-earning 
  Recognizing gender issues in microfinance, as   activities outside the household (see box 1.7). For 
in any project intervention, means more than  example, in Morocco, women’s mobility outside 
The Evolving Financial Landscape 
23

Box 1.7  The Embeddedness of Financial Service Use in Gender Norms in 
Kenya
Research in the rural areas of central Kenya 
are less likely to use ROSCAs and more likely 
indicates that the use of formal and infor-
to use banks or SACCOs to manage lump 
mal financial services is strongly influenced 
sums and hold them until needed or, if possi-
by gender relations (Johnson 2004). Men  ble, take loans.
are much more likely to have accounts with 
Social differences also affect how men and 
banks or savings and credit cooperatives  women engage with financial services. For 
(SACCOs), but women are much more  example, men and women differ in their atti-
likely to use informal group-based systems, 
tudes toward the social consequences of fail-
especially ROSCAs. Men are also much  ing to make a payment in a ROSCA. Women 
more likely to use M-PESA—e-money pay-
said that they would experience embarrass-
ment and transfer—services (Johnson and 
ment and shame if they were unable to pay 
Arnold 2011). 
the contribution; they would view this as 
It is necessary to understand how the divi-
“spoiling” the group. Men said that they would 
sion of labor and control of income in the  not be ashamed of not paying, would not trust 
household influences the type of financial ser-
each other to make the system work, do not 
vices that men and women need. While  like the strictness of the rules, and realize that 
women contribute important labor to agricul-
little could be done if they did not pay. 
tural activities, men usually control the activi-
Consequently, in Kenya, women’s ROSCAs are 
ties with the highest financial returns; women 
more successful than men’s ROSCAs. 
likely control smaller income streams, which 
These differences reflect deeply rooted 
enable them to pay for food and other house-
gender norms. Women’s groups have a long 
hold items needed on a regular basis. These 
history in Kikuyu society, and participation is 
differences in income flows result in gender- 
considered an important social skill; groups 
differentiated demand for financial services.  socialize women in how they should act and 
For women, ROSCAs are an ideal way of  behave. Groups also enable women to pro-
 turning small but fairly regular incomes into a 
vide some of the household essentials. 
larger amount over a period of weeks to pur-
Additionally, since property, especially land, 
chase goods such as household utensils, blan-
tends to be under men’s control, to the extent 
kets, or clothes. Moreover, the timing of these 
that land is used as collateral, men are more 
needs is not especially critical. Men’s incomes 
able to borrow from banks than women. 
are often larger and tend to be received in  However, in Kenya men do not have exclusive 
lump sums. Men are responsible for larger  control of land, and the family must agree to 
purchases, such as assets or farm inputs.  its use as collateral. Women can refuse if they 
They find it difficult to make regular contribu-
think the loan may be misused. In addition, 
tions to ROSCAs at levels that would produce 
men usually hold the licenses for the produc-
the size of payouts needed. Also, since some 
tion of cash crops (tea, coffee) and can open 
of their expenditures have specific timing,  an account with a crop-based savings and 
many men in a ROSCA may require access to 
credit cooperative, while their wives are usu-
the payout at the same time. As a result, men 
ally simply a cosignatory.
Source: Susan Johnson, Centre for Development Studies, University of Bath.
24 
The New Microfinance Handbook

Table 1.1  Gender-Based Obstacles in Microfinance and Microenterprise
Wider community or  
Type of obstacle Individual
Household
national context
Financial
Women lack access  Men control cash income and  Men are perceived as controllers 
to banks or financial  their expenditure patterns do  of money and loans 
services in their own  not support the household
right
Economic
Women undertake 
Households are characterized  Women are underpaid for equal 
activities that 
by gender division of labor, 
work; women are locked in 
produce low returns;  unequal access and control of  low-paid jobs; stereotypes 
women have a 
land, labor, and inputs, and 
determine the appropriate roles for 
heavy domestic 
unequal control of joint 
women in the economy; women 
workload
household produce and 
lack access to markets for inputs 
income streams from this
and outputs if their mobility is 
constrained due to social norms 
Social or cultural Women are not 
Women have a limited role in  Banks and financial institutions do 
literate or educated;  household decision making; 
not view women as a potential 
girls’ education is 
polygamy results in conflict, 
market; women’s mobility is 
not prioritized 
competition, and discrimina-
constrained by social norms 
tion between wives; violence 
toward women is common
Political or legal
Women lack 
Women lack legal rights to 
Women’s legal rights to household 
confidence to claim  jointly owned household 
assets are not defined in law or 
political and legal 
assets
useful for collateral; women lack 
rights
political positions to establish 
appropriate laws; women lack both 
traditional and formal legal rights  
to land
Source: Johnson n.d.
the home is restricted, and women’s work is often  The Financial Ecosystem
associated with shame, as it reflects a man’s 
inability to be the sole financial provider (Banthia  While understanding the behavior and needs of 
et al. 2011).
clients is paramount, many stakeholders are also 
Table 1.1 outlines the most prevalent gen-
concerned with the wider financial ecosystem 
der-based obstacles affecting financial service  and how it affects financial inclusion (or exclu-
access and use. 
sion). Financial inclusion efforts focus on how the 
Altogether, the need for and ability to use and  supply of financial services (products and ser-
benefit from financial services depend to a great  vices provided by sustainable institutions) can 
extent on age and life-cycle income levels, cul-
better meet demand; they also acknowledge the 
tural context, and gender. The more we under-
functions within the wider market system that 
stand client characteristics and influences on  support financial transactions. 
their behavior, the better equipped we will be to 
The contents of this book are shaped by the 
increase financial inclusion in a meaningful way. 
market system approach (see M4P Hub 2008). 
The Evolving Financial Landscape 
25

This approach provides a practical means of  • Core. Transactions between providers and cli-
assessing consumer behavior, the demand for 
ents (supply and demand)
and supply of financial services, and the  rules  • Rules. Informal and formal rules that shape 
and functions that support transactions. 
the behavior of market players, including 
Whether financial service needs translate into 
consumers 
demand that is met by a financial service pro-
vider depends on many factors, including the  • Supporting functions. The collection of func-
degree to which providers are sufficiently 
tions that provide information and services 
informed to identify client needs, potential cli-
supporting the development and expansion of 
ents have information about providers, and trust 
the core.
exists between the two. Beyond this, a provider’s 
Understanding financial market systems 
ability to develop and offer an appropriate prod-
involves breaking down each of these functions 
uct is shaped by its capacity in relation to product into more detail to identify specific elements 
development and  delivery channels and by its  within them and the main players who are likely 
incentives to improve them. For example, do reg-
to be directly engaged (see figure 1.2). Each set of 
ulations encourage the development and expan-
functions can be viewed in isolation, yet in prac-
sion of services? Do the laws on collateral  tice functions only have value when seen as inte-
requirements promote overall financial inclu-
gral parts of a wider ecosystem. By incorporating 
sion? Can providers access funding to support  the interests and incentives of clients and other 
growth? Do they have the right legal form and  key market players and the influence of rules and 
networks to do so? Do credit bureaus exist, and  supporting functions with regard to financial ser-
are they effective? Does the accessible infrastruc-
vice provision, the market system framework 
ture promote overall financial inclusion? Equally  acknowledges that only by understanding the 
important, how do the attitudes  and norms  entire system can we address the constraints to 
among both consumers (for example, to loan  and take advantage of the opportunities for 
repayment) and providers (for example, to risk  increasing financial inclusion (see box 1.8). 
and reward) influence financial inclusion?
This section describes the financial market 
system, specifically the functions within it and  The Core
the roles played by various market actors. A mar-
  Offering a combination of the appropriate 
ket system necessarily includes both private and 
instruments and an understanding of how 
public sector actors as well as civil society and, 
these can be used practically within the con-
indeed, consumers themselves. Because the term 
text of current livelihoods and existing social 
market is often equated only with the private sec-
and cultural norms will enable and encourage 
tor, the term ecosystem is used interchangeably 
people to shift towards improved management 
with market system in this book (see Ehrbeck, 
of their finances. The heart of the market sys-
Pickens, and Tarazi 2012). 
tems approach is to understand the demand 
side and support customer-focused develop-
Functions of the Market System
ment and innovation driving the supply side. 
There are three main sets of functions in a market 
(FSD Kenya). 
system, each carried out by various market play-
ers, including the private sector, government, 
For financial market systems to work more 
NGOs, community groups, representative associ-
inclusively and successfully, two characteristics 
ations, and consumers. 
must be present. First, the number of transactions 
26 
The New Microfinance Handbook

Figure 1.2  Stylized View of the Financial Ecosystem
MARKET FUNCTIONS
MARKET PLAYERS
SUPPORTING
FUNCTIONS
Clients
Information
Funding
Coordination
Infrastructure
Private sector
Research
Technical
assistance
Capacity
develop-
Advocacy
Government
ment
Demand
CORE
Supply
Community groups
Representative associations
Formal
Not-for-profit sector
Informal
rules
rules
RULES
must increase; expanding the access frontier to  discussions are provided in the chapters that 
include previously excluded people is a key indi-
follow.
cator of financial system development and an offi-
cial goal of many financial authorities. Second,  Demand: Clients
products must accurately address the needs of  As discussed in the previous section on clients, 
clients, improving their lives or businesses.5 A  poor households are in continual need of finan-
better-functioning core is therefore manifested in  cial tools to improve their productivity and secure 
more and better-quality transactions. The key  the best possible consumption and investment 
players in the core of the market are clients  choices, all the while managing potential or exist-
(demand) and financial service providers (sup-
ing risks. Understanding demand requires both 
ply), connected to each other by products (sup-
an understanding of the financial service needs of 
ply). The following discussion provides a brief  clients and, as well, their behavior with regard to 
overview of demand and supply. More detailed  existing financial services.
The Evolving Financial Landscape 
27

Box 1.8  Understanding the Financial Market System
For any organization involved in financial  demand; it involves the many other functions 
 
market development—for-profit companies,  that influence transactions—attitudes and 
 
NGOs, governments, investors, donors, and 
values, skills, product and organizational 
other development practitioners—an under-
 devel opment, regulations, and policies. These 
standing of the financial market system is   provide information, knowledge, and incen-
important when considering their objectives  tives that determine behavior and practices 
and roles. Building on a detailed understand-
and shape relationships.
ing of market systems and a clear vision of the 
The players in the system thus extend well 
future of financial inclusion, the market sys-
beyond the “simple” duopoly of clients and 
tems approach guides stakeholders to  providers to include government, private sec-
address systemic constraints and bring about 
tor service providers, associations, and com-
large-scale, sustainable change. It is through 
munities. When the functions and players in 
the development of inclusive and sustainable 
financial market systems work well, benefits 
financial market systems that financial ser-
follow. When they do not, consumers, espe-
vices will make a meaningful difference in the 
cially the poor, are likely to receive limited or 
lives of poor people and promote economic 
temporary benefits. Sustaining the benefits of 
growth. 
access depends on the stability of the finan-
The financial market systems framework 
cial system and its ongoing ability to provide 
recognizes how different players fit within  services and, indeed, ensure that people’s 
the system, including their main functions and 
savings are not put at undue risk.
the relationships between them. Although the 
A functioning and inclusive financial market 
central function in market systems is to pro-
system, therefore, is characterized by strong 
vide a space for transactions, the nature and 
and sustainable performance—demonstrated 
efficiency of those transactions are shaped by 
by size and outreach (number of clients and 
formal and informal rules and a range of sup-
number and variety of providers), depth and 
porting functions. While supply-side factors  quality (poverty level and degree to which 
(offering financial services) are crucial to mak-
products meet client needs)—and the capac-
ing the financial system work better for the 
ity and competence of rules and supporting 
poor, achieving this goal is more complicated 
functions, allowing the market to learn, adapt, 
than a straightforward equation of supply and 
and develop in a sustainable manner. 
Analyzing data from financial diaries collected  100 percent of their income. This reveals a remark-
across Bangladesh, India, and South Africa,  able resourcefulness, but when transaction costs 
Collins et al. (2009) suggests a much more com-
don’t scale with transaction size, fragmenting 
plex picture of demand than previously assumed:  transactions over many informal instruments can 
“The authors of the book, Portfolios of the Poor,  be very costly. Therefore, they not only need 
found that households used between eight and 10  financial tools, they need well-performing and 
different types of mostly informal financial instru-
cost-effective financial tools” (Kendall 2010, 1).
ments with very high turnovers—often 10 times 
The poor often prefer the informal sector on 
the asset values through the year and more than  most dimensions important to consumers (access, 
28 
The New Microfinance Handbook

flexibility, product features, and service quality). 
While financial service providers are often 
However, informal financial mechanisms may  characterized as formal, semiformal, or informal, 
entail cost, inconvenience, embarrassment, and  traditionally referring to their regulatory status, 
sometimes depletion of the very social capital on  we classify them as either community-based 
which they are built. More needs to be under-
(generally informal with no legal status) or insti-
stood about how the informal sector expands out-
tutional (generally more formal and in some cases 
reach, if and how those relying on the informal  regulated).6 
sector are underserved, and how the quality of 
Community-based providers include both 
consumers’ lives could be improved as a result of  individuals (such as friends and family, money-
access to formal financial services. Chapter 2 pro-
lenders, shop owners, traders, and deposit 
vides a more detailed discussion of demand and   
collectors) and groups, including indigenous 
how we can learn from the informal sector and  groups, such as ROSCAs and accumulating sav-
the behavior of clients.
ings and credit associations (ASCAs), and facili-
tated groups trained by external agencies, such as 
Supply: Providers
Savings Groups (SGs) and Self-Help Groups 
While most of the first microfinance institutions  (SHGs). While more formal than ROSCAs, these 
were established as NGOs, the sector has evolved  facilitated groups are not considered to be “insti-
to include many types of providers. Specialized  tutions,” as they, for the most part, are not legally 
commercial banks providing a range of financial  licensed as financial service providers, have few 
services have proven that the poor are “bankable,”  expenses, and provide services primarily within 
while member-based community groups have  the group itself (see chapter 6).
shown that financial services can be provided 
Institutional providers include member-owned 
directly by the community on a sustainable basis.  financial cooperatives and NGOs, which are nor-
Providers are discussed in detail in part II of this  mally registered and possibly supervised, as well 
book; an overview of the types of providers is  as banks (private and public), deposit-taking 
included here and illustrated in figure 1.3.
MFIs, and non-bank financial institutions (NBFIs) 
Figure 1.3  The Range of Financial Service Providers
Community-based providers
Institutional providers
Community-based groups
Registered institutions
Individuals 
ROSCAs, ASCAs 
Financial cooperatives
Regulated institutions
Moneylenders
Deposit-taking MFIs
Burial societies 
SACCOs
Deposit collectors
Savings and postal banks
Savings groups
Suppliers, buyers
Pawnbrokers
State banks
Self-help groups
NGO MFIs
Traders
Commercial microfinance banks
Financial service
Mutual insurers
Shop owners
Non-bank financial institutions
associations
Money transfer companies
Friends, family
Commercial insurers
CVECAs
Mobile network operatorsa
Level of formalization
Note: ROSCAs = rotating savings and credit associations; ASCAs = accumulating savings and credit associations; CVECAs = caisses 
villageoises d’épargne et de crédit autogérées
; SACCOs = savings and credit cooperatives; NGO = nongovernmental organization; 
MFIs = microfinance institutions.
a. Mobile network operators are regulated as communication companies; most are not licensed to provide financial services.
The Evolving Financial Landscape 
29

such as insurance companies and leasing compa-
operators (MNOs) can offer services conveniently 
nies, which are normally regulated in some fash-
in rural areas, although relatively few have 
ion (see chapter 7).
achieved scale (see box 1.9).
No single type of organization presents an 
While recent years have witnessed a consider-
optimal solution to reaching all market segments  able increase in the commercial provision of 
with all types of financial services. In remote rural  microfinance and the emergence of publicly listed 
areas, the low cost structure and proximity of  microfinance companies, informal providers 
user-owned and managed providers constitute  remain the main source of financial services for 
significant advantages over more structured  the vast majority of the poor. For example, 
MFIs or commercial banks. However, credit  FinAccess data provide strong evidence that 
unions and banks have the advantage of being  Kenyan consumers use a portfolio of financial 
able to offer a wider variety of products or a  services. Of those using regulated formal services, 
broader spectrum of terms and conditions and  only 11 percent rely solely on a formal service, 31 
may be more reliable than community-based pro-
percent use a semiformal service, 13 percent use 
viders. New entrants such as mobile network  an informal service, and the remaining 45 percent 
Box 1.9  The Range of Providers in Sub-Saharan Africa
In 2011 the Microfinance Information eXchange (MIX) compiled a data set on financial inclusion 
for Sub-Saharan Africa. The data set brought together information from more than 60 distinct 
industry resources along with hundreds of individual institutions, covering some 23,000 provid-
ers of financial services reaching low-income populations in Africa. Africa has a diverse land-
scape of financial service providers—of which specialized MFIs are an important part—but the 
poor also access financial services through banks, credit unions and cooperatives, postal sav-
ings banks, SGs, and many other types of providers. Figure B1.9.1 shows the outreach of differ-
ent types of providers across Africa.
Figure B1.9.1  Number of Clients, Loans, and Deposit Accounts in Africa, by Type of 
Provider
Provider type
Credit union/Cooperative
Mobile network operator
NBFI/NGO
Bank
Savings bank
Savings groups
Postal savings bank
0M 5M
10M 15M 20M0M
2M
4M
6M 0M 5M
10M 15M 20M
Number of clients
Number of loans
Number of deposit
accounts
Source: Linthorst and Gaul 2011.
30 
The New Microfinance Handbook

use all three categories of services. Similarly, 
The main financial services include savings, 
more than half of those who have a semiformal  credit, payments, and insurance and are 
provider as their most formal source of finance  described in part III of this book.7 While finan-
also use an informal source. Furthermore, this  cial products and services are generally defined 
pattern of multiple service use has increased from  by standard characteristics such as term, size, 
2006 to 2009. In 2009, a mere 2.5 percent of  price, returns, and eligibility, their appeal to con-
Kenyans relied solely on the regulated formal sec-
sumers often depends on their reliability, acces-
tor (FSD Kenya FinAccess data for 2011).
sibility, flexibility, safety, and affordability. For 
example, products are accessible when provid-
Supply: Products
ers explain product features so that clients 
Clients benefit from having access to products  understand the commitment they are making. 
that match the way they live and conduct business  Products are safe if they are well-structured and 
and support them in addressing challenges. The  meet client needs in a transparent way without 
irregularity and limited size of cash flows mean  doing harm. Increasingly, more flexible terms 
that products that permit frequent, small, incre-
and conditions are being offered, including the 
mental transactions are more useful and conve-
ability to repay loans early, receive increases in 
nient than, for example, services that require a  existing loans, and open savings accounts with 
minimum transaction amount or take significant  no minimum balance. Payment services, loans 
time to access. Products provided directly in the  for housing and education, or savings accounts 
community are generally used frequently because  specifically for youth, as well as more complex 
they are accessible, convenient, and in close prox-
products such as leasing and  insurance are 
imity to where poor people live (see box 1.10).
beginning to reach low-income populations. 
Box 1.10  Savings-Led Financial Services in Bangladesh
SafeSave, one of the world’s first MFIs to  walks to households in the neighborhood, pro-
offer basic money management services to  viding services to individual clients. Clients 
poor clients, takes a client-centered approach, 
may deposit as little as Tk 1 (US$0.015) when 
acknowledging that the tiny incomes of poor 
the collector calls. Accounts with balances 
people are often irregular and unreliable, forc-
above Tk 1,000 (US$15) earn 6 percent inter-
ing them to use a complex set of financial  est. Clients may withdraw up to Tk 500 per 
management strategies. With minimal access 
day (US$7.50) at their doorstep or up to 
 
to formal sector providers, they often save in 
Tk 5,000 per day (US$75) at the branch office. 
the home, borrow from moneylenders, and  Long-term savings products are offered as 
participate in savings clubs—devices that are 
well as credit. All borrowers start with a credit 
accessible, but not always reliable. SafeSave 
limit of Tk 5,000 (US$75), but loans are not 
tries to provide the strengths of informal  mandatory. A minimum passbook savings bal-
finance, while redressing its weaknesses.
ance equal to one-third of the loan balance is 
SafeSave offers savings and loan services 
required as collateral at all times. In March 
to anyone living within walking distance of a 
2010, for the first time, SafeSave’s savings 
branch office. Six days a week, a collector  portfolio surpassed its loan portfolio in value. 
Source: SafeSave (http://www.safesave.org/).
The Evolving Financial Landscape 
31

As services become more client-centered, prod-
demand (the main financial service needs, 
uct delivery is also developing through innova-
including cash management, accumulating 
tive channels (see chapter 12).
lump sums, risk management, and money trans-
Table 1.2 provides a simple illustration sum-
fers) and supply (how poor people meet those 
marizing the core of the market system, that is,  needs). 
Table 1.2  Illustrative Solutions to Household Financial Management Needs
Financial man-
Day-to-day cash 
Accumulating  
agement needs
management
lump sums
Coping with risk
Transferring money
Default mecha-
Carry cash 
Hide cash in a secret  Reduce consumption; Deliver in person; 
nism used by the 
place
sell assets
send by friend or 
excluded
family member
Benefits 
Zero fees; zero 
Zero fees; zero 
Requires no planning Cheap; possible 
transaction costs; 
transaction costs; 
social benefits
fully liquid
fully liquid
Costs
High risk of 
Very high risk of  
Hardship; reduce 
Risk of theft or 
expropriation; no 
loss; lack of savings  potential future 
diversion; time- 
ability to borrow
discipline; too 
income
consuming; slow
accessible; loss of 
real value
Community- 
ROSCAs; shop 
ROSCAs; ASCAs
ROSCAs; other 
Bus or minibus taxi 
based mecha-
credit
community groups; 
nisms typically 
moneylenders
used 
Benefits 
Zero fees; very  
Zero fees; very low  Highly flexible;  
Familiar mechanism; 
low transaction 
transaction costs; 
very low transaction  no access  
costs; social 
savings discipline; 
costs; social sup-
requirements
benefits 
investment returns 
ports; very rapid 
(ASCAs)
response
Costs 
Inflexible terms; risk  Risk of loss; loss of  Unpredictable 
Risky; slow; difficult 
of loss; unpredict-
privacy
availability; potentially  to access;  
able; hidden costs 
high fees; high 
expensive
of shop credit 
contingent liability
Institutional 
Bank transaction 
Bank savings  
Insurance; emer-
Mobile phone-based 
mechanisms 
account
account
gency credit
payment
typically used
Benefits 
Fully flexible; secure Secure (deposit 
Can cover extreme 
Lower risk; fast; 
(deposit protection);  protection); moves 
risks; no contingent  easy to access; 
facilitates pay-
savings ”away from  liability; risk cover can  lower cost
ments; can lead to  temptation”; can  
be defined 
credit access
lead to credit access
Costs
High withdrawal 
High minimum 
High premiums or 
Account and 
fees; day-to-day 
balances; day-to-day  interest rates; 
subscriber identity 
access difficult
access difficult; low  accessibility; long  
module (SIM) card 
returns
and unpredictable 
required
claims process
Source: David Ferrand, FSD Kenya.
32 
The New Microfinance Handbook

Rules and Supporting Functions
together create the de jure parameters that shape 
Rules and supporting functions influence the  behavior (of clients and providers). Informal 
effectiveness of transactions (the core of the mar-
rules are usually unwritten and are invariably 
ket) and provide an enabling environment to  more nebulous and ill-defined than formal rules; 
allow markets to grow, adapt, and succeed in  they manifest themselves in attitudes, behavioral 
changing circumstances. Ensuring that they  norms, social organizations, and common prac-
improve and increase transactions supports  tices. These informal rules often drive incentives 
financial inclusion.
and behavior and determine the extent to which 
Who establishes and enforces rules and who  formal rules are adhered to (see box 1.12).
provides supporting functions differs by  function. 
The key players in relation to formal rules are 
Some functions, such as regulations, are appro-
government organizations and industry associa-
priately considered a “public good”; the key play-
tions. The increasing complexity of financial sys-
ers are the government and policy makers and,  tems and new innovations within them—such as 
on occasion, business associations. Others, such  the emergence of mobile banking—pose new 
as credit bureaus or rating agencies, are more  challenges for rule makers in terms of not only 
appropriately provided by private sector firms  what rules should be, but who should make and 
(see box 1.11).8 
implement them. 
Formal rules play a public or collective role in 
Rules
market systems, leveling the playing field for 
A broad term used to define the rules of the  providers and consumers. Formal rules affect 
game,9  rules include  formal rules (regulations  clients by setting legal frameworks and industry 
and standards) and informal rules (social con-
standards that influence market access, the 
ventions and cultural norms). Formal or infor-
range of products, and the competitive land-
mal rules—the rules themselves and their  scape, which, in turn, affect providers and their 
enforcement—govern participation and behavior  ability to serve their markets appropriately. For 
in financial market systems and strongly influ-
example, the legal ability to enforce contracts 
ence financial market outcomes. Formal rules  and register assets, the existence of a national 
have a defined, written set of responsibilities  identification system, or the protection of public 
that are allocated to specific parties, which  deposits are all critical parts of the “formal rule” 
Box 1.11  Key Rules and Supporting Functions for Savings Services
• Rules. Prudential and supervisory regimes that balance increased access with stability and 
depositor protection
• Operational and human resource development. A combination of training services and tech-
nical consultancy aimed at building provider capacity
• Payment systems. Requires collaboration between public and private players, enables orga-
nizations to take deposits and transfer funds 
• Deposit insurance. Whether public or private sector–based, requires savings organizations to 
agree on deposit requirements 
Source: Glisovic, El-Zoghbi, and Foster 2011.
The Evolving Financial Landscape 
33

Box 1.12  Formal and Informal Rules
Formal rules consist of the written laws, gov-
ferent individuals based on a combination of 
ernment policies, formal regulations, and  social norms, culture, and historical factors. 
industry standards that are formally docu-
Any specific community tends to adopt such 
mented and (sometimes) enforced. They are 
rules, codes of conduct, and regulations based 
shaped and influenced by the informal rules of 
on a combination of norms associated with 
the society or business community. In turn, 
different social institutions. Sometimes these 
they influence how informal rules are  informal rules fill an obvious gap in the formal 
expressed in the performance of the market.
legislation. Informal rules are often psycholog-
Informal rules are unwritten, tacit rules that 
ically internalized: not merely unwritten, but 
define acceptable roles and activities for dif-
beneath people’s conscious attention.
Source: microLINKS wiki 2010.
system. Formal rules are discussed in more  capital, where systems and structures have been 
detail in chapters 3, 17, and 19. 
developed to build trust and foster social and eco-
Informal rules are an integral part of local cul-
nomic transactions beyond the family and kin 
ture, value systems, and practices. By definition,  group, it will be easier and less costly to build sus-
they are not the responsibility of one player.  tainable systems for financial intermediation 
Although particular individuals or organizations  (Bennett 1997). 
may exert considerable influence, informal rules 
Informal rules can contribute to the effective-
emerge organically and are the result of traditions  ness of formal rules when the norm is compliance 
and habits influenced by social institutions, such  or when formal rules codify informal norms 
as gender, religion, caste, tradition, inheritance  already widely accepted (microLINKS wiki 
rights, and landownership.10 For example, accord-
2010), such as Islamic finance principles now 
ing to microLINKS wiki (2010), “Typically these  being incorporated into regulatory frameworks. 
gender norms are expressed through informal  Informal rules may also emerge in response to 
(and formal) rules that lead to discriminatory  formal rules that do not work well for a particular 
property and inheritance laws, for example, differ-
group or do not exist. For example, a village leader 
ent access to resources, and to restrictions on the  can “vouch” for borrowers in the absence of a 
tasks or places of work that women may occupy.” 
credit bureau or can verify property ownership in 
Norms suggest a standard of conduct that  the absence of a housing registry. Given that 
 people believe they ought to follow to avoid sanc-
informal rules reflect long-held beliefs and social 
tioning (Coleman 1994). Social and cultural  structures, they typically are difficult to change 
norms surrounding attitudes toward money,  (although some can be addressed by corrective 
sharing, and authority can greatly influence the  regulation or judicial decision). 
type of financial services that are most useful in a 
Informal rules also influence the supply side 
given community. Trust, for example, plays an  of the market. They may be manifested in, for 
integral role in the decision to use a particular  example, industry norms in relation to innova-
financial service or adopt a set of financial behav-
tion and risk, which, in turn, drive attitudes and 
iors (Shipton 2007). In societies with high social  practices to develop new products. And for 
34 
The New Microfinance Handbook

 providers of all sizes, the level of trust clients  institutions do change and evolve in response to 
have, as well as the norms regarding repayment  new technologies or interaction with new cul-
of loans, is critical in determining the incentives  tures. For example, mobile money may make it 
for increased financial inclusion. For example,  easier to transfer money from urban to rural 
historical experience such as conflict or disaster  areas, thus resulting in less reliance on commu-
can create social dynamics that persist for gen-
nity solidarity to manage risks and deal with 
erations, such as a lingering lack of trust, a lack  emergencies.11 Understanding informal rules 
of available resources, infrastructure, and oppor-
provides insight into what will work within a 
tunities, and overall difficulty in establishing  particular community (see box 1.13). 
relationships and creating solidarity in the com-
munity. Communities marked by significant eth-
Supporting Functions
nic conflict may be less receptive initially to  Supporting functions provide the resources, 
peer-based group lending models that have his-
information, and services that shape financial 
torically worked very well in microfinance.  market behavior and enable markets to grow, 
Alternatively, a community where cash is less  adapt, and succeed in changing circumstances. 
prevalent than in-kind assets  potentially requires  Weak supporting functions (and inappropriate 
unique financial services  
outside traditional  rules) leave markets vulnerable, lacking the 
credit and savings products. 
 necessary depth to be sustainable and fit into a 
While some informal rules may appear  changing world. The composition and nature of 
unproductive, they serve an important purpose,  supporting functions, and who provides them, 
such as providing a social safety net. These rules  vary from one context to another but are con-
might include shared access to income, common  cerned generally with information and communi-
understanding of property, and rigid social  cation, capacity building, coordination, resource 
structures, as discussed earlier. However, social  development, and innovation. All of these support 
Box 1.13  Understanding Informal Rules through Financial Landscapes
The methodology (and metaphor) of financial landscapes seeks to examine the path through 
which the poor access services in relation to the world around them, including, for example:
• Spatial. How distance and ease of travel in locating providers affect access to services, taking 
into account settlement patterns and physical infrastructure
• Historical. How past policies and approaches have shaped existing service provision and 
attitudes
• Sociocultural. How social and personal networks develop in response to limited access
• Economic. How patterns of income and expenditure shape the demand for services.
This type of research seeks not only to throw light on the specific situations of households 
but also to examine how this affects financial service provision and access. In doing so, a more 
complete picture should emerge of both the core and the “informal rules” that have shaped its 
development.
Source: Bouman and Hospes 1994.
The Evolving Financial Landscape 
35

the core function—the exchange between clients  • Funding. Can take various forms, such as 
(demand) and service providers (supply).
equity or debt. The key players here are pri-
Because they differ from one context to 
vate investors, but in practice, especially for 
another, there is no comprehensive list of sup-
microfinance, a range of social investors are 
porting functions. However, the following are 
active, often supported by donor funds, not 
some of the main functional areas:
usually seeking a commercial (or indeed any 
financial) return.
• Capacitydevelopment. Concerned with devel-
oping capacity of various players including  • Infrastructure. The range of technical and 
policy makers and providers. It therefore may 
other support services required to enhance the 
involve training services or other means by 
efficiency of the overall system. This could 
which employees learn new skills. In more 
include credit bureaus, deposit insurance, and 
established markets, capacity development for 
accounting services. The key players are likely 
the industry as a whole may involve coordina-
to be private sector companies and public reg-
tion among private and public players.12
ulatory authorities.
• Coordination. The capacity (within a market 
Supporting functions are described in more 
system) to go beyond the limitations of  detail in chapters 3, 5, 16, and 18.
 individual perspectives, understand the sys-
tem as a whole, and support its development.  Implications of the Market System 
This is a noncommercial, collective, public  Framework: Providers and Facilitators
role and therefore is likely to be the domain of  While all organizations engaged in financial 
government or representative industry (and  inclusion may agree that development of the sys-
perhaps consumer) associations.
tem as a whole represents a worthy aim, they do 
• Advocacy. Efforts to provide an appropriate  not all have the same role or perspective. 
voice in the financial market system, especially  Organizations differ with respect to several fac-
for providers and consumers, and to ensure  tors, for example, their legal status (for-profit 
that their views contribute to public functions  business, NGO, association, government), funding 
such as regulations and standards. 
sources (grants, debt, equity, client-generated 
revenues), scale, and motivations. However, per-
• Information. Refers loosely to the “informa-
haps the most basic but useful distinction is 
tion environment,” for example, in relation to  between organizations that see themselves as 
emerging trends and products (aimed at both  market players with a continuing direct role 
providers and consumers) and to more spe-
within the market system and facilitators that see 
cific information-based products and services.  themselves as external actors with a mandate to 
The key players include specialized service  act as temporary catalysts in stimulating others in 
companies and government or associations in  the market (see figure 1.4). Knowing your place in 
relation to public information on, for example,  the financial services landscape is an important 
standards and legal rights.
step in determining what you should do and how 
you should do it. 
• Research. The provision of knowledge-based 
products or services related to, for example,  • Marketsystemplayers. Organizations or indi-
the demand and supply sides of the core, 
viduals with an active and continuing role 
impact assessment and the implications of 
delivering functions in the financial eco-
wider trends. 
system. This includes providers of financial 
36 
The New Microfinance Handbook

Figure 1.4  Market System Players and Facilitators
FINANCIAL MARKET SYSTEM
SUPPORTING
Private 
FUNCTIONS
sector
Government
Facilitators
Community
Seeking to
groups 
D
develop the
CORE
S
market system
Representative
as external
associations 
catalyst 
Not-for-
profit sector
RULES
Players
Specific roles within
the market system 
 services, regulators, and other developers and 
function more effectively and inclusively. 
enforcers of formal rules and providers of sup-
Facilitation is therefore a public role (not com-
porting functions. These entities are part of 
mercial); it is temporary (not permanent) and 
the system and envisage remaining part of it in 
requires understanding and capacity to inter-
the future.
vene with appropriate and timely resources 
(financial, human, and political). And while in 
• Facilitators. External players, standing outside 
the short to medium term, the role of the facil-
the system, whose role is to facilitate positive 
itator may involve multiple activities— 
changes in the market system. Facilitators are 
including direct roles in the market if 
most often donors and development agencies 
required—in the longer term, the strategic  
that are funded by donors. (Investors who pro-
purpose of facilitation is, by definition, not to 
vide debt or equity to providers are considered 
have any continuing role in the market system.
to be market players, as they provide funding, 
an important supporting function.) Grant 
Table 1.3 outlines the strategic differences 
funding is used (or should be) to facilitate the  between the two roles. In the long term, who 
market and to develop the capacity of market  should be a market player (that is, provide a prod-
players in the system. While facilitators work  uct or service, public or private) and who should 
in a variety of ways, their role is to use resources  pay for those  products or services? There is rela-
to address constraints, allowing the system to  tively little disagreement about who should fulfill 
The Evolving Financial Landscape 
37

Table 1.3  Key Characteristics of Facilitators and Providers in the Financial Market System
Characteristic
Facilitators
Market players
Orientation and  Broad. What is good for the market system  Narrow. What is good for me and my clients 
purpose
as a whole?
or stakeholders?
Long-term role
No role in the longer term; facilitate others  Continuing role with incentives and capacity 
in the market system
to grow
Activities
Varies with market constraints identified, 
Consistent with long-term role; provision of 
for example, technical, financial, organiza-
services, either financial services in the core 
tional, information assistance
or supporting functions or formal rules
Skills, knowledge Strategic overview and (flexible) technical  Narrow technical competence to fulfill 
capacity to address constraints
specific role
Funding 
Development agencies and donors
Other players in the market, clients 
(revenues from services), or government 
(for public services)
Legal form
Development mechanisms; donors, 
Appropriate to role; mainly private players 
foundations, contractors, NGOs
(formal and informal) for service provision
Cost base
Appropriate for development agencies
Appropriate for market system
some functions in the financial system. Financial  Banking without Branches
service delivery is generally accepted as appropri-
The third significant influence on financial ser-
ately provided by the private sector, while the  vices for the poor is the opportunity presented by 
development of regulatory frameworks, for  technology to increase financial inclusion.13 
example, merits public subsidy. Historically how-
Building on the previous discussion of the finan-
ever, ambiguity over the nature of some functions  cial ecosystem, this introduction to branchless 
has provided justification for extensive donor  banking focuses on the new market players—
subsidy in microfinance. Donors that fund market  MNOs and agent networks—within the system 
players directly or themselves play market roles  and the emerging new business models that 
only have a valid rationale for participating in the  result. Chapter 12 provides a more technical dis-
short term (see chapter 4).
cussion of each of the various transaction or 
If the financial market system is to be truly  access points—for example, mobile phones, 
facilitated and a position reached where long-term  Internet, automated teller machines (ATMs)—
financial inclusion has been achieved and facilita-
and the development and management of an 
tion is no longer required, facilitators must figure  agent network; it also includes a glossary of 
out how to play a role without becoming a market  branchless banking terms.
player and how to implement their vision of how 
Cost and proximity drive the delivery of finan-
the market system should function without them  cial services. Historically, providing services in 
in the future (see chapter 19). Figure 1.5 illus trates  close proximity to clients entailed high costs for 
the evolution of taking a financial system  both the provider and the client. However,  
approach rather than an institutional approach—
financial service providers are increasingly find-
from (a) strengthening supply to (b) understand-
ing innovative ways to integrate the delivery  
ing demand and from (c) building the core market  of financial services into the everyday lives of cli-
to (d) developing the wider market system. 
ents. While community-based providers 
 are 
38 
The New Microfinance Handbook

Figure 1.5  Evolution of Intervention Focus from Financial Institutions to Financial Systems
(a) Strengthening
supply
SUPPORTING
FUNCTIONS
(b) Understanding
demand 
(d) Developing the
CORE
wider
SUPPLY
DEMAND
market system
RULES
(c) Building the
core market 
Source: Rob Hitchins, The Springfield Centre.
already largely “branchless,” for institutional  transfers to full-service banking, allowing depos-
providers, branchless banking is changing the  its, withdrawals, and, if relevant, loan disburse-
way clients and providers interact and is poised  ment and payments or even insurance premium 
to lower the costs of delivery significantly and  payments or payouts. 
to reach financially excluded households that 
In providing an overview of branchless bank-
cannot be served profitably using conventional  ing and the associated new business models, it is 
branch-based approaches—especially in remote,  helpful to define a few terms. Mobile money 
sparsely populated areas and urban slums 
  refers to a type of electronic money that can be 
(CGAP 2011).
transferred over a mobile phone. The issuer of 
Banking without branches requires alterna-
mobile money may (depending on the local law 
tive access points for client transactions. These  and the business model) be an MNO or a third 
include self-serve solutions such as mobile  party, including a bank (CGAP 2011). Mobile 
phones or ATMs, staff-based transaction points  banking is the use of a mobile phone to access 
such as mobile branches that visit underserved  financial  services and execute financial transac-
areas on specific days, and third-party agents  tions  connected to a bank account. This covers 
including retailers (or in some cases, MFIs)  both transactional and nontransactional ser-
using card-reading point-of-sale (POS) devices,  vices, such as viewing financial information on a 
mobile phones, or Internet-connected computing  mobile phone (Chatain et al. 2011). An agent is 
devices. Branchless product offerings range from  any third party acting on behalf of a bank or 
individual money transfers and government cash  other financial service provider (including an 
The Evolving Financial Landscape 
39

electronic money issuer or distributor) in its  with reliable cash flow who can service clients 
dealings with customers. Agents perform  seeking to deposit, withdraw, or send funds to a 
“cash-in” (the exchange of cash for electronic  third party. Providers such as banks or MNOs 
value) and “cash-out” (the exchange of elec-
often establish agent networks through a range of 
tronic value for cash) services. 
distribution networks, including airtime sellers, 
shopkeepers, retailers, traders, petrol stations, 
New Market Actors: A Wider Ecosystem
post offices, or kiosks in markets. Agents charge 
Branchless banking is primarily about the emer-
transaction fees, but because they serve areas 
gence of different kinds of businesses, often with  where most institutional providers are unable to 
new kinds of players, to deliver multiple financial  reach, these fees are often lower than the cost of 
services to a mass market through technology-  traveling to a bank branch or using a traditional 
enabled business models that operate very differ-
money transfer company.
ently from more traditional financial service 
Agents can facilitate transactions via several 
delivery models. Branchless banking services  access devices, including a POS device, a mobile 
require an ecosystem of players. For example,  phone handset, a tablet, or a personal computer. 
mobile banking, a subset of branchless banking,  A client can deposit cash with an agent in one 
requires partnerships between MNOs and banks  location, and those same funds can be withdrawn 
or other financial service providers and agents.14  immediately by another client at a different loca-
Mobile banking solutions “are hard to build  tion.16 Agents must have an account at a bank that 
because they require strong multiparty orches-
has a secure, real-time transaction-processing 
tration, in principle spanning several regulatory  capability, either online using wireless or 
domains, and the proposition is severely weak-
Internet connectivity or offline using smartcards 
ened if any one element of the solution is not  capable of updating balances and recording 
properly primed. Indeed, the commercial  transactions (see chapter 12). A payments system 
arrangements between the parties are what  or network (see chapter 18) is needed that allows 
holds the system together” (Mas 2008, 8). This  the agent’s bank to account for and settle trans-
discussion focuses on agent networks and MNOs  actions with all participating client banks. 
as the two main new entrants to financial service  Consumer protection safeguards are also 
provision. 
required to minimize exposure of bank clients to 
agent risk (Mas 2008). 
Agent Networks
Some providers use agents for more than sim-
While branchless banking channels offer clients  ple transactions, such as providing account bal-
more convenience and access points, POS devices  ances or notifying clients of payments coming 
on their own cannot accept deposits; Internet and  due, delivering credit products, and, if properly 
mobile channels by themselves have no cash  licensed, delivering insurance products. Based on 
transaction capability; and mobile branches may  a representative case in the Mexican market, as 
not visit often enough to meet all the needs of cli-
much as 20 percent of the transactions coming 
ents.15 Thus these channels individually cannot  into branches could be handled by agents (Mas 
replace traditional channels altogether (Mas  and Kumar 2008).
2008). This is where agents enter the picture. 
Depending on the regulatory environment, 
An agent network is a group of retailers with  sometimes MFIs can act as agents for larger 
existing businesses or retail locations who (pri-
commercial banks or for MNOs. This strategy 
marily) provide cash-in, cash-out services. An  allows microfinance customers to gain exposure 
agent may be any retailer conveniently located  to mobile banking and can also help MFIs to 
40 
The New Microfinance Handbook

 differentiate themselves from the competition  New Business Models: Partnerships for 
and bring enhanced liquidity to their branches  Branchless Banking
(Kumar, McKay, and Rotman 2010).
Developing partnerships between financial 
Agents provide the customer interface.   service providers and MNOs is not easy. A key 
Therefore, when developing a network of agents,  consideration when developing partnerships is 
providers must address the operational chal-
how flexible the service will be in terms of trans-
lenges in a way that fosters a positive and consis-
mitting and receiving funds from clients with 
tent customer experience that will create and  other financial service providers or MNOs. 
maintain trust in the system. Strategies for  MNOs may partner with multiple financial insti-
enrolling, training, incentivizing, managing, and  tutions, increasing the ability of clients to trans-
retaining agents are critical considerations for all  act across financial institutions (interoperability), 
providers that use agents to deliver financial  but diminishing the unique added value for the 
 services. Providers can hire and manage their  financial partners (see chapter 12). At the same 
own agents, or they can outsource this function  time, banks and other providers that partner 
(see chapter 12).
with only one MNO restrict the use of the ser-
vice to clients of that MNO. Financial service 
Mobile Network Operators
providers must balance the need for universal, 
Mobile network operators provide the ability to  multi-MNO solutions with the practicality of 
use mobile phones for financial services—either  outsourcing more functions to a single MNO. 
directly to consumers or on behalf of other finan-
At the outset, it can be expensive to engage in 
cial service providers, usually through an agent  mobile banking; partners may be scarce and the 
network. MNOs can provide money transfer and  incentives to reach a broad mass of people may 
payment services directly without being linked  not be aligned between the necessary actors. 
to another financial service provider (mobile  Some providers, including MNOs, do not have 
money), or they can partner with a bank or other  the high market share that might translate into 
provider to increase outreach both in terms of  the volume of transactions needed for mobile 
numbers as well as available products (mobile  services to break even. Furthermore, adequate 
banking) (Kumar, McKay, and Rotman 2010). 
back-office and transaction-switching capability 
The role of MNOs in mobile banking can vary  as well as sufficient internal controls are required, 
from simply selling text-messaging services to  which smaller providers may not have or not 
providing a full-fledged parallel banking infra-
have access to. To increase adoption rates, banks 
structure (although it is still early in the process  and others need to drive awareness of the service 
to fully understand what this involves). Which  and ensure strong branding. While mobile bank-
role(s) a bank or other financial service provider  ing reduces the cost of service delivery and 
wants the MNO to play depends on how much   increases convenience for both providers and  
it wants to integrate mobile banking services  clients, significant efforts are required to allay 
into its core business and its ability to implement  security fears and natural resistance to new 
technology- based  deployments.17 Customer technologies. 
experience is determined directly by the tech-
In addition, negotiations between the MNO 
nology platform used and the ability to access  and the financial service provider need to con-
cash-in, cash-out services (Mas and Kumar  sider the customer service interface (for exam-
2008). These and other issues are still being  ple, the MNO’s customer call center) and the 
worked out, and expectations for the future are  marketing and cross-selling of bank services 
uncertain (see box 1.14).
to  telephone customers. MNOs can use their 
The Evolving Financial Landscape 
41

Box 1.14  Potential of Mobile Banking
Mobile banking has great potential to reach  other services. Mobile money has often fallen 
vast numbers of low-income, unbanked peo-
between the regulatory cracks, and MNOs in 
ple at affordable prices with a wide range of 
several countries are offering mobile pay-
products to meet complex financial needs. Yet 
ments without being regulated as banks. 
early experience suggests that, although the 
Simply put, MNOs are poorly positioned on 
potential is strong, it is by no means guaran-
their own to offer a broader range of products. 
teed that mobile banking will deeply pene-
Strategic partnerships with providers that bet-
trate low-income, unbanked segments with  ter understand the financial landscape and 
appropriately designed products. 
needs of the client are critical. For some 
First, the very qualities that endowed  MNOs, mobile payments do everything they 
mobile network operators with a head start in 
want them to do: increase loyalty among 
mobile money may work against their capac-
voice clients and decrease the cost of distrib-
ity to field a more complex suite of products. 
uting airtime. In other words, they have no 
The common mobile money product—a liq-
motivation to do more unless they have 
uid, electronic wallet with the capability to  strong, strategic partners. Because financial 
transfer money—is quite simple, akin to the 
services are not their core business, MNO 
preexisting airtime wallet. However, MNOs  owners and shareholders may not be inter-
know little about credit, savings, and insur-
ested in investing in more services or 
ance. They also lack regulatory room to offer 
partnerships.
Source: McKay and Pickens 2010.
extensive agent networks and retailers to pro-
define the options for mobile banking, including 
vide cash-in,  cash-out services and to sign up  regulatory restrictions on outsourcing cash-in, 
customers for banking services. The MNO’s  cash-out functions, know-your-customer (KYC) 
brand can be leveraged to appeal more directly to  obligations, and limits on mobile money transac-
clients with stronger  affiliations to mobile phones  tions. In fact, the maximum amount allowed for 
and mobile brands than to banking. This may be  transfers is generally relatively low, which may 
particularly appealing for efforts to increase  limit the use of this service. Other issues include 
financial inclusion among youth. However, using  data security and customer privacy regarding 
the MNOs’ distribution and marketing channels  e-banking, account issuance of non-banks, and 
also has revenue implications: fees are split  taxation. 
among the MNO as a brand, the MNO as a trans-
At the time of writing, various new technolo-
action channel provider, and the bank as finan-
gy-enabled business models are emerging: those 
cial intermediary.
that provide money transfer services (mobile 
And lastly, in many countries, regulation of  money), those that link MNOs with bank services 
MNOs by the banking authorities is not yet clear,  (mobile banking), and agent banking being estab-
although this is beginning to change as new mod-
lished by large retailers. Some of the more inter-
els emerge and the various stakeholders better  esting ones are described in box 1.15, although 
understand the systemic risks inherent in mobile  time will tell which ones will reach significant 
banking. Ultimately, significant regulatory factors  scale and longevity.
42 
The New Microfinance Handbook

Box 1.15  New Branchless Banking Business Models
Safaricom’s M-PESA: mobile money
Telenor and Tameer’s EasyPaisa (Pakistan). 
Safaricom’s M-PESA is a transfer and  payment 
The partnership between Telenor, an MNO, 
service with close to 17 million customers in 
and Tameer Bank grew out of a strategic 
Kenya, a country with 7 million bank accounts, 
 alliance that started after Tameer Bank decided 
most of which are considered active. The indi-
to use mobile phone banking services to reach 
vidual accounts only exist on the M-PESA plat-
rural clients. Telenor had 18 million subscribers 
form, not in bank accounts. Bank accounts  in Pakistan, and Tameer Bank wanted to take 
hold the float that backs the e-accounts one-
advantage of Telenor’s prepaid card distribu-
to-one on a daily basis, which makes Safaricom 
tion network and to act as its cash-in, cash-out 
a non-bank e-money issuer, though it is not 
agent. Tameer Bank had already decided to 
licensed or regulated by the central bank or 
co-brand the new service—EasyPaisa—with 
under e-money regulations (as of February  the MNO in order to reach the millions of sub-
2012). In M-PESA’s case, the float is held by a 
scribers who had a strong affinity to Telenor 
trust, not by Safaricom itself. M-PESA has a 
but were not bank clients. After realizing the 
mixed-agent model. Some agents also sell air-
advantages of having a bank license to facili-
time and are directly managed by Safaricom, 
tate mobile money, Telenor acquired a 51 per-
but most agents are managed by intermedi-
cent share in Tameer Bank in November 2008.
ary companies under arrangements agreed 
In 2012, millions of people were using over-
with Safaricom.
the-counter services of EasyPaisa agents on a 
M-Kesho, Iko Pesa: mobile money and  recurring basis, and more than 500,000 had 
bank account links. In Kenya M-Kesho links  mobile wallet accounts. With a network of 
the M-PESA wallet offered by Safaricom with 
12,000 agents, EasyPaisa was growing quickly. 
a bank account offered by Equity Bank, allow-
Tameer’s traditional core business (credit, sav-
ing customers to move money back and forth 
ings, insurance) is enhanced by EasyPaisa, as 
between the M-PESA wallet and the bank  Tameer holds the float from all EasyPaisa 
account. Orange in Kenya has transitioned all 
account balances, adding liquidity and dramati-
of its Orange Money accounts into Equity  cally reducing the cost of funds for its loan port-
Bank accounts (Iko Pesa), which they did tech-
folio. Tameer pays all staff salaries via EasyPaisa; 
nically by integrating the Orange Money plat-
in the future, it could experiment with different 
form with Equity’s core banking system.  kinds of savings and other accounts, potentially 
Rather than add a link to move money from an 
switching its good customers to receiving 
M-PESA account to a bank account like  and paying their loans via this mobile platform. 
M-Kesho, the accounts of Iko Pesa are fully 
Telenor benefits from customer loyalty 
integrated, making them one and the same. 
(reduced churn) and lower airtime distribution 
Several banks and MNOs are establishing  costs, all of which significantly enhance its core 
partnerships of this kind. In West Africa, Airtel 
voice and text business. EasyPaisa illustrates 
Money has established a link with Ecobank in 
the importance of understanding and manag-
Ghana and Burkina Faso. In Madagascar,  ing partnerships in which the parties have their 
Orange has partnered with a microfinance  own core business but see advantages to join-
bank to offer interest-paying savings accounts 
ing forces for some things.
on Orange Money. It is not yet clear, however, 
Oxxo (Mexico): agent banking. Oxxo shows 
how successful these models will be.
how retail chains with their large retail 
(continued next page)
The Evolving Financial Landscape 
43

Box 1.15 (continued)
 footprint and relationship with customers 
Oxxo is already involved in financial 
across income segments can play an impor-
 services and has sizable bill payment and 
tant role in new technology-enabled finan-
insurance businesses. It is negotiating with 
cial service business models. Oxxo is the  multiple banks to serve as a cash-in, cash-out 
largest retail network in North America, with 
merchant for their bank accounts. It is also 
more than 9,000 locations in Mexico. Oxxo 
offering its own branded electronic wallet in 
claims to open a new store every eight  partnership with one of the banks, which will 
hours and serves 7.5 million people every 
be accessible to customers using both cards 
day. It is 100 percent owned by FEMSA, the 
and mobile handsets. Oxxo’s main customer 
largest beverage company in Latin America, 
base is unbanked, so its offer of financial ser-
which was originally set up to distribute  vices is expected to significantly contribute to 
beer. 
financial inclusion.
Source: Steve Rasmussen and Kabir Kumar, CGAP.
Branchless Banking and MFIs
• Use mobile financial services to update or
MFIs, both regulated and NGOs, have generally 
replace practices related to the core business, 
not played a critical role in branchless banking; 
for example, use mobile payments for loans 
rather they have used the new technology to 
and insurance premiums
enhance customer service and reduce costs. For  • ActasanagentonbehalfofabankoranMNO.
example, as MFIs become licensed, they can join 
the national payments system, gaining the use of 
Together, these three drivers—a focus on 
ATMs and cards or POS devices to provide ser-
understanding clients better; acknowledgment 
vices through new channels. While some MFIs  of the multiplayer, multifunction nature of the 
are able to take advantage of opportunities made  financial ecosystem; and the opportunities tech-
available through technology, many struggle, and  nology presents—can support increased finan-
the expectations and hopes for what might have  cial inclusion. The following chapters provide 
been have not materialized at any scale. MFIs  much more detail on each of these areas, describ-
require superior customer service skills, sophisti-
ing the functions and roles within the financial 
cated back-office systems, and strong leadership  market system and how they can work better for 
and technical skills to achieve the organizational  the poor. 
changes required, and many are simply not there 
yet. However, MFIs and other smaller providers  Notes
can engage in branchless banking in several ways   1.  For example, see the Clients at the Centre 
(Kumar, McKay, and Rotman 2010): 
Initiative of the Consultative Group to Assist 
the Poor (CGAP) or the Center for Financial 
• Usemobilephones(orpersonaldigitalassis-
Inclusion of ACCION. 
tants, notebooks, or any other technology) to   2.  The Scottish government defines financial 
collect data in the field 
inclusion as access for individuals to appropriate 
44 
The New Microfinance Handbook

financial products and services. This includes 
but they are not addressed in this book 
people having the skills, knowledge, and 
because poor populations use them so 
understanding to make the best use of those 
infrequently. 
products and services. Financial exclusion is 
 8.  In practice, rules and supporting functions—
often a symptom of poverty as well as a cause. 
whatever their type—are often delivered or 
See http://www.scotland.gov.uk/
subsidized directly by development agencies. 
Publications/2005/01/20544/50280.
Sustainability analysis in microfinance has 
 3.  Findings are based on focus group discussions 
historically focused on providers at the core 
with 64 clients from regulated and unregu-
and the extent to which their operations are 
lated MFIs and 20 in-depth interviews with 
financed from operational revenues, rather 
members of the Debtors Association, the 
than extending to the wider market system as 
Superintendencia de Bancos, and MFI staff in 
a whole. Yet if the objective is to develop 
El Alto, La Paz, Santa Cruz, and Montero, 
functioning, sustainable market systems, 
Bolivia.
sustainability analysis needs to be equally 
 4.  Portfolios of the Poor is a seminal work 
comprehensive, extending beyond the core to 
synthesizing research findings from financial 
include supporting functions.
diary studies in Bangladesh, India, and South 
 9.  The concept of rules of the game is central in 
Africa (Collins et al. 2009).
institutional economics. See chapter 19 for 
 5.  This has become an issue of some controversy, 
further discussion. 
with some believing that the microfinance 
10.  According to microLINKS wiki (2010), “Social
industry as a whole—led by donor funding—
institutions are complex, enduring structures 
has developed a supply-side/product-push 
or mechanisms of social order (and coopera-
character that emphasizes credit rather than 
tion) that govern customs and recurring 
other services, especially savings, increasing 
behavior patterns important to a society. They 
personal debt without bringing commensurate 
are usually identified with a social purpose 
benefits.
(e.g., mitigating conflict, validating an elite). 
 6.  There are, of course, exceptions. Some large 
Enduring institutions such as gender, race or 
cooperatives operate very much like regulated 
ethnicity, class, and religion help to shape 
financial institutions, while some rural banks 
individuals’ beliefs and expectations. Social 
are tiny and somewhat informal, despite being 
institutions exist because they serve a purpose, 
subject to formal regulation. Furthermore, the 
which is often to protect the power or 
degree of formality or legal form does not 
privilege of particular groups.” 
always equate with sustainability. Some 
11.  Although mobile money still relies upon, and 
state-owned banks may rely heavily on 
indeed may be successful because of, social 
subsidies, while most commercial banks are 
institutions. See Susan Johnson’s blog where 
financially independent. And while Savings 
she states, “These interpersonal transfers 
Groups can have very formal operating 
operate within social networks that involve 
procedures and are generally sustainable and 
relationships of ‘give and take’ that can operate 
independent of any external assistance in the 
over long periods of time and in which 
long term, some externally facilitated groups 
resource transfers may be given in one form, 
such as Self-Help Groups and Financial Service 
for example, cash, and returned in another, for 
Associations are designed to use outsiders on a 
example, support with resources of many 
medium- to longer-term basis, and most NGO 
different kinds or social connections to a job 
MFIs continue to rely on donor subsidies.
and so on. Hence mobile money transfer has 
 7.  Other products such as foreign exchange or 
brought a range of financial transactions that 
bonds are also available in the formal sector, 
involve a reciprocal dimension.” http://
The Evolving Financial Landscape 
45

technology.cgap.org/2012/04/19/what-does-the- 
andTheGambia:UnderstandingtheSupply
rapid-uptake-of-mobile-money-transfer-in-
andDemandofRemittancesbetweenSpainand
kenya-really-mean-for-financial-inclusion/.
TheGambiaandItsImpactonFinancial
12.  Financial literacy or education could be 
ServiceAccess. New York: Women’s World 
included within this function—or as a separate 
Banking. 
category—for the demand side of the market.
Bennett, Lynn. 1997. “A Systems Approach to 
Social and Financial Intermediation with the 
13.  This section draws on various CGAP focus 
Poor.” Paper presented at the Banking with the 
notes, including Mas and Kumar (2008); Mas 
Poor Network and World Bank Asia regional 
(2008); Kumar, McKay, and Rotman (2010); 
conference “Sustainable Banking with the 
and McKay and Pickens (2010).
Poor,” Bangkok, November 3–7. 
14.  The exception is that, if a bank wants to 
Bold, Chris, David Porteous, and Sarah Rotman. 
launch its own direct mobile payments system, 
2012. “Social Cash Transfers and Financial 
it only needs regular data services from an 
Inclusion: Evidence from Four Countries.” 
MNO and could therefore launch without any 
Focus Note 77, CGAP, Washington, DC, 
real partnership. It would just require normal 
February.
use of the mobile phone network.
Bouman, F. J. A., and Otto Hospes. 1994. Financial 
15.  This section is adapted from Flaming, McKay, 
LandscapesReconstructed:TheFineArtof
and Pickens 2011 and Lehman 2010.
MappingDevelopment.Boulder: Westview 
16.  While POS devices provide access to bank 
Press.
accounts as well, how quickly the funds can be 
*CGAP (Consultative Group to Assist the Poor). 
accessed will depend on clearing arrange-
2011. “Global Standard-Setting Bodies and 
ments between the institutions.
Financial Inclusion for the Poor—Toward 
17.  At a minimum, banks or other providers need 
Proportionate Standards and Guidance.” 
to buy wireless connectivity from the MNO. 
White Paper prepared on behalf of the G-20’s 
The next step is to seek access to the memory 
Global Partnership for Financial Inclusion, 
in the subscriber identity module (SIM) to use 
CGAP, Washington, DC, October.
the encryption keys and phone service menu, 
CGAP and World Bank. 2010. Financial Access 
which they get from an MNO. A more involved 
2010:TheStateofFinancialInclusionthrough
role would be for the MNO to manage the 
the Crisis. Washington, DC: CGAP and World 
entire communications between the client and 
Bank.
the back-office server of the bank. The bank 
Chatain, Pierre-Laruent, Andrew Zerzan, Wameek 
could even have the MNO host and run the 
Noor, Najah Dannaoui, and Louis de Koker. 2011. 
core banking system. In such a case, while the 
“Protecting Mobile Money against Financial 
bank owns the accounts, the MNO operates 
Crimes.” World Bank, Washington, DC. 
the system.
*Chen, Greg, Stephen Rasmussen, and Xavier 
Reille. 2010. “Growth and Vulnerabilities in 
References and Further Reading
Microfinance.” Focus Note 61, CGAP, 
Washington, DC. http://www.cgap.org/gm/
* Key works for further reading.
document-1.9.42393/FN61.pdf. 
Banthia, Anjali, Janiece Greene, Celina Kawas, 
Elizabeth Lynch, and Julie Slama. 2011. 
Christen, Robert Peck. 2011. “What Does Focusing 
SolutionsforFinancialInclusion:ServingRural
on the Client Really Mean?” CGAP Blog, 
Women. New York: Women’s World Banking. 
CGAP, Washington, DC.
Banthia, Anjali, and Peter McConaghy. 2012. 
CIA (Central Intelligence Agency). 2008. CIA 
RemittancesandAccesstoFinanceinSpain
World Factbook 2008. Washington, DC: CIA.
46 
The New Microfinance Handbook

*Cohen, Monique. n.d. “The Emerging Market-Led 
Needs.” Workshop paper commissioned for 
Microfinance Agenda.” MicroSave Briefing 
the 2011 Global Microcredit Summit, 
Note 25, MicroSave Kenya.
Valladolid, Spain, November 14–17. 
Cohen, Monique, and Candace Nelson. 2011. 
Hudon, M. 2008. “Norms and Values of the 
“Financial Literacy: A Step for Clients towards 
Various Microfinance Institutions.” CEB 
Financial Inclusion.” Workshop paper 
Working Paper 08/006, Centre Emile 
commissioned for the 2011 Global Microcredit 
Bernheim, Brussels, February. 
Summit, Valladolid, Spain, November 14–17. 
*Johnson, Susan. n.d. “Gender and Microfinance: 
Coleman, J. C. 1990, 1994. FoundationsofSocial
Guidelines for Good Practice.” http://www 
Theory. Cambridge, MA: Harvard University 
.gdrc.org/icm/wind/gendersjonson.html. 
Press.
———. 2000. “Gender Impact Assessment in 
*Collins, Daryl, Jonathan Morduch, Stuart 
Microfinance and Microenterprise:  
Rutherford, and Orlanda Ruthven. 2009. 
Why and How?” DevelopmentinPractice 10 
PortfoliosofthePoor. Princeton: Princeton 
(1): 89–93.
University Press.
———. 2004. “Gender Norms in Financial Markets: 
*Demirgüç-Kunt, Aslı, and Leora Klapper. 2012. 
Evidence from Kenya.” WorldDevelopment 
“Measuring Financial Inclusion: The Global 
32 (8): 1355–74.
Findex.” Policy Research Working Paper 6025, 
———. 2011. “Understanding Kenya’s Financial 
World Bank, Washington, DC.
Landscape: The Missing Social Dimension.” 
*Ehrbeck, Tilman, Mark Pickens, and Michael 
FSDNews 17 (August): 2. 
Tarazi. 2012. “Financially Inclusive 
*Johnson, S., and S. Arnold. 2011. “Financial 
Ecosystems: The Roles of Government Today.” 
Exclusion in Kenya: Examining the Changing 
Focus Note 76, CGAP, Washington, DC, 
Picture 2006–2009.” In Financial Inclusion in 
February.
Kenya:SurveyResultsandAnalysisfrom
Faz, Xavier, and Paul Breloff. 2012. “A Structured 
FinAccess 2009, 88–117. Nairobi: FSD Kenya 
Approach to Understanding the Financial 
and Central Bank of Kenya.
Service Needs of the Poor in Mexico.” CGAP 
*Karim, Nimrah, Michael Tarazi, and Xavier 
Brief, CGAP, Washington, DC, May.
Reille. 2008. “Islamic Microfinance: An 
*Flaming, Mark, Claudia McKay, and Mark Pickens. 
Emerging Market Niche.” Focus Note 49, 
2011. “Agent Management Toolkit: Building a 
CGAP, Washington, DC. 
Viable Network of Branchless Banking Agents 
*Kendall, Jake. 2010. “Improving People’s Lives 
(Technical Guide).” CGAP, Washington, DC.
through Savings.” Global Savings Forum, 
*Glisovic, Jasmina, and Mayada El-Zoghbi with 
November. http://www.gatesfoundation.org/
Sarah Foster. 2011. “Advancing Savings 
financialservicesforthepoor/Documents/
Services: Resource Guide for Funders.” CGAP, 
improving-lives.pdf. 
Washington, DC. 
*Kumar, Kabir, Claudia McKay, and Sarah Rotman. 
Harriss-White, B. 2004. “India’s Socially 
2010. “Microfinance and Mobile Banking: The 
Regulated Economy.” Indian Journal of Labour 
Story So Far.” Focus Note 62, CGAP, 
Economics 47 (1).
Washington, DC, July. 
*Hashemi, Syed M., and Aude de Montesquiou. 
Ledgerwood, Joanna. 1998. Microfinance 
2011. “Reaching the Poorest: Lessons from the 
Handbook. Washington, DC: World Bank.
Graduation Model.” Focus Note 69, CGAP, 
*Lehman, Joyce. 2010. “Operational Challenges of 
Washington, DC, March.
Agent Banking Systems.” Brief written for the 
Hatch, John. 2011. “When Clients Grow Old: The 
Global Savings Forum, Bill and Melinda Gates 
Importance of Age in Addressing Client 
Foundation, Seattle, November.
The Evolving Financial Landscape 
47

Linthorst, Audrey, and Scott Gaul. 2011. “What Do 
Orozco, Manuel, Anjali Banthia, and Mariama 
We Need to Know about Financial Inclusion in 
Ashcroft. 2011. “A Country Profile on The 
Africa?” SEEP Network, Washington, DC. 
Gambia: The Marketplace and Financial 
*M4P Hub. 2008. “A Synthesis for Making Markets 
Access.” Women’s World Banking, New York. 
Work for the Poor (M4P) Approach.” http://
Perdomo, Maria. 2008. “Consumer Protection: A 
www.m4phub.org/resource-finder/result 
Client Perspective.” Research note prepared 
.aspx?k=m4p%20synthesis&t=0&c=0&s=0.
for Microfinance Opportunities and Freedom 
*Mas, Ignacio. 2008. “Being Able to Make (Small) 
from Hunger.
Deposits and Payments, Anywhere.” Focus 
Pickens, Mark. 2011. “Which Way? Mobile Money 
Note 45, Washington, DC, CGAP. 
and Branchless Banking in 2011.” CGAP 
———. 2010. “Savings for the Poor: Banking on 
Technology Blog, CGAP, Washington, DC, 
Mobile Phones.” World Economics 11 (4). 
March 9.
*Mas, Ignacio, and Kabir Kumar. 2008. “Banking 
*Porteous, D. 2005. “The Access Frontier as an 
on Mobiles: Why, How, for Whom?” Focus 
Approach and Tool in Making Markets Work 
Note 48, CGAP, Washington, DC. 
for the Poor.” http://bankablefrontier.com/
assets/pdfs/access-frontier-as-tool.pdf.
Mas, Ignacio, and Dan Radcliffe. 2010. “Mobile 
Payments Go Viral: M-PESA in Kenya.”  
Rankin, Katharine N. 2002. “Social Capital, 
http://papers.ssrn.com/sol3/papers 
Microfinance, and the Politics of 
.cfm?abstract_id=1593388. 
Development.” Feminist Economics 8 (1): 1–24. 
*McKay, Claudia, and Mark Pickens. 2010. 
Rotman, Sarah. 2010. “An Alternative to M-PESA? 
“Branchless Banking 2010: Who’s Served? At 
Orange and Equity Bank Launch Iko PESA.” 
What Price? What’s Next?” Focus Note 66, 
CGAP Technology Blog, CGAP, Washington, 
CGAP, Washington, DC.
DC, December 6.
microLINKS wiki. 2010. “Informal Regulations 
Shipton, Parker. 2007. TheNatureofEntrustment:
under BEE.” Value Chain Framework wiki 
Intimacy,Exchange,andtheSacredinAfrica. 
page. http://apps.develebridge.net/amap/
New Haven: Yale University Press. 
index.php/Informal_Regulations_under_BEE.
World Bank. 2011. WorldDevelopmentReport 2011: 
———. n.d. “Social Institutions Comprising 
Conflict,Security,andDevelopment
Informal Regulations.” http://microlinks.kdid 
Washington, DC: World Bank.
.org/good-practice-center/value-chain-wiki/ 
Wyman, Oliver. 2007. “Sizing and Segmenting 
social-institutions-comprising-informal- 
Financial Needs of the World’s Poor.” Bill and 
regulations. 
Melinda Gates Foundation, Seattle.
48 
The New Microfinance Handbook

CHAPTER 2
Clients
Stuart Rutherford, Daryl Collins, and Susan Johnson

No matter how it is measured, the number of  unbanked poor—dwarf the number of clients 
people without access to financial services is  already served by microfinance, estimated at 190 
very large indeed. In 1976, when Muhammad  million at the end of 2009 (Microcredit 
Yunus in Bangladesh started the experiment that  Campaign Summit 2011). 
led to the Grameen Bank, he focused on the very 
In chapter 1, “The Evolving Financial 
poor. As microfinance grew, it attracted the “eco-
Landscape,” we discussed who the poor are, how 
nomically active poor,” people who might be  they differ, and how various influences such as 
expected to take loans to run a small business,  life-cycle stages, geography, livelihoods, and 
for example. More recently with the drive for  informal rules and norms, such as gender, affect 
“financial inclusion,” attention has turned to the  their access to financial services. This chapter 
“unbanked” poor—poor people not using formal  examines financial services from the point of 
financial services of any sort (including microfi-
view of poor people. It looks at the kinds of tools 
nance, sometimes referred to as “semiformal”  that the poor need to manage their money, 
services). Just over half of the world’s adult pop-
shows why they need them, and assesses the 
ulation is unbanked, most of them poor: In  extent to which they already have access to 
Africa, four out of five adults are unbanked, and  them. It describes the key characteristics of 
in South Asia, three out of five (Chaia et al. 2009).  good quality pro-poor formal financial tools and 
In rich countries, by contrast, fewer than one in  shows how and why the poor, the extremely 
ten adults lacks a formal means to save or to bor-
poor, and the unbanked poor might use and ben-
row (Chaia et al. 2009).1 All these numbers—of  efit from such services if they were more widely 
the extremely poor, the moderately poor, and the  available. 
Clients 
49

The Poor and Financial Services: 
their money management needs are presented, 
Diverse Needs and Common 
beginning with the most basic question of all: 
Problems
Why do poor people need financial tools in the 
first place? To answer that question, we need to 
The poor, as broadly defined in the opening para-
move into the villages and slums and find out 
graph, make up half or more of the world’s popu-
more about how poor people manage their money.
lation, and although they are somewhat clustered 
regionally, above all in Africa and Asia, in all other  The “Financial Portfolios”  
respects they are diverse. It follows that their  of the Poor
financial behavior is similarly diverse. The bor-
rowing and saving patterns of an agricultural  Finance is the intersection of money and time. 
day-laboring household are not the same as those  Looking at one element in the absence of the 
of a farmer, let alone those of a household that  other tells less than half the story. One-off surveys 
depends on a small shop or workshop in an urban  that focus on the finances of poor households may 
slum, or on low-paid wage jobs in a factory, or on  identify which savings institutions are used or 
domestic service. Even where livelihoods are sim-
what types of loans are outstanding, but say little 
ilar, innate differences between households will  or nothing about how the timing of cash flows is 
generate different financial patterns, according to  managed to accumulate savings or repay loans. To 
the age, the gender, and the health of the house-
see how poor households try to reconcile con-
hold members. Research shows that women and  strained incomes with expenditure needs, and 
men tend to have different attitudes toward  how financial tools, no matter how crude, are 
household resources and their allocation, includ-
employed to achieve that end, we need to look at 
ing financial resources.2 At an individual level,  their household finances as a totality, as a portfo-
personality counts: Some people are more cau-
lio of tools, each with its particular cash flow. To 
tious than others and may therefore be more  understand how and why poor households 
averse to loans and more ready to save. Conversely,  choose and use their financial tools, we need to 
there are overarching cultural traditions—for  observe how these portfolios change over time: 
example, the preference for certain types of  “What has been missing is a close look at how 
 savings-and-loan clubs among the ethnic Chinese  portfolios function: not just how well the pieces 
or among the slum dwellers of Nairobi—that give  work, but how well they work together. Focusing 
a distinctive shape to the financial behavior of  on  how gives new insight into the day-to-day 
whole groups of people. The degree of monetiza-
nature of poverty and yields concrete ideas for 
tion of a country’s or of a district’s economy will  creating better solutions for it” (Collins et al. 
affect the scope for financial intermediation. And,  2009, p. 14). 
last, a household’s financial service needs change 
For the book Portfolios of the Poor, the authors 
over time with life-cycle events: for example, as  conducted year-long “financial diaries” in urban 
the children are educated and leave home and  and rural sites in Bangladesh, India, and 
 
productive activities in the household decline. 
South Africa, to better understand this three- 
Nevertheless, poverty presents poor people  dimensional view of household finances. These 
with a number of financial management prob-
were not “diaries” that the households them-
lems that cut across differences in traditions, live-
selves kept, but reports from interviews carried 
lihoods, and household composition. These  out by trained investigators, speaking the local 
commonalities are the subject of this chapter.  language, on a frequent and regular basis through-
Here general observations about poor people and  out a full year.3 The investigators recorded as full 
50 
The New Microfinance Handbook

an account as possible of income and expendi-
take, almost always require large sums of money if 
ture, and focused especially closely on financial  they are to be coped with successfully. The poor’s 
flows—flows in and out of savings and loan tools.  need for ways to save and to borrow—their need 
At the same time, they probed for an understand-
for financial services—is greater than the needs of 
ing of how circumstances, preferences, and aspi-
the nonpoor: not in monetary value, of course, but 
rations shaped the financial decisions the  in intensity. Being able to take a dollar from a 
households made. From these “diaries” it was  bank, or borrow it from a helpful neighbor, may 
often possible to construct not just the balance  allow a mother to take her child to the clinic and 
sheets of the household accounts but also—and  have her conjunctivitis cleared up; not being able 
much more revealing—cash flow statements  to do so may lead to her daughter going blind in 
showing the activity that lay behind the balance  later life. Managing money well is an essential life 
sheets, all set in the context of the particular  skill that most poor people take very seriously.
household’s circumstances. Altogether, data for 
To manage their money, the households that 
about 250 households were gathered, supple-
took part in the “diaries” research pushed and 
mented by a further 50 households from  pulled more money through informal tools than 
Bangladesh collected in a subsequent and slightly  through formal savings, loan, or insurance 
modified “diary” exercise.4 
accounts at banks, insurance companies, or 
microfinance institutions (MFIs). This was true 
Active Money Managers
even where banks were near at hand (as in South 
The “diary” research revealed that poor people  Africa) or where MFIs had already reached the 
use financial tools intensely. At first this finding  slum or the village (as in the Bangladesh case). 
seems counterintuitive. It is easy to suppose that  This can be partly understood from the “supply 
very small incomes lead to a “hand-to-mouth”  side.” Banks are mostly set up to serve corporate 
existence in which income is consumed as soon  clients and wealthier individuals and were never 
as it arrives and there is no need and no scope for  designed to cater to the needs of the poor. MFIs 
intermediation and thus no need for the financial  are built to serve the poor, but so far at least, they 
tools that make it possible. This turns out not to  have focused most sharply on one particular 
be the case. The poor, rather, tend to be intensive  financial service they believe will help poor peo-
money managers, constantly seeking ways to set a  ple to climb out of poverty—the short-term loan 
bit of money aside or to borrow. This is not in spite  for small-business investment. Investing in a 
of incomes being small, but precisely because they  business may indeed provide the potential to 
are small. Small incomes are often unreliable and  increase incomes, but it is rarely the financial ser-
irregular, so there is an ever-present need to make  vice in greatest demand. Many MFIs and other 
sure there is enough money to put food on the  service providers now recognize this and are 
table every day and not just on those days when  beginning to offer a broader range of products tai-
money comes in. Small incomes, even if they  lored to the poor, but most of these services are 
arrive regularly, also mean that large-scale but  relatively new and have yet to reach large num-
unavoidable expenditures—for marriage, educa-
bers of clients. 
tion, homemaking, and festivals, for bicycles, 
If we look at the “demand side” and see things 
fridges, fans, televisions, and mobile phones, and  from the point of view of poor households it is 
for business and bribes and so on—can almost  easier to understand why they rely most often on 
never be found from current income, and so must  informal devices and services. They need ways to 
be saved or borrowed, or both. The same applies  build sums of money: small sums to keep the 
to emergencies, which, no matter what form they  household fed and clothed, and bigger amounts 
Clients 
51

for life-cycle expenses of all kinds and for emer-
includes the financing of productive activities, 
gencies. Because such sums can be built only by  such as setting up and stocking small businesses, 
capturing money squeezed from already very  or buying assets for self-employment, such as 
small cash flows, they need tools that help them  rickshaws. 
do exactly that—set aside a little money each day 
or each week or month that can be used to build  Cash Flow Management and Income 
savings or to repay loans. Such tools need to be  Smoothing
close at hand, and flexible enough to catch as  When the World Bank says that a percentage of 
many deposits and repayments as possible. The  the world’s population lives on US$2 a day, it 
financial diaries revealed that saving at home,  means that the average monthly income, multi-
often in very small values, is the most common  plied by 12 and divided by 365, comes to US$2. But 
and frequent kind of transaction carried out by  most people who live on low incomes do not actu-
poor householders as they seek to protect money  ally receive US$2 each and every day. Many poor 
from many competing demands. Then comes  people derive their income from one or several 
 borrowing and lending small sums in the village  informal activities that produce income sporadi-
or slum, among family and friends, and often  cally. An Indian slum dweller may pull a rickshaw 
interest free. To build larger sums, poor people  most days, but not on days when he cannot find 
typically save through savings groups of various  one to hire, or it is raining heavily, or he is too ill, 
sorts (some of them very sophisticated) or use  or the streets are blocked by a demonstration. 
larger-scale informal borrowing, often from mon-
Meanwhile his wife has a low-grade job in a gar-
eylenders and usually with interest. 
ments factory where, in theory, she gets paid 
monthly, but in practice she can never be sure 
when her floor supervisor is going to get around 
Understanding the Poor’s Financial  to paying her, or how much he is going to hold 
Service Needs 
back for how long. 
Research exercises such as the financial diaries 
Income irregularity and unreliability make up 
reveal the complexity of money management  one leg of a “triple whammy” of financial handi-
among the poor and the intimate way in which it  caps faced by the poor. The other legs are low 
shapes and is shaped by the circumstances of  incomes and the lack of adequate financial tools. 
individuals and their households. Nevertheless,  The effect of all three working together and rein-
the research also provides an opportunity to look  forcing each other is reflected most sharply in the 
at the financial lives of poor people in aggregate,  poor’s struggle to manage life on a day-to-day 
and when that is done, dominant themes emerge  basis. If income really did come in at a reliable 
that respond to the set of most pressing financial  US$2 a day, not only would planning expendi-
needs faced by all poor people. One of these is  tures be much easier, but the poor might also be 
short-term cash flow management to deal with  offered better financial services by lenders or 
day-to-day life—what economists might call “con-
deposit collectors who would know their clients 
sumption smoothing.” Another is the problem of  could save or repay at least a small amount every 
how to deal with emergencies when they arise, or  day. But with US$8 coming in one day and then 
“risk management.” A third is how poor house-
nothing for a week, just putting food on the table 
holds struggle to assemble the large sums of  each day becomes a logistical problem that needs 
money they need to take care of major life-cycle  help from financial tools if it is to be solved. 
events and to build up household assets. For some 
Widening the timescale reveals an extra layer 
households, an important part of this last  category  of seasonal problems. Farmers or traders whose 
52 
The New Microfinance Handbook

income is “lumpy,” arriving with the harvest or  a handful of grain into a “reserve” bag each time 
with the good trading months when festivals  they cook a meal. They borrow and lend, close by 
occur, can face two intertwined cash flow man-
in their slum or village, both small sums of money 
agement problems. First, they have to find a way  and small amounts of rice, kerosene, salt, and 
to retain liquidity throughout the year, perhaps by  soap. The disadvantages of one financial tool lead 
keeping back most of the harvest and then selling  to the use of another, sometimes in a chain. For 
it in smaller amounts from time to time. Second,  example, because saving money in the home is so 
they have to make sure the money raised by such  hard when there are so many requests for help or 
sales is stored somewhere where it can be called  for loans from family and neighbors, demands for 
on for daily expenditure without being eroded by  candies or a drink by children and husbands, or 
the many other demands they face. Boxes 2.1 and  the temptations offered by peddlers, people often 
2.2 illustrate this with two households from the  use “moneyguards”—other trusted people in their 
financial diaries studies.
extended family or neighborhood with whom 
It is not surprising, then, that the financial dia-
they can keep a little money out of harm’s way. 
ries showed that day-to-day money management,  Because moneyguards are not always reliable—
both in towns and in villages, is the most intensive  they may not have the money on hand the day it is 
part of the poor’s money management efforts.  needed—the poor end up borrowing from other 
Almost everywhere housewives keep a little  neighbors (often interest free if the sum is small), 
money back each time they shop, but they also put  or buying goods on credit at the local shop, or 
Box 2.1  Income Volatility, Week-by-Week and Year-by-Year
Pumza lives in Langa, a township near Cape 
her inflows of cash, that is, the cash revenues 
Town, South Africa. She supports herself and 
that Pumza receives as well as the collections 
four children by selling sheep intestines that 
she makes from clients who bought from her 
she grills on the side of the street. Every day 
on credit. The lighter, solid line shows her 
she buys and cooks intestines and sells  business outflows of cash, that is, inventory 
them to passersby. “This can be a fairly prof-
purchases and business expenses, such as 
itable business, and indeed Pumza makes a 
wood to cook the sheep intestines. Both lines 
profit averaging about US$95 per month. A 
are quite volatile, but most importantly, they 
government-provided child support grant of 
do not always move in step. Sometimes busi-
US$25 a month supplements this income,  ness does not go well, and Pumza does not 
so Pumza’s five-person family lives on a  earn enough revenue to buy stock for the next 
monthly income of about US$120. These fig-
day. In the time we knew her this happened 
ures show that Pumza is not among the  twice—indicated by the arrows in the chart. 
poorest of households, but they do not reveal 
She could have sold her old stock, but cus-
the fluctuations in cash flow that Pumza  tomers prefer fresh meat and might choose to 
experiences in her business life.” 
go to one of the other several sheep intestine 
Figure B2.1.1 shows these cash flows on a 
sellers in the area. If she’s lucky, these times 
fortnightly basis. The dark, solid line shows  coincide with the receipt of her child grant, 
(continued next page)
Clients 
53

Box 2.1  (continued)
which helps tide her over, but on the two  of US$30. In this way, she was able to fund 
occasions when we observed this problem,  her first cash flow shortfall in figure B2.1.1. 
she was not lucky in this way. However, dur-
Unhappily her savings club failed her during 
ing May, she and a group of three other sheep 
the next shortfall, because one of the club 
intestine sellers had formed a savings club.  members failed to pay in. Pumza ended up 
From Monday to Thursday, they each paid in 
going to the moneylender, where she paid an 
US$7.70 and took turns getting the entire pot 
interest rate of 30 percent per month.
Figure B2.1.1  Revenues and Inventory Expenses of a South African 
Small Businesswoman, Daily Cash Flows Aggregated Fortnightly 
(Twice Monthly) 
US$ converted from South African rand at US$1 = R 6.5, market rates

120
100
Used moneylender loan
Used savings 
club payout
80
60
US$
40
20
0
March 21, 2004
April 21, 2004
May 21, 2004
June 21, 2004
July 21, 2004
August 21, 2004 October 21, 2004
September 21, 2004November 21, 2004
Revenues plus credit collections
Inventory purchases and expenses
Source: Collins et al. 2009, p. 41.
Source: Collins et al. 2009, p. 42 and passim, with permission from Princeton Press.
54 
The New Microfinance Handbook

Box 2.2  Cash Flow Management Given Volatile Seasonal Income
Sita, a widow, farmed a little land in northern 
During the household’s eight-month-long 
India. Two of her sons lived with her, and as 
“low season” it sometimes fell to less than 
well as helping on the land, they took casual 
half of that. 
laboring work. Nevertheless, 60 percent of 
Astonishingly, Sita and her sons still man-
their income was earned in just four months, 
aged to save enough grain and cash, at home, 
from June to September, and in the year  to ensure that they could eat throughout the 
that we tracked their lives, bad weather  year. To get hold of a larger sum they mort-
meant that that income was especially low. 
gaged land to borrow from a grain trader for 
Averaged over the year, total household  whom one of the sons worked, and repaid 
income was just under US$30 per month, or 
that debt by deducting a little at a time from 
about 32 cents for each member of the  his wage. In these ways, over the year they 
household (about US$1.20 per person per  saved and repaid about US$63, almost a fifth 
day when adjusted for purchasing power). 
of their total income.
going into rent arrears. Then, when the rent  financial tools to average annual income varied 
arrears have built to the point where the landlord  between about 75 percent and 175 percent in 
begins to threaten eviction, they borrow larger  India, a similar amount in Bangladesh, and a figure 
sums, with interest, from a moneylender. To repay  somewhat higher in South Africa (Collins et al. 
the moneylender, saving efforts have to be  2009, pp. 31–33). This is because much day-to-day 
redoubled, or assets have to be sold off. But selling  management involves short-term, rapidly revolv-
off assets—for example, selling roof sheets to  ing exchanges of cash. Many of the smallest loans 
repay a creditor—simply creates another essential  from neighbors were repaid in a matter of days. 
item that requires the poor to save. No wonder  “Big flows and small balances” is a good general 
households in the financial diaries told the  description of poor-owned portfolios, and they 
researchers that “All this keeps us awake at night,”  are matched in the experiences of MFIs that have 
or confided that “I hate having to borrow money  a track record of offering unusually convenient 
from other people—but there is no life without  passbook savings to poor communities. When 
money, so we just have to do it.” 
examining the accounts at BURO, an MFI in 
But although day-to-day money management  Bangladesh, researchers found that the annual 
is where the majority of financial services are  flow through the passbook savings product was 
used, this does not show up much in the balance  four and a half times the value of the year-end 
sheets of the poor. Year-end balances of most  savings balance (Rutherford et al. 2001). Poor 
“diary” households revealed rather low levels of  people need to save short term to form small sums 
household savings and of local borrowing and  that can be withdrawn to cope with everyday life. 
lending. It is only when cash flows are examined  Saving, for the poor, is a verb before it is a noun
that this intensity of use can be seen. Typically a  something you do rather than something you pos-
household’s annual financial cash flow was many  sess. More often than not, saving is a way of cop-
times the value of their financial assets and liabil-
ing with small and unreliable incomes rather than 
ities. The ratio of cash pushed and pulled through  a way of building capital. 
Clients 
55

A reliable lender of small loans can also help to  for the borrower or built into the price of the 
smooth income, as box 2.3 shows.
loan). Lacking formal insurance, most poor peo-
ple must look for other ways to anticipate risk and 
Dealing with Emergencies and  
to deal with emergencies when they occur. 
Anticipating Risk
Poor households are peculiarly vulnerable to 
When emergencies strike, poor people, like every-
emergencies. Many live in fragile ecosystems: 
one else, need large amounts of capital if they are  Pushed to the margins by poverty, they are closer 
to have a chance of fending off the worst effects of  than others to seas that breed cyclones or rivers 
the event. In wealthy countries, and among the  that flood, or farmland prone to drought. Close to 
better-off in poorer ones, insurance is available to  one-fifth of the burden of disease in developing 
provide that capital, in the right amount at the  countries can be attributed to environmental 
right time. Insurance is a fast-growing and excit-
risk—with unsafe water, poor sanitation, and poor 
ing part of microfinance, but it has reached   hygiene as leading risk factors causing premature 
few poor households so far (though many  deaths (World Bank 2005). The poor may live in 
microlenders do provide insurance against debt if  provisional slums with uncertain legal status 
a borrower dies holding a loan, either as an option  where they can be pushed out by landlords or 
Box 2.3  Ramna’s Top-Ups 
One of several innovations that Grameen  in a tea stall. Ramna was in charge of keeping 
Bank introduced in 2002 in an effort to make 
the home ticking and making sure everyone 
its products less rigid was the loan “top-up.” 
was fed. She found Grameen’s top-up sys-
Under this provision, borrowers may top-up 
tem useful. Every six months she got a use-
their loans to the original disbursed value  fully large lump sum that helped her keep the 
once they are about halfway through the  household stable. The researchers saw her 
annual repayment schedule. In effect, they 
spend these sums on stocks of rice, manag-
can take smaller loans every six months  ing her father-in-law’s funeral, buying medi-
rather than a bigger loan once a year. Ramna 
cines for her husband, and paying for school 
and her husband provide a good example of 
fees and books and clothes. Once she simply 
Grameen clients who benefited from the top 
lodged her loan top-up with a moneyguard 
up loan. They were getting on in age,  neighbor until she needed to take it back to 
unskilled, uneducated, and unlikely to run  pay off a private loan that became due. On 
any kind of business, but they still had two 
another day she was found keeping back 
sons at home whose schooling they desper-
some of her top-up in a locked box at home 
ately wanted to continue. Their income came 
because she knew that a “down” period was 
from whatever casual employment or  coming and she would need an extra source 
self-employment Ramna’s husband could  from which to make the regular weekly 
find: During the three years that their finan-
Grameen loan repayment—behavior that 
cial life was tracked, he did farm labor, col-
indicated the value she placed on getting her 
lected crabs from the sea nearby, and worked 
biannual infusions of useful capital.
56 
The New Microfinance Handbook

governments at short notice, or suffer from fires  ceremonies, many of them related to the 
 
ignored by the municipality. Unable to buy suit-
HIV/AIDS pandemic.
able drugs or quality feed, their animals die 
How did they cope when these crises struck? 
younger and produce less than those of wealthier  Often they did not: The illness was never properly 
farmers. Cooking over an open flame near homes  cured, the home or the job was lost for good, and 
built of bamboo walling or straw roofs, they expe-
the cousin was given only the most basic of buri-
rience a higher risk of destructive fires. That same  als. The question then becomes, How did they try 
wood smoke damages lungs and eyes, an example  to cope? When disaster strikes, people pull in 
of how health problems start more often and   whatever resources they can reach. Assets may be 
are cured less easily among the poor than among  sold or, in the case of precious metals, pawned. If 
the population in general. 
there is time for the deal, any land in the house-
In Bangladesh, half of the households studied  hold’s ownership may be mortgaged out. Savings 
in the diaries project suffered serious financial  may be exhausted. Social networks are called on 
disruption from ill health during the study year,  for gifts in kind or in money, and for interest-free 
and in India the figure was two in five. One in five  or low-cost loans. Nonessential spending is fore-
of the Bangladesh households lost a home during  gone. Without access to insurance services poor 
the year, and four out of five of the South African  people use whatever financial tools they have 
households had to contribute to expensive funeral  available to them to manage risk (see box 2.4).
Box 2.4  Enayet’s Foot
Enayet worked on building sites with his  factory, money she had planned to use for her 
father in a slum in Dhaka, Bangladesh. When 
marriage. But the sum they raised was still far 
he was about 17, his parents realized he was 
from enough, and faced with a “no fee no 
becoming dependent on drugs. They remon-
treatment” ultimatum from the doctors, 
strated with him, and Enayet ran away from 
Enayet’s father went to better-off people in 
home and lived on the streets of Chittagong, 
the neighborhood—a retired teacher with a 
a port city several hundred kilometers away. 
pension, a shopkeeper, and a small-time 
His father drew down their meager savings 
pawnbroker—to take loans on interest of 10 
and gave up working to search for his son. He 
percent a month. Later, in the time of the 
found him, but only because Enayet got into a 
financial diary research, Enayet was back 
brawl and broke his leg. He had no money to 
home, walking with a crutch. The expensive 
treat the injury, and it worsened: Eventually 
loans had not been repaid, and very little inter-
he contacted his father when he could bear 
est had been given. Enayet’s mother suffered 
the pain no longer. Back in Dhaka, Enayet’s 
verbal abuse from one of the lenders and did 
family gave up almost everything to have him 
her best to ignore it. Almost certainly, the 
admitted to the hospital. They sold their furni-
debt will not be repaid; from time to time 
ture, their jewelry, and their bicycle. They got 
Enayet or his father will make token interest 
loans from extended family. Enayet’s younger 
payments, hoping that eventually the principal 
sister withdrew her savings from a club run by 
will be forgiven or forgotten.
women working on her floor in a garments 
Clients 
57

Nevertheless, when a particular risk is espe-
Building Bigger Sums for Life-Cycle Events, 
cially expensive, or has an unusually high likeli-
Assets, and Businesses
hood of happening, poor households may try to  The constant threat of emergencies requires 
buy protection from it, using formal insurance or  households to find large sums of money quickly
informal substitutes. Such is the case in South  But they are by no means the only reason why 
Africa of funeral insurance, where many poor  poor households need to build large sums. All of 
households anticipate having to pay out for funer-
us, including the poor, need to be frequent big 
als and invest in devices specifically designed to  spenders, to deal with life’s big events—annual 
deal with this event. Many of the “diary” house-
festivals, ceremonies to celebrate birth, marriage 
holds belonged to an informal burial society into  and death, costs for education and home building, 
which they pay monthly premiums and in return  and assets to make life better, such as fans and 
receive financial benefits to help cover the high  televisions. Some will also want to build large 
costs of burials. Some of the same households also  sums to establish a new business or expand an 
paid into formal funeral insurance policies.5
existing one, or to invest in a large asset for 
Many households used both the informal and  self-employment, such as owning one’s own rick-
the formal schemes, so the financial diaries  shaw rather than hiring one on a daily basis, or 
authors were able to compare how well they  buying or leasing-in more land to farm. Others 
worked. Within an overall financial portfolio of  will migrate to find work, in the big city or over-
8 to 12 financial instruments, South African dia-
seas, and will need to finance these often costly 
ries households usually had at least one burial  journeys. How do they go about building these 
society and one formal funeral insurance policy.  bigger sums?
These households spent, on average, 3 percent of 
We have seen that most of the financial tools 
gross monthly income in total on all of their  used by poor people are informal. But informal 
funeral cover instruments. 
sector finance is not geared to handling large 
On pure economic terms, formal funeral insur-
sums of money over protracted periods of time. It 
ance has about the same value as informal burial  is not safe to hold large amounts of savings at 
insurance:6 Formal funeral insurance tends to  home, or in a savings club, because the longer 
cost more on average per month than informal  these savings have to be kept, and the greater 
burial insurance, but it also pays out more.  their value, the greater the risk of loss or theft or 
Looking beyond economics, burial societies have  misuse. Similarly, even the greediest money-
the advantage of providing a great deal of physical  lender is not willing to lend large sums to the poor 
assistance and moral support around the time of  because large loans need lengthy repayment peri-
the funeral. Fellow members take on a signifi-
ods, and the longer the loan is held the greater 
cant role in preparing and serving the feast dur-
grows the risk of default. 
ing the burial, often providing the cookware and 
So, even though these kinds of large expendi-
eating utensils. However, burial societies can be  ture can usually be anticipated, rather than being 
quite unreliable. Evidence suggests that close to  needed suddenly, poor people nevertheless find 
10 percent of them run out of money (FinMark  themselves building up sums piecemeal, just as 
Trust 2003). Therefore, although many poor  they do when faced with an emergency. It is not 
households may continue to belong to burial soci-
unusual for a big asset to be bought with a mix of 
eties for the social benefits they provide, formal  savings, loans, gifts from family, and the proceeds 
insurance providers have a clear contribution to  from the sale or mortgaging of other assets. The 
make in this market by continuing to offer good  piecemeal approach also characterizes the way 
value products with reliable service. 
that savings for large-scale expenditures are 
58 
The New Microfinance Handbook

assembled. Certain items, notably gold jewelry,  or a large compound (in the case of South Africa). 
roof sheets (and bricks and cement blocks and  In the urban areas renting a home was more com-
lengths of timber), and, in many households,  mon. In some cases, such as in some slums in 
livestock, are used as long-term stores of value,  Dhaka, Bangladesh, families owed the physical 
and although the terms of most informal finan-
structure of a simple timber-and tin-sheet one-
cial tools are short, they can be used to finance  room home and perched it rent free on land 
these savings-in-kind. ROSCAs are particularly  owned officially by the government or some other 
good at this.
institutional landlord. In South Africa some of the 
ROSCAs, short for rotating savings and credit  diaries households owned a permanent brick 
associations, are savings clubs in which members  home, although others with shaky tenure in the 
pay regularly into a pot that is taken in its entirety  urban areas could simultaneously be building a 
by one of their number in rotation and are com-
home in the rural areas. 
mon around the world. Pumza, the sheep-intestine 
Financing the ownership of a home, then, was 
seller featured in box 2.1, was in a four-member  a challenge being faced by only a minority of the 
daily ROSCA, and Enayet’s sister, mentioned in  diary households—but where that was the case, 
box 2.4, belonged to a much bigger monthly  the challenge was considerable, and the solution 
ROSCA run by fellow workers at her garments  to it required huge self-discipline, as the case of 
factory. ROSCAs are often deliberately designed  Jonas and Mimimi, from South Africa, shows 
to make it easier to obtain expensive items. In the  (box 2.5). Although many MFIs and other provid-
Philippines, for example, rural school teachers  ers are beginning to offer housing loans or 
use ROSCAs to help furnish their homes after   contractual savings products to invest in a home, 
marriage: They persuade their colleagues to join a  these tools were not available to this couple. 
ROSCA and use the proceeds to buy sofas and  Therefore, like many others around the world, 
chairs. 
they did their home building in a piecemeal 
Where MFIs have become common, as in  fashion.
much of South Asia, the short terms that charac-
Much of what is observed about the financing 
terize their lending (mostly about one year) lead  of domestic assets is also true of productive assets. 
to similar uses of the sums loaned. To the conster-
They too are often acquired through a range of 
nation (and sometimes disapproval) of MFI field  sources including gifts, asset sales, remittances 
officers, MFI clients may take a loan ostensibly  from family members working in the big city or 
for business investment and use it to buy gold  overseas, and savings and loans. The savings may 
jewelry. From the clients’ point of view, buying  have been held until needed in lower-value items 
such a store of savings is as legitimate a use for a  acquired through saving or borrowing short term 
loan as any other, especially when other opportu-
in the informal sector. 
nities to save (or invest) are so scarce.7 The piece 
Once again, community-based devices such as 
of jewelry may serve as decoration until called on  the ROSCA, with its simple and flexible formula, 
to help finance something on a much larger scale,  can be a powerful way of assembling cash for 
such as the wedding of the young woman whose  working assets. In Vietnam fishing communities 
neck it adorns.
have used “auction ROSCAs” (ROSCAs in which 
In all three countries in the financial diaries  the order in which the lump sum is taken is deter-
studies, most of the rural sample owned their  mined not by lottery but by bidding for it at each 
home and the parcel of land on which it stood,  draw) to raise money for boats and equipment. So 
often through inheritance. The better-off also had  high is the demand for capital that club members 
land to farm (in the case of India and Bangladesh)  sometimes forego as much as 50 percent of the 
Clients 
59

Box 2.5  Building a Home Little by Little
Jonas and Mimimi, a married couple who run a shebeen (township bar) in Langa near Cape 
Town, have an impressive capacity to save. Mimimi’s profits from the shebeen business are 
about US$324 per month, while Jonas works as a gardener and is paid US$185 per month, for 
a total monthly household income of US$509. Compared with other diaries households in 
Langa, which have an average monthly income of US$425, they are doing quite well. Mimimi 
typically manages to send about US$31 per month to her relatives in a rural area of the Eastern 
Cape. Their children live there with Mimimi’s mother, and she sends money every month to pay 
for their food and school fees as well as to contribute to a home they are building there. She then 
manages to stretch about US$87 for their living expenses every month. A typical monthly 
budget is detailed below.
Mimimi’s typical monthly budget (US$)
509
Source of funds
  Business profits
324
  Regular wages
185
Uses of funds
486
  Cell phone
6
 Cigarettes
3
 Electricity
16
 Food
49
  Money sent to Eastern Cape
31
  Transport to shopping
1
  Transport to work
13
  Savings clubs
367
Net savings in bank
23
Jonas and Mimimi’s most important savings devices are two informal savings clubs. Together, 
they save about US$367 with these clubs. A total of US$3,065 was paid out from one of them 
during the research year, and it was all used to build the house in the Eastern Cape. The other 
club paid out US$725 a few months later. From this payout, they spent the majority on a 
Christmas feast and Christmas presents when they went to the Eastern Cape for the holidays. 
But that still left about US$260 to buy cement for the floors and to buy doors for the house. 
In the end, between the two savings clubs and the money they retained from Jonas’s salary 
in a bank account, this young couple built up about US$4,000 in savings (not counting the money 
sent to the Eastern Cape every month). Of this, 12 percent was spent on Christmas, 6 percent 
was retained in the bank, and 82 percent was used to build the Eastern Cape house. The way 
they saved to build the house and the proportion of savings that went toward the house is similar 
to that of many other households in South Africa.a
Note: a. See “Housing and the Finances of the Poor” at www.financialdiaries.com for more details regarding how 
financial diaries households acquired housing.
60 
The New Microfinance Handbook

sum in bidding for it. In Bangladesh rickshaw  of default—the shame and maybe a bit of rough 
drivers run “rickshaw ROSCAs” to build a big  treatment at the hands of other members—but, 
enough sum to buy their own rickshaws. At some  more importantly, because the inability to keep 
gathering place, often the garage where their  up the repayment schedule is a very good indica-
hired rickshaws are parked overnight, each rick-
tor that one’s financial position is not strong 
shaw driver in the club sets aside a fixed contribu-
enough to maintain the asset once it is acquired. 
tion from his daily earnings, and when there is  Many rickshaw drivers who struggle to meet 
enough in the kitty to buy a rickshaw it is decided  ROSCA dues or repay MFI loans used to buy a 
by lottery which member of the club is to receive  rickshaw end up having to sell their machine, 
it. By a clever twist, which illustrates well the  almost always at a big discount, because they lack 
sophistication that often characterizes ROSCAs,  the means to bring financial stability to other 
after a club member has received his rickshaw he  aspects of their life. 
puts in double the usual amount each day: He can 
That leads to an important observation: All 
afford it because now he does not have to pay rent  poor households need financial tools to handle 
for a rickshaw. This has the effect of accelerating  their basic needs—day-to-day consumption 
the ROSCA so that the next rickshaw purchase  smoothing, dealing with emergencies, and build-
comes along sooner, reducing the length of time  ing sums to pay for life’s big occasions. If those 
that members’ investments are at risk. A few men  basic needs are not being at least partially met, 
have used these clubs so successfully that they  lending to poor people exclusively for productive 
have acquired fleets of rickshaws, and then grad-
investment may not be wise. At best, the loans 
uated to motorized rickshaws. 
meant for business will be diverted to the more 
Note, however, that not every Dhaka rickshaw  basic needs. At worst the loan will go into a busi-
driver wants to own his own rickshaw. Costs and  ness that will prove short lived or loss making in 
risks are associated with owning such assets.   the face of other financial demands made on the 
A rickshaw needs maintenance. It needs to be  borrower. 
stored somewhere safely at night. It has to be pro-
In the case of Bangladesh, one of the world’s 
tected from confiscation by police officers run-
most mature microfinance markets, MFI lenders 
ning extortion rackets. Not every poor rickshaw  have by and large learned to turn a blind eye to the 
driver can manage these tasks, so many prefer not  fact that many poor clients use their MFI loans 
to try. It is not only because they cannot afford  primarily or even exclusively for nonproductive 
them—or do not have access to the right financial  purposes—even though some of these MFIs con-
products at the opportune time—that poor people  tinue to insist in public that loans are given only 
own few productive assets or invest in few pro-
for microenterprise investment. A set of financial 
ductive activities: Other aspects of their poverty  diaries carried out to examine how informal 
may make it unprofitably hard to benefit from  devices and MFI services fit into the financial 
investment. 
lives of the rural poor in Bangladesh sheds light 
Nor does every self-employed person want to  on this: Productive investment is only one of a 
join a dedicated ROSCA of this sort, again for rea-
range of uses that people borrow from MFIs for, 
sons to do with the financial facts of his or her life.  as box 2.6 shows.
The pressure to keep up with the payment sched-
Other evidence suggests that business owners 
ule is severe, and if one cannot be sure that one’s  can benefit from small, flexible cash infusions in 
cash flow will allow one to pay on time every time,  a cash flow crunch, but that they may not lead to 
it may be better to avoid the commitment. This is  business growth. Financial diaries done with a 
not just because of the immediate consequences  modest sample of small business owners in 
Clients 
61

Box 2.6  How MFI Loans Are Used in Bangladesh
Out of a total of 237 microfinance loans care-
more than a timber hut with a few dollars’ 
fully tracked through repeated visits to bor-
worth of stock. Then one finds only a handful 
rowers of Bangladeshi MFIs over a three-year 
of households with a more than nominally 
period, just under half were used to stock  productive business: perhaps a couple of fam-
retail or trading businesses, or to finance  ilies running rice mills, and someone success-
small-scale production, or to buy or maintain 
fully recycling garment-factory waste into 
assets of one sort or another. One in ten loans 
stuffing for mattresses.a Most of the other 
were on-lent to subborrowers outside the  villagers are agricultural day laborers or are 
household (neighbors and relatives), and a  self-employed service workers, pushing rick-
similar number were used to pay down exist-
shaws or ferrying boats or loading trucks in 
ing debt (including, sometimes, debt from  the neighboring market or selling tea from a 
other MFIs). The remainder were used for  microstall. The small number of better-off 
consumption or for a mix of uses. Half of  farmers, with landholdings big enough to pro-
these MFI loans, then, by number and roughly 
duce more rice than the family can eat, are 
by value, were used for what could broadly be 
mostly not MFI clients because they dislike 
called “income-generating activities.” But this 
having to attend weekly meetings and find the 
does not mean that half of the borrowers 
loans too small for their needs: They may also 
used their loans in this way, because a small 
have access to formal finance, particularly if 
number of commercially active borrowers  they have land they can pledge. Putting this 
took bigger loans and took them more fre-
into numbers, the study found that 14 percent 
quently from more than one MFI. Imagine a 
of the MFI borrowers were responsible for 
small Bangladesh village: Just a few house-
taking two-thirds of all MFI loans used for 
holds are running shops that are anything  businesses.
Note: a. This was the situation in one village where these diary studies were undertaken.
South Africa8 showed that business owners were  people to borrow to establish and expand 
able to start operating with fairly small sums of  businesses.
upfront capital. However, to keep their business 
Most MFIs began with the primary purpose of 
in operation, they need frequent fresh infusions  providing loans to the poor to start or expand a 
of capital. Rarely did these business owners  small business, but the early hope that every poor 
dream of expanding their business, or imagine  person can become a successful entrepreneur is 
that they would make more money if they did.  now giving way to an understanding that enter-
They were rather more concerned about just  prise lending is best when targeted at clients 
keeping it going, to provide a stable, if small,  selected for their aptitude for business and their 
source of income.
stable domestic finances. As a result, the 
Enterprise borrowing, then, is not for every-
 
enterprise-investment side of microfinance is 
one. Nevertheless, a good proportion of MFI  gradually moving away from loans with weekly 
 borrowers—at least one in seven in the sample  repayment schedules that may not match the cash 
from Bangladesh described in box 2.6—respond  flow patterns of small business, and toward loans 
well to the microcredit dream of enabling poor  given to and tailored for individuals rather than 
62 
The New Microfinance Handbook

group-based borrowers. This should leave room  “Moneyguards”—people trusted to hold money 
for group-based saving and borrowing for the non-
safely on one’s behalf—are common. They may be 
entrepreneurial poor to adapt better to their wide  neighbors, relatives, or employers. Often the 
range of nonbusiness money-management needs. 
transactions take place in both directions: The 
diary research found several households that 
both take in and put out money in this way, at the 
How Good Are the Financial  
same time.9 Moneyguarding is closely related to 
Tools Used by the Poor? 
casual interest-free borrowing and lending among 
So far this chapter has provided numerous exam-
kin or neighbors. Sometimes it is hard to tell them 
ples of how poor people choose and use their  apart: In Bangladesh diary households might say 
financial tools. In this section we step back to  they had “put” some money that week with a 
review the overall quality of these services and  neighbor, and they would give vague answers 
devices. Understanding better the strengths and  when asked to specify whether this was a loan or 
weaknesses of the present set of tools should help  a savings deposit or a repayment on a loan. 
to structure thinking about how microfinance  Nothing better illustrates the complex ways in 
might, in the future, add more value to the finan-
which a community’s aggregate cash savings flow 
cial lives of the poor. 
back and forth between its members. This ambi-
guity is, like much in the informal sector, a 
Convenient, Frequent, and Flexible—But 
strength and a weakness: It enables a good deal of 
Not Always Reliable
interaction to take place, but at low levels of reli-
The most convenient tools of money manage-
ability that in turn place limits on the values and 
ment are ones that can be organized by the users  durations of this kind of intermediation.
themselves, without the need to interact with 
Where greater certainty or larger sums are 
others, without the need to travel, available at any  needed, a price is usually demanded. Village or 
time of the day or night, and at little or no cost. It  slum moneylenders who lend as a business ask 
is not surprising then that the financial diary  for interest, and many who lend merely to fulfill 
research found almost every poor household  family or social obligations do likewise. The 
held—or tried to hold—savings at home. But this  interest is often at a high rate, either to compen-
level of convenience and flexibility comes with  sate for the evident risk of lending to very poor 
obvious drawbacks: It is just too easy to take back  people (in the case of professional lenders) or, in 
these savings, so only those with exceptionally  the case of those lending as an obligation, to help 
strong willpower (and there are such people) are  limit the amount of money being lent. There is 
able to build or keep large sums at home. Security  more on the social aspects of this kind of lending 
is another obvious weakness of home savings:  below. 
They are vulnerable to theft or misuse, or to 
One way to borrow free of social entangle-
being lost in floods or storms, and at the very least  ments is to use a pawnbroker. The limitation here 
they will lose value to inflation. Self-help home  is that poor people rarely hold much in the way of 
saving, then, illustrates the trade-off very com-
pawnable goods, so very large sums cannot usu-
monly found in informal finance—between con-
ally be obtained by this route. The mortgaging of 
venience on the one hand, and low reliability,  land has other disadvantages: The land mort-
short-termism, and insecurity on the other.
gaged may have been the household’s main 
One way to mitigate these drawbacks is to  income source, and the larger sums that can be 
form a financial relationship with somebody else.  had from mortgaging land often prove very 
Clients 
63

 difficult, if not impossible, to repay, so the land is  discipline. Saving within a bigger group, as in a 
in effect lost for good. 
ROSCA or an ASCA10 (accumulating savings and 
MFIs have been much better able than banks  credit association, described in chapter 6, 
to approximate the convenience of informal  “Community-Based Providers”), offers much 
finance. They have done this in various ways.  more discipline, relying on the power of group 
First, they got physically close to their clients, by  pressure and sanctions to keep the transactions 
holding meetings right in the village or slum.  flowing regularly. Many poor people are well 
Soon, they settled on a form of lending in which  aware of the flip side of informal finance’s flexibil-
repayments were made easy by being small and  ity and convenience—its lack of discipline—and 
frequent—often weekly, at the meeting, some-
this helps to explain the popularity of devices like 
times even daily, through itinerant collectors. It  the ROSCA. Researchers have also suggested that 
was this level of convenience and frequency—
when people are distracted by the problems of 
rather than anything to do with microenterprise  poverty, and have to juggle several income flows 
development, or “group solidarity”—that led to  from different sources and deal with the individ-
microcredit’s extreme popularity in its early days.  ual cash flows of numerous financial tools, they 
Provided that their household cash flows were  can lose sight of their longer-term financial posi-
strong enough to come up with a small weekly  tion.11 By joining a group such as a ROSCA poor 
toll, people could borrow for whatever purpose  people may inject enough regularity into their 
was most pressing at the time. Later, when some  financial lives to help them plan for and meet 
of the disadvantages of a credit-only regime   longer-term  goals. 
became apparent (such as the risk of overindebt-
In earlier sections we have seen how ROSCAs 
edness), MFIs, where regulators allowed them to,  help their members build sums that can be used to 
introduced passbook savings that could be depos-
meet emergencies or acquire assets. ROSCAs can 
ited into or withdrawn from at will, at the village  fail, but as well as offering a disciplined environ-
or slum meeting. Nevertheless, most general  ment that encourages regular saving, they have 
lending to the poor by MFIs (as opposed to their  other advantages. One is that because they never 
lending to microenterprises) is short term and  require cash to be stored (at each meeting the 
therefore of low value relative to incomes: A typi-
money goes straight to that meeting’s taker) there 
cal loan may have a term of 11 months and be  is no risk of the treasurer dipping into the fund. 
worth the equivalent of two or three months’  Another is that the combined eyes of all the mem-
household income. This is very useful for con-
bers ensure that transactions will be more than 
sumption smoothing (as shown by Ramna’s  usually transparent and verifiable. These virtues 
behavior described in box 2.3) but not for the big-
offset the moderate risk of the ROSCA going 
ger sums that all households need from time to  wrong because a member simply fails to pay in 
time. To accumulate big sums, with most MFIs,  after he or she has taken his or her turn at the 
borrowers still need to build a series of modest  lump sum. Other features of ROSCAs make them 
sums through successive rounds of borrowing,  suitable for poor people: They require no book-
and find their own ways of storing their value—
keeping, so the illiterate are rarely confused by 
most commonly by holding them in nonfinancial  more literate members of the group. They are 
assets such as jewelry or livestock.
without cost: Money goes straight from the 
depositors to the taker in what must be the 
Disciplined—But Only in the Short Term
world’s swiftest and cheapest form of financial 
Saving on your own is hard. Saving with a money-
intermediation. And they are close at hand and 
guard helps impose some distance but not enough  convenient: People set up ROSCAs right where 
64 
The New Microfinance Handbook

they live or work and hold meetings at times that  credit union to become a permanent formal 
suit them. Box 2.7 illustrates several of these  institution, providing the members with ongo-
ROSCA features.
ing services and, crucially, enough security to 
Poor people find it easier to form larger sums  allow members to build up large deposits over 
through ROSCAs than they do through saving at  the long term, or pay steadily into insurance or 
home or saving with partners such as money-
pension policies. What has stopped this admi-
guards. Nevertheless, really big sums—enough to  rable system from becoming the obvious first 
buy a home or business outright or fund a pension  choice for poor people around the world is that 
annuity—cannot usually be formed through  the degree of formal organization needed to 
ROSCAs because, like all informal schemes,  keep a credit union stable requires levels of 
ROSCAs become riskier the longer they run, the  education and financial sophistication that are 
more members they have, and the bigger the  simply not available in most of the world’s 
amounts transacted. ROSCAs are time bound: As  poorer village and slums. 
soon as every member has received the “prize” 
Credit unions are inventions of the nine-
once, it comes automatically to an end, although  teenth century. More recently, nongovernmental 
the members are, of course, free to start another  organizations (NGOs) have taken up the basic 
cycle and accumulate another modest sum.  idea of the savings club and used it to work with 
ROSCAs illustrate another typical informal-
poor people on a range of development issues, 
finance trade-off—security versus longevity and  not just finance. The largest endeavor of this 
volume. 
kind is India’s Self-Help Group (SHG) move-
The group-based approach to financial ser-
ment, which counts its members in millions. 
vices to the poor has been taken up by outsid-
SHGs are basic savings clubs linked to formal 
ers in various ways. The oldest and most  banks, which recognize them as legal entities 
impressive is the credit union movement, now  and lend to them at favorable rates. More recent 
found throughout the world.12 Credit unions  still is the Savings Groups movement,13 which 
take the basic idea behind all ROSCAs and  has been building steadily over the last 20 years 
ASCAs—the idea of a group of people coming  and follows a rather different course. The NGOs 
together voluntarily to pool their savings—and  that promote savings groups prefer to tackle the 
submit it to enough  formalization to allow the  weaknesses of savings clubs, especially problems 
Box 2.7  Daisy’s ROSCA
Enayet’s sister’s saving club (see box 2.4 about 
one of the women, in a fixed order  decided by 
Enayet) was a ROSCA (she called it a lotteri 
lottery on the first day of the ROSCA, took the 
shomiti). Daisy earned 1,500 taka a month  whole 5,100 taka, a sum equivalent to two or 
(about US$25 at the market rate). In a meeting 
three months’ salary. When Enayet was admit-
that took place each monthly payday, when  ted to the hospital, Daisy’s turn to take the 
she and 16 other women on her floor con-
money was still a long way off, but, in return 
ducted their ROSCA, they each contributed  for a modest tip, she was able to get another 
300 taka from their wages, and each month 
member to swap turns with her.
Clients 
65

of poor governance, by training members in the  the social relationships in which people are 
use of improved practices. Because these savings  engaged may be complex, involving labor 
groups are standalone entities not linked to  exchange and land rental as well as money. In 
banks or other institutions, they are seen as par-
such contexts “moneylenders” may act as patrons 
ticularly suitable to remote and sparsely popu-
who assist their “clients,” and this remains true 
lated areas.
even when such help could result in cycles of debt 
Microcredit MFIs, as is well known, of course,  that are ultimately damaging to the long-term 
lend through groups. But MFI groups in the  welfare of the borrower. In these cases, with few 
 fastest-growing microcredit traditions, such as  competing options, poor people often prefer to 
that based on the work of Grameen Bank, are not  retain such avenues of access to resources than to 
mutual entities that own or share their own group  avoid them. 
funds, but simply groups of retail customers 
Another way in which the informal sector 
brought together by the MFI to reduce service  operates through social relationships is in the 
delivery costs. 
ways people assist each other, especially family 
and friends. Poor people may help their friends 
Social Embeddedness—A Strength  
and relatives in ways that are quite open-ended. If 
and a Weakness
a child needs school fees and parents cannot pro-
The discipline that ROSCAs offer is in part a  vide, another relative—or even a friend—may 
result of the social relationships they embody:  help. Such assistance creates a debt that takes the 
Being a member of the group creates an obliga-
form of a future obligation to reciprocate. It may 
tion to contribute or to be shamed in front of the  not be reciprocated in cash, or in school fees, but 
group.14 However, this discipline is often tem-
in a completely different form such as labor, lend-
pered by flexibility in the way in which the  ing animals, or taking care of a child. It is a form of 
ROSCA responds to clients’ needs. The essential  saving with others that is not directly financial 
feature of the group is that it represents a source  and in which the return is unknown at the time, 
of liquidity that members can access one way or  but is indeed an obligation. In this way debts are 
other. This can involve direct negotiation at a  not to be avoided: They create relationships of 
group meeting to obtain the payout because of a  reciprocity that can be drawn on in the future. In 
pressing need, shock, or emergency, or members  the case of Enayet (see box 2.4) the loans his par-
can negotiate directly with each other to change  ents took were never repaid in full and were on 
the order in which the payout is received (as in  the way to being “forgiven”—but public disap-
Daisy’s case; see box 2.7) or borrow the payout  proval and comment ensures that the borrowers 
from the member who did receive it. Groups  cannot forget that the obligation represented by 
organize themselves in many ways, and they vary  the unpaid debt continues. 
in how flexible they are prepared to be, but the 
The social relationships in which informal 
key feature is that by jointly creating a source of  financial services are embedded are both one of 
liquidity, members have a right to make claims on  their greatest strengths as well as their greatest 
that resource and to be listened to by other mem-
weakness. For those who are able to manage 
bers, either formally at the club meeting or at its  “negotiability” successfully they offer flexibility 
margins. This feature can be referred to as  and responsiveness for risk management in par-
“negotiability.” 
ticular, but also for productive investment and 
Although the mechanism differs, this negotia-
asset building. However, such relationships are 
bility is also a feature of moneylending.  not open to all, and the poorest people are less 
Moneylending is often seen as exploitative, but  able to engage with them because they are less 
66 
The New Microfinance Handbook

able to reciprocate, although they may also be the 
enabling them to transact frequently, through 
recipients of assistance from time to time.
out-of-branch banking of the sort seen in 
weekly village or slum meetings or in mobile-
Creating Better Financial Services 
phone banking, will remain vital. Breaking 
for the Poor
the formation of sums down into small bite-
size pieces, as in Grameen- or village bank–
The picture this chapter has painted of the cur-
style weekly savings and repayments or via 
rent state of financial services for poor people has 
daily collection agents, will still be essential. 
numerous implications for microfinance. They 
Above all, the MFI’s superior level of reliabil-
are overwhelmingly positive. Taken together, 
ity and transparency, relative to much infor-
they suggest that microfinance enjoys big oppor-
mal finance, needs to be retained and 
tunities to grow in both quality and quantity:
strengthened. 
• First,thepictureimpliesaveryhighdemand • Fifth,itshowswheremicrofinancewillhave
from poor people for financial services. This is 
to improve and extend its products and deliv-
seen in the intensity with which poor house-
ery systems. Two very important goals are 
holds use whatever financial tools they have at 
finding ways to introduce greater flexibility 
hand.
into loan terms and repayment schedules 
(while still offering discipline) and finding 
• Second, it implies that this high level of
ways of enabling the poor to engage in much 
demand is by no means fully met, neither in 
longer-term intermediation, through long-
volume nor in quality. This is seen in the fail-
term commitment savings plans (including 
ure of the existing, largely informal, tools to 
insurance and pension plans) and loan terms 
satisfy in full the financial needs of the poor, in 
longer than the six months to one year com-
the low levels of reliability that characterize 
mon to much microlending at present.
much informal intermediation, and in the still 
very modest numbers of poor people reached  • Sixth,itsuggeststhatthedemandbypoorpeo-
by MFIs and other formal providers. 
ple for financial services may be quite similar 
across regions and districts, which implies 
• Third,itimpliesthatagreatdealofthedemand
that although microfinance practitioners will 
from poor people is not for the products and 
need to modify their work to suit each loca-
services that the microfinance industry has 
tion, a core set of needs is present that can be 
emphasized during its first three decades. In 
met by broadly similar products. This is seen 
particular, the demand for savings (including 
in the remarkable congruence of behaviors 
insurance) may outstrip the demand for loans; 
observed in the two South Asian nations and in 
the demand for general-purpose loans may 
South Africa—countries that have very differ-
outstrip the demand for loans for micro- 
ent histories, cultures, and levels of economic 
business investment; and the demand for long-
and financial development.
term saving, borrowing, and insurance 
instruments is at least a strong as the demand 
A key challenge for formal service providers 
for short-term savings and loans. 
has been the struggle to get close enough to the 
• Fourth,itimpliesthatmuchofthemethodol-
poor to compete with the proximity and fre-
ogy that microfinance has already developed  quency of informal tools. Informal tools are cer-
will be relevant to meeting this demand.  tain to keep their advantage in this respect, and it 
Techniques for getting close to clients and  would be foolish to think that formal services will 
Clients 
67

entirely replace them. But by finding ways to con-
school fees, for example—can be met. This range 
tact their clients where they are, in the village or  of plans can be offered, more reliably, by a formal 
slum, and doing so as often as they can, through  provider that is in regular frequent contact with 
regular weekly or daily routines, or via cell phones  its clients. 
and bank agents, formal services should be able to 
These challenges are well worth formal pro-
gain a much bigger share of the everyday financial  viders tackling. Informal finance, where poor 
intermediation of the poor than they have at pres-
people conduct most of their financial lives, can 
ent. Recent innovations that will help them do  suffer from low reliability and an inability to offer 
this include mobile-phone banking and legisla-
long terms to create large-value sums. These are 
tion to allow banks to operate through agents—
major deficiencies, and formal services can and 
either peripatetic as in India’s recent “banking  should offer something better. Reliability, in the 
correspondent” provisions or as a supplemental  sense of ensuring that agreed contracts are hon-
business for local shops, as in Brazil. 
ored, is fundamental. The poor live in environ-
Another challenge for formal providers is to  ments that are continuously changing; most have 
make products more flexible, to respond better to  neither cash flows, nor living arrangements, nor 
the irregular cash flows of poor clients. Here  environmental and social conditions that are 
again there is cause for optimism: Worries about  static or reliable. Bringing more reliability into 
internal control, and a sensible concern to keep  financial tools will provide a significant boost to 
things simple, caused early microcredit pioneers  the ability of the poor to plan and envision a 
to begin with rigid payment schedules, such as  future beyond the short term. This requires ser-
the strict weekly repayments of Grameen-style  vices that are offered in a timely manner and 
microlending. But with experience and the astute  under clear conditions, with terms that are 
use of technology they are now able to offer “pass-
upheld and with opportunities to easily ask 
book” savings—savings accounts where the client   questions and seek redress. 
can deposit or withdraw as much as he or she 
A minimum “menu” of financial services for all 
likes at any time—and flexible loan repayments, at  poor clients in the second decade of the twenty-
least for modest value loans. 
first century would ideally include passbook 
Because they are permanent institutions, it is   savings and flexible small-scale loans (for short-
much easier for MFIs and other formal providers  to- medium-term money management), medium- 
to offer long-term intermediation. Formal com-
term loans (such as up to three years) with 
mitment savings plans for the poor (which  structured repayments suited to whatever is 
include endowment and other forms of insur-
known about the client’s household cash flow, 
ance, and pension plans) will be a huge growth  and medium-to-long-term commitment savings. 
area for microfinance. They offer the discipline  As techniques for doing so evolve, providers 
that poor people so often seek when they use  should aim to add pensions, and insurance cover, 
group-based devices such as ROSCAs but add  starting with the risks that are easiest to calculate, 
value by having much longer terms, allowing  such as life insurance, but aiming eventually at 
much larger sums to be formed. They can also  the more difficult ones, above all health and agri-
offer a “one-stop shop” for such services. In East  culture. To carefully selected segments of clients, 
Africa it is common for people to take member-
providers should also learn how to offer longer- 
ship in several ROSCAs at once, each with its  term loans for productive investments tailored to 
own term, frequency, and value, so that the user  business cash flow, and for big life-enhancing 
can ensure that different spending needs—
investments (in homes, household goods, and 
weekly consumption, quarterly rents, or annual  education) tailored to repayment capacity shown 
68 
The New Microfinance Handbook

to exist by the transaction records of successive  10.  For descriptions of some of the most common 
loans. There is nothing in the history of microfi-
forms these clubs take, see Rutherford  
nance to suggest that offering these services to a 
(2009).
majority of the world’s poorest households can-
11.  For a view of how the realities of poverty affect 
not be achieved in this decade.
financial decision making among low-income 
people, see Bertrand et al. (2004). 
12.  See, for example, http://www.woccu.org.
Notes
13.  See http://savingsgroups.com and http://
 1. http://financialaccess.org/sites/default/
savings-revolution.org.
files/110109%20HalfUnbanked_0.pdf.
14.  This section was contributed by Susan 
 2.  Susan Johnson, “Gender and Microfinance: 
Johnson, Centre for Development Studies, 
Guidelines for Good Practice,” http://www 
University of Bath.
.gdrc.org/icm/wind/gendersjonson.html.
 3.  Details on how the households were selected 
and how the fieldwork was executed can be 
References
found in Appendix I of Collins et al. (2009). 
Bertrand, Marianne, Sendhil Mullainathan, and 
 4.  These diaries ran for three years rather than  
Eldar Shafir. 2004. “A Behavioral Economics 
12 months, but with monthly interviews rather 
View of Poverty.” American Economic Review 
than biweekly. The objective was to under-
94 (2): 419–23.
stand how households used MFI services 
rather than how they manage money generally.
Chaia, Alberto, Aparna Dalal, Tony Goland,  
Maria Jose Gonzalez, Jonathan Morduch,  
 5.  For more analysis on how well both types of 
and Robert Schiff. 2009. “Half the World Is 
funeral insurance helps cover the event of 
Unbanked.” Financial Access Initiative  
death in poor households, see Collins and 
Framing Note, Financial Access Initiative,  
Leibbrandt (2007).
New York. 
 6.  See Daryl Collins, “Focus Note: Financial 
Cohen, Monique. 2012. The Emerging Market-Led 
Decisions and Funeral Costs,” http://www 
Microfinance Agenda. PoP Briefing Note 25, 
.financialdiaries.com/Funerals_and_ 
MicroSave, Lucknow. 
Financing.pdf.
Collins, Daryl, and Murray Leibbrandt. 2007. “The 
 7.  For more on “borrowing to save” see Jonathan 
Financial Impact of HIV/AIDS on Poor 
Morduch, “Borrowing to Save: Perspectives 
Households in South Africa.” AIDS 21 
from Portfolios of the Poor,” http:// 
(suppl. 7): S75–S81.
financialaccess.org/sites/default/files/FAI_
Borrowing_to_Save_0.pdf.
Collins, Daryl, Jonathan Morduch, Stuart 
Rutherford, and Orlanda Ruthven. 2009. 
 8.  Bankable Frontier Associates, “Small Business 
Portfolios of the Poor: How the World’s Poor 
Financial Diaries: Report of Findings and 
Live on $2 a Day. Princeton: Princeton 
Lessons Learned,” http://www.bankablefrontier 
University Press. 
.com/assets/pdfs/Small-Bus-Fin-Diaries_Pilot-
Study.pdf.
FinMark Trust. 2003. FinScope Survey South 
Africa. Johannesburg: FinMark Trust. 
 9.  In Uganda a MicroSave team found two 
women who always “kept” a few dollars of 
Genesis Analytics. 2005. “A Regulatory Review of 
each other’s money. They explained that by 
Informal and Formal Funeral Insurance 
doing so they could resist their husbands when 
Markets in South Africa.” www.finmark.org.za.
they asked for cash, by saying “Oh, no, you 
Helms, Brigit. 2006. Access for All: Building 
can’t have that money—it belongs to the lady 
Inclusive Financial Systems. Washington, DC: 
next door” (Rutherford 1999, p. 23).
Consultative Group to Assist the Poor. 
Clients 
69

Kuyasa Fund. 2005. Kuyasa Fund: Community-
———. 2010e. “The ‘Triple-Whammy’ of Poverty: 
Based Lending. Marshalltown, South Africa: 
Lessons from Portfolios of the Poor: How the 
FinMark Trust. 
World’s Poor Live on $2 a Day. PoP Briefing 
Microcredit Summit Campaign. 2011. “The State 
Note 1, MicroSave, Lucknow.
of the Microcredit Summit Campaign Report 
Rutherford, Stuart. 1999. “Savings and the Poor: 
2011.” Microcredit Summit Campaign, 
The Methods, Use and Impact of Savings by the 
Washington, DC. 
Poor of East Africa.” MicroSave, Lucknow.
MicroSave. 2010a. “Borrowing to Save: 
Rutherford, Stuart, with Sukhwinder Arora. 2009 
Perspectives from Portfolios of the Poor.” PoP 
The Poor and Their Money. Rugby: Practical 
Briefing Note 3, MicroSave, Lucknow. 
Publishing.
———. 2010b. “Grameen II and Portfolios of the 
Rutherford, Stuart, with S. K. Sinha and Shyra 
Poor.” PoP Briefing Note 7, MicroSave, 
Aktar. 2001. Buro Tangail Product Development 
Lucknow. 
Review. Dhaka and London: BURO and DFID.
———. 2010c. “How Do the Poor Deal with Risk?” 
World Bank. 2005. Environment Matters: Annual 
PoP Briefing Note 3, MicroSave, Lucknow.
Review. Washington, DC: World Bank.
———. 2010d. “Living on $2 a Day.” PoP Briefing 
Wright, Graham A. N. 2005. “Designing Savings 
Note 1, MicroSave, Lucknow.
and Loan Products.” MicroSave, Lucknow.
70 
The New Microfinance Handbook

CHAPTER 3
The Role of Government and  
Industry in Financial Inclusion
Stefan Staschen and Candace Nelson

Tailoring a country’s financial system to enable  from infrastructure to legally mandated outreach 
financial markets to work better for the poor  targets. Industry players are rallying around codes 
involves the combined efforts of public and private  of conduct intended to increase transparency and 
players. It is relatively recent, and commendable,  fair treatment of consumers and are defining per-
that both government and the financial services  formance in financial, social, and environmental 
industry acknowledge the importance of increas-
terms. Both spheres share the responsibility for 
ing financial inclusion. But financial inclusion is  “responsible” finance, building financial inclusion 
not simply about numbers or attracting more cli-
on a foundation of consumer protection.
ents to the range of providers. “Responsible” 
This chapter outlines the role of government 
financial inclusion increases access to financial  (through its policies, regulation, and other sup-
services in ways that are safe for consumers,  port for a stable financial sector) and industry 
enabling their participation informed by knowl-
(through standards and guidelines) in promoting 
edge and choice. Increasingly shared by public and  financial inclusion, as both separate and some-
private actors, this vision requires coordinated  times overlapping arenas of activity. In addition, it 
efforts from both. Governments are investing  recognizes coordination and advocacy as impor-
authority in policies and rules that shape behavior  tant functions within the market system. This 
in market systems; their imprint is wide-ranging,  chapter provides a high-level perspective on the 
Contributions to this chapter were made by Kate Lauer. 
The Role of Government and Industry in Financial Inclusion 
71

roles of government and industry, largely related  more awareness of the reasons why market forces 
to formal rules that help to shape the financial  will not—without an appropriate enabling envi-
market system;1 more detailed information on the  ronment, infrastructure support, and adequate 
specifics of regulation is provided in chapter 17. It  consumer protection and financial capability—
will be of interest to policy makers, industry asso-
achieve the goal of improving financial inclusion.
ciations, financial service providers, and other 
Policy making is a complex process bringing 
stakeholders seeking to understand the enabling  together various actors who use a multitude of 
environment for financial services. 
tools and strategies to promote financial inclu-
sion. Policy decisions influence where resources 
are allocated and how priorities are established 
The Role of Government in 
within political, economic, and social institutions. 
Financial Inclusion
Policies are designed to guide decision makers 
and to achieve an intended purpose. They typi-
  Microfinance is now seen as an integral part of  cally outline general principles, but they do not 
an inclusive financial system. As a result, finan-
carry the force of law.2 
cial inclusion has become an important policy 
Policy makers recognize the potential for eco-
goal that complements the traditional pillars  nomic growth and poverty alleviation through 
of monetary and financial stability, as well as  the development of a more inclusive financial ser-
other regulatory objectives such as consumer  vices sector. In doing so, they also acknowledge 
protection (Hannig and Jansen 2010). 
three primary barriers to financial inclusion: 
Government as Rule Maker 
• Supply-sidebarrierssuchastransactioncosts,
Governments have increasingly embraced finan-
the inability to track an individual’s financial 
cial inclusion as one of their policy objectives. 
history, and lack of knowledge about how to 
Data from the Financial Access 2010 Survey 
serve poorer customers
(CGAP 2011) show that in 90 percent of econo-
• Demand-sidebarriersthatrestrictthecapacity
mies, at least some aspect of the financial inclu-
of individuals to access available services and 
sion agenda is under the purview of the main 
products, including socioeconomic and cultural 
financial regulator. Furthermore, “As rule makers, 
factors, lack of formal identification systems, 
governments determine not only what efforts 
and low levels of financial literacy (AFI 2010)
may be undertaken to promote financial inclu-
sion, but also by whom, how, and when. In addi-
• Poor regulatory frameworks, including con-
tion to prudential and consumer protection rule 
sumer protection mechanisms that hinder the 
making, governments can enable innovative 
quantity and quality of financial products and 
financial inclusion business models, including 
services.
permitting the entry of new actors into the finan-
The main participants in developing formal 
cial service sector” (Ehrbeck, Pickens, and Tarazi  rules include the legislature (typically the parlia-
2012, 6). Rather than provide financial services  ment), the government unit (the relevant ministry 
directly, the government’s role is to maintain mac-
and government bureaucracy), and the regulator 
roeconomic stability and provide appropriate reg-
(the central bank or regulatory authority). A legis-
ulatory and supervisory frameworks (see Duflos  lative process in microfinance normally starts 
and Imboden 2004). And while the assumption  with a mostly technical discussion among the 
still holds that the private sector plays the central  experts and the regulator,3 but eventually depends 
role in providing financial services, there is much  on the support of the legislature to implement 
72 
The New Microfinance Handbook

legal changes. Educating lawmakers about the  to reduce the risk of serving them, a deposit 
rationale and objectives of proposed rules early  insurance system protects clients against loss of 
on can help to overcome any potential resistance  savings, and a land registry system facilitates 
and create a joint understanding of what is needed  access to loans using land as collateral. 
to achieve an enabling environment for financial 
Nonfinancial infrastructure also has a bearing 
services for the poor.
on financial inclusion. For example, roads for trav-
eling to the nearest service point, electricity for 
Infrastructure Support
recharging mobile phones or running real-time 
The government has traditionally played a strong  communication systems between remote areas, 
role in ensuring that infrastructure is in place and  agents, and head offices, and national identification 
providing oversight. The front-end infrastructure  systems all promote access to financial markets. In 
includes client access points, such as post offices,  all these areas, the government plays a crucial role, 
automated teller machines, point-of-sale devices,  either as provider or as regulator and promoter.
and retail agents, all of which are subject to 
 specific rules and regulations. The back-end infra-
Promoting Savings through Government 
structure includes automated clearinghouses,  Payments
real-time gross settlement systems, retail pay-
The government can potentially play an impor-
ment switches, and cash distribution networks  tant role in promoting savings and catalyzing vol-
(see chapter 18). Not least because of the growing  umes by moving its social transfers, wages, and 
importance of branchless banking models, the  pension payments onto electronic channels and 
payment system infrastructure has received a lot  ensuring that these channels are linked to easily 
of attention, as it constitutes the rails for the  accessible, basic transaction accounts. Its policy 
cost-effective provision of financial services. If the  with regard to social safety nets and govern-
government (for example, the central bank) does  ment-to-person (G2P) payments can thus have an 
not run these systems, at least it nurtures them  important impact on the viability of innovative 
and sets the general rules of operations.
delivery channels and draw more clients into the 
In addition to service delivery infrastructure,  formal financial sector. Both the government and 
several other supporting functions should be  the poor benefit as G2P payments can often be 
considered in the government’s domain for finan-
delivered at substantially lower cost and with less 
cial inclusion. For example, credit bureaus allow  “leakage” if they are delivered electronically 
clients to build a credit history and help providers  (Pickens, Porteous, and Rotman 2009; see box 3.1). 
Box 3.1  Bank and Retail Network Partnership 
The Mexican government is leveraging public 
harnessing its public infrastructure to pursue 
infrastructure for savings and G2P payment  this goal. In areas with no financial services, it 
delivery. The 2010 Budget Law crafted by the 
is attempting to reach people by linking a net-
Ministry of Finance stipulates that all govern-
work of 23,000 community-owned stores 
ment payments (primarily administered by the 
with its conditional cash transfer program 
Ministry of Social Development) must be deliv-
(Oportunidades) and the savings services of a 
ered electronically by 2012. The government is 
state-run bank.
Source: Almazan 2010.
The Role of Government and Industry in Financial Inclusion  
73

Consumer Protection
For countries characterized as “low-access 
In an environment of increasingly complex finan-
environments” (where levels of financial access 
cial products and services, effective consumer  and financial literacy are low and regulators face 
protection is important for the overall sustainabil-
significant capacity constraints), the Consultative 
ity of the financial market system.4 Participation  Group to Assist the Poor (CGAP) recommends 
in the formal financial sector must pose fewer  that the government agenda for consumer pro-
risks for vulnerable, low-income  people who have  tection pursue three basic goals: transparency, 
little experience with formal finance and low lev-
fair treatment, and effective recourse (Chien 
els of financial literacy and capability.
2012; Brix and McKee 2010).5
Governments have an important role in pro-
Transparency covers broad disclosure of rele-
viding the legal and enforcement muscle to ensure  vant product terms and conditions, including 
that financial institutions do not undermine con-
pricing, fees, and default provisions. When such 
sumer protection by intentionally capitalizing on  disclosure rules require all providers of the same 
their advantages in information, knowledge, and  type of product to use standardized formulas as 
power. Effective consumer protection legislation,  well as plain language to communicate relevant 
applied equitably across providers, can facilitate  charges, consumers are better able to compare 
comparison shopping and healthy competition,  products. Disclosure requirements are consid-
leading to improved products and practices.  ered more market friendly and effective at reduc-
Despite limited regulatory and supervisory capac-
ing costs to the borrower than mandated interest 
ity and challenges in enforcing legal contracts in  rate ceilings (Brix and McKee 2010). 
the countries where microfinance is needed most, 
Transparency targets two interrelated 
governments can ensure that providers disclose   objectives— increased  consumer comprehension
prices and other characteristics of credit products   allowing consumers to understand and choose 
in a consistent manner using agreed terminology  appropriate products, and increased market 
and definitions; and they can set rules for client   competition, stimulated as consumers engage in 
privacy, out-of-court redress mechanisms, or rig-
comparison shopping. Disclosure regulations 
orous safety of data storage and transmission to  should govern both content provided to the con-
protect customer funds and information (AFI  sumer and how it is communicated for effective 
2011). Some examples of consumer protection  comprehension. Disclosure of the various cost 
regulations include the following: 
components and other product terms can be 
overwhelming to consumers and counterproduc-
• TheNationalBankofCambodiarequiresthat tive to the objective of enhancing their compre-
microfinance institutions (MFIs) state their  hension. For example, creditors in Armenia are 
interest on a declining balance rather than a  required to advise customers orally regarding 
flat-rate basis.
terms, costs, risks, and obligations associated 
• South Africa’s sweeping National Credit Act with a service. A standardized summary sheet of 
addresses over-indebtedness and reckless lend-
product costs and terms used by all providers is 
ing by defining these terms under the law. It sets  one of the most useful tools for ensuring that con-
clear rules governing disclosures, credit report-
sumers have information they can understand 
ing, and advertising, among other practices. 
and compare. Standardized forms are also easier 
for providers, particularly smaller and less sophis-
• Indonesian regulators require regulated pro-
ticated ones, as they save time and resources by 
viders to have written procedures and a formal  not having to develop their own disclosure forms 
complaints unit.
to meet regulatory requirements (Chien 2012). 
74 
The New Microfinance Handbook

The perspective of the individual consumer is  financial institutions not only handle complaints, 
critical to tailoring disclosure regulations. Loan  but also often handle questions and can play a 
pricing provides a good example. Because nominal  role in facilitating consumer comprehension of 
interest rates do not reflect the total cost of a loan,  disclosed information. Sometimes the regulatory 
regulations should mandate that pricing be  agency takes responsibility for this function, and 
expressed using one or more of the following  sometimes it assigns the role to an industry asso-
 methods: (1) total financial cost of credit, (2) repay-
ciation, ombudsman, or other entity. Rules gov-
ment schedules, and (3) annual percentage rate  erning these processes should specify all aspects 
(APR) or effective interest rate (EIR; see chapter 9).  of customer complaints, including the method of 
While the use of APRs and EIRs allows for greater  submission, location, and time frame for resolu-
comparability, total loan cost and the amount and  tion. Providers need to display such information 
frequency of repayment may be easier for low-  clearly and communicate it directly to clients. 
income consumers to comprehend. Limited data 
While these three goals—transparency, fair 
suggest that borrowers tend to focus on the amount  treatment, and recourse—are basic to protecting 
of the installment payment rather than the interest  consumers, it may not be feasible or practical to 
rate, because their main concern is whether their  address all of them at once. An incremental 
cash flow will cover loan payments (Chien 2012).  approach to developing a set of disclosure poli-
For example, policy makers in Peru and Ghana  cies and regulations may be necessary, taking into 
standardize the calculation of APR or EIR with  consideration compliance costs for industry and 
regulators specifically to address the capacity con-
supervisory capacity of government. A starting 
straints of smaller, less formal institutions. Allowing  point might be to tackle the most critical yet 
for the monthly presentation of APRs or EIRs is   discrete transparency issues in a given context. 
another practical option introduced in the  At an intermediary level, governments can target 
Philippines. Monthly APRs or EIRs may be more  broader consumer comprehension. Finally, regu-
appropriate for loans of less than a year and more  lators can reinforce market competition by 
comprehensible to consumers (Chien 2012).
requiring broad dissemination of comparable 
Fair treatment covers ethical staff behavior, the  metrics for total costs (such as APRs and EIRs) 
sale of appropriate products, and acceptable mar-
and other key terms through advertising and 
keting and reasonable collections practices. Rules  media channels, allowing market forces to apply 
governing truth in advertising support transpar-
pressure on providers. Extensive dissemination 
ency through disclosure. Codes of ethics guard  of new disclosure requirements, coupled with 
against overly aggressive responses to delinquency.  sufficient time for implementation, can help to 
Zero tolerance of delinquency, a cornerstone of  reduce the industry’s costs of compliance. 
institutional performance, can result in abusive  Consumer testing can be used to refine disclosure 
collections with adverse effects on poor house-
rules at each stage and build a stronger disclosure 
holds. In India, Ghana, and elsewhere,  regulators  regime over time (Chien 2012; see box 3.2).
have established rules governing fair debt collec-
However, even where provided for by law, 
tion and prohibiting intimidation and coercion.
broad application and enforcement of consumer 
Effective recourse is necessary for consumer  protection regulations can be difficult to achieve 
trust in the formal financial system; when things  in practice. Challenges include consistent appli-
go wrong, consumers need to know they have a  cation of rules and coordination among multiple 
way to communicate their complaints and  regulators where supervisory authority is 
resolve their issues. Consumer recourse mecha-
divided. Microinsurance provides a good exam-
nisms such as specialized help desks within  ple of this (see box 3.3).
The Role of Government and Industry in Financial Inclusion  
75

Box 3.2  Encouraging Stakeholders to Adopt New Rules
The success of the disclosure regime in Peru 
Financial institutions in Peru are required to 
can be attributed in part to the extensive  resolve all questions related to the content of 
efforts of the Superintendency of Banking and 
a contract before it is signed. In addition, they 
Insurance. Regulators spent two years dis-
must designate customer service personnel 
cussing disclosure rules with the industry,  to consult with clients on the scope of stan-
addressing issues of compliance costs, and  dardized contracts. Such an approach shifts 
developing providers’ familiarity with formulas 
the burden of achieving comprehension onto 
for calculating EIRs. In addition, a large cam-
the provider, but should not be viewed as a 
paign was launched to educate consumers on 
substitute for clear instructions on what and 
EIRs and to ensure they understood the new 
how information is disclosed.
disclosure rules. 
Source: Chien 2012.
 Box 3.3  Policy for Microinsurance
Policy makers need to understand the insur-
microinsurance. Government can consider 
ance needs of low-income households and  treating microinsurance products differently 
ensure that policies facilitate the market-based 
than commercial products for tax purposes. 
provision of microinsurance. They can engage 
Increasingly, central banks and finance minis-
the insurance industry and other actors—such 
tries have become engaged in promoting finan-
as unregulated insurers and networks—in 
 
cial literacy, as low levels of information and 
a dialogue on microinsurance and involve 
 
trust are probably the biggest barrier to uptake 
them in educating the market and promoting 
of insurance among low-income populations.
Source: Martina Wiedmaier-Pfister.
Building Financial Capability
exercise them. These include the right to under-
Although historically governments may have  stand product choices, often offered by competing 
focused on limiting harmful credit products  providers, and the right to choose the services that 
through interest rate caps and debt forgiveness,  are best for them.6 Consumers need to develop 
the focus has shifted toward the need to empower  relationships with financial service providers on 
financial service users, to inform them, and to give  the basis of knowledge and choice as opposed to 
them tools to protect their rights (CGAP 2010).  fear. Ill-informed consumers and unsupervised 
CGAP identifies consumer financial capability,  providers can undermine the impact of financial 
government regulation, and industry codes of  inclusion efforts; this risk is especially high in a 
conduct as the three principal consumer protec-
context of rapid, often technology-driven, change 
tion strategies (McKee, Lahaye, and Koning 2011).  in the financial service marketplace. Given the 
Consumers need to know their rights in order to  asymmetries in knowledge, as well as access to 
76 
The New Microfinance Handbook

information and skills between providers and 
Financial capability is the ability to apply 
 
consumers, governments can help to meet 
  that knowledge, to make informed decisions, 
the  
challenges—educational, regulatory, and  and to take effective actions regarding the cur-
financial— of empowering consumers to use finan-
rent and future management of money. It 
cial services effectively and participate in their  includes the ability to save, borrow, and spend 
own protection. However, with limited  experience  wisely, to generate more stable cash flows, and 
in addressing this need, government strategies to  to manage the challenges associated with 
support responsible finance are key to learning  costly life-cycle events (see box 3.5). Challenges 
what works (see box 3.4).
of money management are never static, and 
Three overlapping terms are used in relation  neither are the solutions, especially given the 
to the concept of consumer financial capability:  unpredictable and seasonal incomes that 
financial literacy, capability, and education. 
are common among the poor. Financial capa-
Financial literacy is the ability to understand  bility is an evolving state of competency 
basic information about financial products and   subject to ever-changing personal and eco-
services.
nomic circumstances. 
Box 3.4  Financial Capability Strategies
A Ghanaian government survey in 2007  strategy for financial literacy and consumer 
revealed a low level of knowledge of financial 
protection in the microfinance sector was 
institutions, services, and products among  adopted that addressed three pillars of finan-
adults. As a result, the government launched a 
cial capability: knowing, understanding, and 
financial literacy program in 2008 to create  changing behavior. The strategy featured edu-
awareness and build trust between consum-
cation materials describing key products and a 
ers and service providers. In 2009, a national 
road show that toured rural areas. 
Source: AFI 2011.
Box 3.5  Financial Literacy in the Russian Federation
In Russia, research was conducted to study 
having more unspent income at the end of the 
the consequences of greater financial literacy 
month and higher spending capacity. The rela-
on the use of financial products and financial 
tionship between financial literacy and the 
planning. The study found that financial liter-
availability of unspent income was even more 
acy was positively related to participation in 
evident during the recent financial crisis, sug-
financial markets and negatively related to the 
gesting that better financial literacy may better 
use of informal sources of borrowing.  equip individuals to deal with macroeconomic 
Individuals with higher rates of financial liter-
shocks. 
acy were significantly more likely to report 
Source: Klapper, Lusardi, and Panos 2012.
The Role of Government and Industry in Financial Inclusion  
77

Financial education is a key tool, coupled with  other stakeholders for achieving an inclusive 
experience using financial services, to build finan-
financial sector. It also raises awareness of and 
cial literacy and capability. It introduces people to  secures commitment to sound practices and estab-
good money management practices with respect  lishes the means for communication and coordi-
to earning, spending, saving, borrowing, and  nation around implementation to avoid gaps or 
investing. Its power lies in its potential to be rele-
duplication of efforts (Porter 2011). In 2010, 45 
vant to anyone and everyone, from the person  percent of the countries participating in the 
who contemplates moving savings from under the  Financial Access 2010 Survey had a dedicated 
mattress to a Savings Group to the saver who tries  strategy document for promoting financial inclu-
to compare account features between competing  sion (see box 3.6). Regulators in countries with a 
banks. Serving multiple, interrelated purposes,  financial inclusion strategy also have, on average, 
financial education promotes personal financial  more financial inclusion topics under their pur-
management, product uptake and use, and con-
view and more resources and staff working on 
sumer awareness and protection.
these matters (CGAP 2010). 
Matching the content of financial education to 
Financial inclusion strategies are developed 
the target group is essential to making it relevant.  through a consultative process among the key 
Target groups for financial education can be  stakeholders in financial inclusion (government, 
defined by age, gender, employment status, or  regulators, the industry, and consumer associa-
relationship to a specific financial product. For  tions) and approved by a government body. They 
example, financial education targeted to youth is  typically include a diagnostic of the current state 
likely to focus on negotiating with parents about  of the sector to ensure “evidence-based policy 
spending money, the value of saving, and planning  making,” policy objectives, strategies, and an 
for the future.
action plan for implementation (Duflos and 
Finally, to ensure financially capable consum-
Glisovic-Mézières 2008). Financial inclusion 
ers, financial education must be integrated with  strategies need to consider existing capacity as 
hands-on experience; consumers need to choose  well as the need for reform and capacity building 
and use financial products and services if they are  (Porter 2011). 
to understand their full benefits. 
An important element is the process itself: 
bringing a diverse range of actors to the same 
Financial Inclusion Strategies
table whose only common denominator may be 
A financial inclusion strategy clearly defines and  their potential to affect the financial ecosystem 
aligns a shared vision among policy makers and  and getting them to agree on a shared vision for 
Box 3.6  Financial Inclusion in Mexico
Under its National Development Plan for   different services and were subject to  different 
2007–12, the Mexican government reformed 
regulations than traditional banks. The plan 
banking laws to permit nontraditional entities 
also facilitated the transition of small savings 
such as banking agents to operate in rural  and credit organizations into regulated deposit- 
areas. Niche banks were allowed to offer  taking entities.
Source: AFI 2011. 
78 
The New Microfinance Handbook

the sector. The action plan for implementation  to come to a common understanding on how to 
needs to consider all elements of the  financial  reach this goal. 
market system: the core (clients and providers 
National strategies that focus on responsible 
and the products they exchange) and the rules  financial inclusion, as opposed to simply access to 
(formal and informal) and supporting functions  finance, might lead to significantly greater bene-
(infrastructure, funding, and information). Only a  fits for households and service providers alike. 
combined effort of all stakeholders is likely to  While many financial inclusion strategies may 
have a significant impact on the overall goal of  not focus on consumer protection and financial 
making markets work for the poor. 
capability, they should (see figure 3.1).
While financial inclusion strategies have the 
potential to lead to better structured and more  Legal Mandates
evidence-based policy-making processes, they  Some countries use quantitative financial inclu-
have suffered from several shortcomings (drawn  sion targets or specific product offerings man-
on CGAP research summarized in Duflos 2011):
dated by law as tools to promote the provision 
of financial services to underserved populations 
• Many strategies are driven by donors. Govern-
or geographic areas. These financial inclusion 
ment must have strong interest in and owner-
mandates can be seen as a complement to other 
ship of the process and the outcome.
financial regulations and incentives (for exam-
• Theoutcomecanonlybeasgoodastheanalysis.  ple, tax advantages for providers to reach 
At times, the diagnostic does not include all  poorer segments of the population). Mandates 
relevant actors and institutions; the analysis  appear to be a simple and effective tool for 
should be conducted by a team of experts with  achieving financial inclusion targets; assuming 
a diverse set of skills and be updated regularly.
that enforcing compliance is possible, prede-
fined targets can be reached (for example, 
• Thecommonvisiondoesnotsufficientlyconsider everybody has access to certain products or all 
the local context. This is particularly the case if  districts are served by at least one branch). 
the document is drafted by an international  However, in practice this might not always be 
consultant without much involvement of local  the case.
actors. 
Priority sector lending targets are the best-
• The strategy is not disseminated widely or known example of financial inclusion targets. 
updated regularly. The success of implementa- Priority sector lending usually requires a certain 
tion depends on broad dissemination, a clear  percentage of a provider’s loan portfolio to be 
allocation of rules, sufficient funding, and the  dedicated to sectors such as agriculture, micro 
setting of realistic targets; the strategy should  and small businesses, housing, or microfinance. 
be a “living document.” 
Basic or “no frills” bank accounts, designed for 
low-income clients with low or no fees, are 
The extent to which financial inclusion strat-
another example of financial inclusion man-
egies have improved access to finance is difficult  dates; in some countries (including Belgium and 
to know, as we do not know how the sector  France in the European Union, Indonesia, and 
would have developed without a strategy. What  Mexico) banks are required by law to offer basic 
we do know is that financial inclusion strategies,  accounts (see box 3.7). 
if taken seriously, are a powerful instrument for 
Expert opinions about the usefulness of legal 
convening stakeholders who have a potential  mandates are divided. Opponents give the follow-
impact on financial inclusion and helping them  ing reasons: 
The Role of Government and Industry in Financial Inclusion  
79

Figure 3.1  Financial Inclusion Strategies and Responsible Finance
‘Responsible’ financial inclusion that raises financial capability in line with financial access leads to:
• Stronger positive impacts at level of individual, firm, economy, financialsector
• Lower risk (for individuals, financial institutions, and the financial sector)
• Improved uptake of new technology
FINANCIAL INCLUSION
FINANCIAL INCLUSION COMBINED WITH
FINANCIAL LITERACY, CONSUMER PROTECTION
Examples of how households/firms can benefit
Examples of how households/firms can benefit
• MICROINSURANCE: Reduces exposure to potential
• MICROINSURANCE: Understand the risks covered, 
   losses to enable business growth
   cost compared to the potential benefit, select product 
• BASIC BANK ACCOUNTS: Low income household
• BASIC BANK ACCOUNTS: Select a bank account that 
   access through a mobile phone or ATMs 
   meets its needs, manage fees and debt levels 
• REGULATORY REFORMS: Innovation by financial 
• REGULATORY REFORMS: Harmonization of   
   institutions to serve lower income clients
   regulation to capability levels and objectives of  
   education programs
Financial inclusion
Responsible finance
Source: Tata and Pearce 2012. 
Box 3.7  Financial Inclusion in India
India’s government has a long tradition of pro-
In a parallel initiative, in 2010 the govern-
moting financial inclusion. For more than 40 
ment and the central bank set goals to provide 
years, the central bank, the Reserve Bank of 
by 2015 all 600,000 villages in India with a 
India, has been operating priority sector lend-
banking outlet (either by a branch or a retail 
ing mandating a portion of banks’ loan portfo-
agent, in India known as a business corre-
lios to be in the agriculture sector and to small 
spondent), with stipulated annual targets 
and micro enterprises. In 2005, it required  along the way. While these targets were not 
banks to offer basic no-frills accounts with no, 
specified by law, the Reserve Bank of India 
or very low, minimum balances and affordable 
requires all banks to report progress regularly 
charges. However, use of these accounts has 
and closely monitors their achievements.
been very low. In 2011, banks were advised to 
It is still too early to say how successful the 
provide at a minimum four products: (a) a sav-
implementation of these ambitious goals will 
ings or overdraft account, (b) a remittance  be. Some banks have risen to the challenge 
product for electronic transfer of government 
and opened numerous new outlets (mostly 
benefits and other remittances, (c) a pure   business correspondents). Others have com-
savings product (ideally a recurring-deposit  plained that the financial inclusion targets hurt 
scheme), and (d) entrepreneurial credit. 
their profits.
80 
The New Microfinance Handbook

• Inamarketeconomy,itisassumedthatpro-
Standards for supervision are largely set by inter-
viders know best how to serve the market. It is  national financial standard-setting bodies; they 
also assumed that a decision not to offer a cer- reflect national and global experience with differ-
tain product is informed by economic factors.  ent types of institutions and the risks and benefits 
If mandated to do so, providers will incur  of different activities. While standards represent 
losses that have to be recovered elsewhere.
formal rules, they are typically “soft law”; there is 
no technical means of enforcing them, although 
• Targetscanbeachievedatlowestcostifthey there may be consequences (in terms of reputation 
focus on those providers that are best posi-
and pricing) for failure to comply with them. In 
tioned to contribute to their achievement.7
some cases, the threat of these consequences can 
• Onamorepracticallevel,itisdifficulttosetup have significant impact on the actions of a govern-
rules in a way that does not encourage regula-
ment or its regulator.
tory avoidance (for example, providers choos-
Global standard-setting bodies set standards 
ing a different legal form, moving to another  and provide guidance for the regulators of finan-
jurisdiction, or bending the rules).
cial institutions. Due to the historical emphasis 
on setting standards for existing institutions and 
• The achievement of targets has to be moni-
their clients and the supervision of such institu-
tored, and an effective enforcement mecha-
tions, many standards have not yet considered the 
nism, including penalties for nonachievement,  issues of particular relevance to providing the 
has to be established, which requires additional  poor with financial services. Moreover, these 
resources.
standards may inhibit new approaches, including 
technical and nontechnical innovations, and new 
Proponents, however, argue that mandates   products and services that the poor need. 
to explore new markets are needed to counter  However, the global standard setters have begun 
the complacency of financial institutions. When  to consider how existing standards might need to 
mandates are imposed (if applied to all so that no  be revised in order to facilitate financial inclusion. 
individual provider’s competitive position is com-
This effort requires understanding the risks of 
promised), financial institutions will do their best  financial exclusion as well as the changing risks 
to comply with the targets at the lowest cost and  and benefits of increased financial inclusion. In 
eventually may even be able to cover their costs. In  addition, attention is required to understand the 
some cases (South Africa and Germany), the mere  situation of poor countries with high levels of 
threat of a legal mandate prohibiting commercial  financial exclusion and weak supervisory capac-
banks from refusing any customer the opportu-
ity (both staffing and experience) and to adjust 
nity to open a bank account was sufficient to lead  standards accordingly (CGAP 2011). 
the banking industry, of its own accord, to offer 
Of the various standard-setting bodies, the 
basic accounts to everybody.The ultimate deci-
three most relevant to financial services for the 
sion whether to mandate financial inclusion in  poor are the Basel Committee on Banking 
law depends on the specific context of a country.
Supervision (BCBS), the Financial Action Task 
Force (FATF), and the International Association 
Global Standards and Standard-Setting 
of Insurance Supervisors (IAIS). 
Bodies
The BCBS formulates standards and guide-
The term “standards” encompasses many things in  lines for the supervision of banks and other 
the financial sector.9 Standards may be general or  deposit-taking institutions and is best known for 
specific, and they may be national or international.  its international standards on capital adequacy 
The Role of Government and Industry in Financial Inclusion  
81

and its Core Principles for Effective Banking  and higher borrowing costs, among other conse-
Supervision (known as the Basel Core Principles).  quences (Isern and de Koker 2009).
In December 2011, the BCBS proposed revised 
The IAIS is a broad-based forum composed of 
principles intended to address the postcrisis les-
insurance regulators and supervisors from some 
sons for promoting sound supervisory systems.  190 jurisdictions in almost 140 countries. Its 
These proposed principles are significant for the  stated mission is to promote effective and glob-
prominence given to the principle of proportion-
ally consistent regulation and supervision of the 
ality (see chapter 16). In 2010 the BCBS issued  insurance industry in order to develop and main-
guidelines on applying the Basel Core Principles  tain fair, safe, and stable insurance markets for 
to microfinance activities of depository institu-
the benefit and protection of policyholders. The 
tions. The guidelines highlight the importance of  IAIS issues standards and guidance material 
a proportionate (risk-based) approach as well as  (including Issues in Regulation and Supervision of 
the key differences between a microloan portfolio  Microinsurance; IAIS 2007) and has recently 
and a commercial loan portfolio. The key differ-
revised its Insurance Core Principles to incorpo-
ences include (a) the particularities of the  rate the principle of proportionality. Specifically, 
labor-intensive microlending methodology, (b)  the Insurance Core Principles state, “Supervisors 
the licensing requirements, which should reflect  need to tailor certain supervisory requirements 
different risks than those of commercial banks,  and actions in accordance with the nature, scale, 
(c) the particular provisioning and reserve  and complexity of individual insurers. In this 
requirements that should be applied to micro-
regard, supervisors should have the flexibility to 
loans, and (d) the need for different liquidity  tailor supervisory requirements and actions so 
requirements (BCBS 2010).
that they are commensurate with the risks posed 
The FATF is the global standard-setting body  by individual insurers as well as the potential 
for anti-money-laundering and combating the  risks posed by insurers to the insurance section 
financing of terrorism (AML/CFT) rules. It is  or the financial system as a whole” (IAIS 2011, 
organized as a task force–style body with 34  para. 8).
member countries and two regional organizations 
(the European Commission and the Gulf 
Cooperation Council).
Coordination and Advocacy
10 The FATF recommenda-
tions articulating standards for national regimes  An important element of policy and rule mak-
on AML/CFT have recently been revised to incor-
ing for financial inclusion is the interaction of 
porate a risk-based approach that is critical to  various stakeholders and how those interac-
financial inclusion efforts (FATF 2012). For exam-
tions shape policy outcomes. The development 
ple, under the revised recommendations, a mobile  and implementation of formal rules are not a 
money account with strict transaction limits does  one-off event; rules need to be revised regularly 
not require the same customer due diligence rules  in light of experience and learning. As with 
as a current account with no limits. Specifically,  every other part of the financial market system, 
FATF recommendations outline the measures  the process of how rules are developed and who 
that countries, financial institutions, and related  is involved needs to be understood and sup-
businesses should institute. While the recom-
ported in a way that encourages pro-poor regu-
mendations are not legally binding, countries that  lation (Gibson 2010). 
do not adhere to them run the risk of being con-
How rules develop depends on the level of 
sidered a haven for illicit transactions or criminal  accountability and responsiveness among rule 
activity. This can result in international sanctions  makers to the advocacy “voice” of different 
82 
The New Microfinance Handbook

interest groups and the wider political economy  poor is a key element in designing and imple-
around financial regulation. This means that  menting effective financial inclusion reforms and 
coordinating bodies, such as the G-20 Global  policies (see box 3.8). This is particularly impor-
Partnership for Financial Inclusion, and advo-
tant as new partnerships develop between pro-
cacy groups, such as associations of providers or  viders, including banks and mobile network 
consumer groups, are important players in rela-
operators, or as retailers and agents become 
tion to the rules regarding financial services.  involved in the delivery of financial services. A 
Each group has its own motivation and objec-
lack of coordination can increase risks such as 
tives, which may or may not always result in  improper sequencing of regulatory changes or 
what is best for the ultimate beneficiary of poli-
regulatory changes in one sector that undermine 
cies, the wider public.11
efforts in other areas (AFI 2010). 
Coordination
Alliance for Financial Inclusion
Coordination of policy makers and various stake-
More and more policy makers and representative 
holders interested in financial services for the  bodies are beginning to coordinate formally with 
Box 3.8  Negotiating a Special Microfinance Law in Uganda:  
The Outcome of Competing Interests
In 2003 Uganda passed a special law for  the contrary, MFIs knew about microfinance 
microfinance deposit-taking institutions. A  and increasingly learned about financial regula-
detailed analysis of the process leading to the 
tion; donor projects at the time were led by 
adoption of this law and the role of participat-
knowledgeable microfinance “champions.” 
ing interest groups can explain why the law 
Policy makers (the government and the 
has generally been regarded as a success,  parliament) also had a strong interest in the 
despite its bias toward overregulation (which 
topic of microfinance, viewing it as a way to 
occurs at the expense of improving access to 
gain political capital, but knew much less 
financial services) and weak emphasis on  about the rationale for and objectives of regu-
consumer protection.
lating it. They could easily have derailed the 
The interest groups with the strongest  process, but donors, MFIs, and the Bank of 
influence on the outcome were the central  Uganda prevented that. Finally, clients had the 
bank (Bank of Uganda), donor agencies, and 
most to gain from adoption of the law because 
the most mature MFIs in the country (which 
they would acquire better access to financial 
planned to apply for a license under the new 
services (savings, in particular). However, their 
law). All three groups had the highest level of 
voice was hardly heard in the process. The 
knowledge about what an enabling legal  absence of client consultation and the conser-
framework for microfinance should look like: 
vative approach taken by the regulator explain 
The Bank of Uganda knew about financial reg-
why the new regime has not been as success-
ulation and acquired increasing knowledge  ful in increasing access as hoped and is rela-
about microfinance, but was biased toward  tively weak on consumer protection.
overregulation (as regulators typically are); on 
The Role of Government and Industry in Financial Inclusion  
83

one another to influence financial inclusion. For 
at all levels of policy development … Dialogue 
example, as of 2012, government institutions from 
between policy makers and the industry is 
78 countries had joined the global Alliance for 
also a powerful tool for deciphering and 
Financial Inclusion (AFI), a network of financial 
 mitigating risks that help to create regula-
policy makers that promotes peer learning and 
tion and foster innovations in access (AFI 
the implementation of effective policies that 
2010). 
advance the goal of financial inclusion: 
A good example of coordination efforts is the 
  A global policy response based on leader-
Maya Declaration initiated by AFI to commit pol-
ship from developing countries, closer  icy makers to prioritize financial inclusion (see 
international cooperation, and strong and  box 3.9).
coordinated partnerships between relevant 
Other coordination and advocacy efforts 
public and private sector stakeholders at  include the G-20 Global Partnership for 
national and international levels could be  Financial Inclusion and the Responsible Finance 
the most effective way to support countries  Forum. 
Box 3.9  The Maya Declaration
Launched under the auspices of the Alliance for Financial Inclusion (AFI), the Maya Declaration 
is the first global set of measurable commitments, spearheaded by developing- and emerging- 
country governments, to unlock the economic and social potential of the 2.5 billion poorest 
people through greater financial inclusion. In the declaration, members recognize the key role 
that financial inclusion policy plays in enhancing stability and integrity, its role in fighting poverty, 
and its essential contribution toward inclusive economic growth. The Maya Declaration raises 
the profile of financial inclusion and provides public visibility to ensure that policy makers are 
held accountable for their commitment. Among AFI members, 24 have made specific national 
commitments to financial inclusion. For example,
• Central Bank of Brazil pledged to launch a National Partnership for Financial Inclusion.
• Bank of Tanzania pledged to raise its level of financial access to 50 percent of its population 
by 2015 through mobile banking.
• Mexico’s Comisión Nacional Bancaria y de Valores committed to establishing banking agents 
or branches in every municipality of the country by 2014.
• Reserve Bank of Malawi pledged to introduce agent banking in 2012.
• National Bank of Rwanda set a target of 80 percent financial inclusion by 2017.
• Peru’s Superintendency of Banks and Insurance pledged to enact a new law regulating 
electronic money within the next year.
In support of the Maya Declaration, AFI is establishing a peer review mechanism, serving as 
a policy clearinghouse for peer-reviewed solutions, and providing subject matter expertise to 
help members to implement commitments. It will award grants to support knowledge exchange, 
develop financial inclusion strategies, and provide advocacy tools to help institutions win the 
support of key partners needed for implementation.
Source: http://www.afi-global.org/gpf/maya-declaration.
84 
The New Microfinance Handbook

Global Partnership for Financial Inclusion
reference for policy makers and other stakehold-
In 2010 the G-20 recognized financial inclusion  ers seeking to promote increased financial inclu-
as a key pillar of the global development agenda  sion (see box 3.10). 
and created the Global Partnership for Financial 
Inclusion as an implementing body open to G-20  Responsible Finance Forum
countries, non-G-20 countries, and other rele-
The Responsible Finance Forum is an interinsti-
vant stakeholders (Ehrbeck, Pickens, and Tarazi  tutional community of practice for exchanging 
2012). The G-20 principles for innovative finan-
knowledge and building consensus on responsible 
cial inclusion play an increasing role as a point of  finance. It was created to support participating 
Box 3.10  The G-20 Principles for Financial Inclusion
At its first summit in June 2010, the G-20 identified a set of principles that reflect conditions 
conducive to spurring innovation for financial inclusion while protecting financial stability and 
consumers:
• Leadership. Cultivate a broad-based government commitment to financial inclusion to help to 
alleviate poverty
• Diversity. Implement policy approaches that promote competition, provide market-based 
incentives for delivering sustainable financial access, and promote the use of a broad range 
of affordable services (savings, credit, payments and transfers, insurance) as well as a diver-
sity of service providers
• Innovation. Promote technological and institutional innovation as a means to expand financial 
system access and use, including by addressing infrastructure weaknesses
• Protection. Encourage a comprehensive approach to consumer protection that recognizes 
the roles of government, providers, and consumers
• Empowerment. Develop financial literacy and financial capability
• Cooperation. Create an institutional environment with clear lines of accountability and coor-
dination within government and encourage partnerships and direct consultation across gov-
ernment, business, and other stakeholders
• Knowledge. Use improved data to make evidence-based policy, measure progress, and con-
sider an incremental “test and learn” approach acceptable to both regulators and service 
providers
• Proportionality. Build a policy and regulatory framework that is proportionate with the risks 
and benefits involved in such innovative products and services and based on an understand-
ing of the gaps and barriers in existing regulation
• Framework. Consider the following in the regulatory framework, reflecting international 
standards, national circumstances, and support for a competitive landscape: an appro-
priate, flexible, risk-based AML/CFT regime; conditions for the use of agents as a cus-
tomer interface; a clear regulatory regime for electronically stored value; and 
 market-based incentives to achieve the long-term goal of broad interoperability and 
interconnection.
Source: G-20 Information Centre (http://www.g20.utoronto.ca/2010/to-principles.html).
The Role of Government and Industry in Financial Inclusion  
85

institutions, including development agencies and  generally developed on the basis of member 
development finance institutions, in sharing  needs, internal capacities, and the external politi-
knowledge and information on development  cal environment. For example, regional or interna-
efforts and potential collaborations, to build on  tional associations, whose membership typically 
responsible finance frameworks and foster broad-
comprises national-level networks and providers 
based dialogue and facilitate convergence of  from multiple countries, engage in policy in a 
views, and to support coordinated action. The  more indirect manner. Regional associations often 
Responsible Finance Forum considers issues  publish information on industry practices or 
related to consumer protection regulation, indus-
lobby market players on issues affecting their 
try action, and financial capability, with an empha-
members across countries and markets. By doing 
sis on more transparent, inclusive, and equitable  so, they facilitate the work of local association 
financial sectors (Responsible Finance Forum  representatives. 
2012; see figure 3.2). 
National associations can influence policy 
more directly by engaging with local authorities 
Advocacy
who can pursue direct changes to various laws or 
Industry networks or associations often take a  secondary legislation (for example, regulations 
central role in advocating the interests of provid-
and guidelines). They can pursue specific actions 
ers. As associations are formed on the premise of  that advance an advocacy strategy—letter writing, 
common interests, they can effectively communi-
publicity campaigns, or direct lobbying with pol-
cate members’ shared concerns about a particular  icy makers—to communicate or publicize their 
issue. The activities that constitute advocacy are  support for change on a particular issue. Industry 
Figure 3.2  Responsible Finance: A Multiple-Stakeholder Approach
1. Consumer protection (regulations): A regulatory framework for financial 
    consumer protection, at both national and international levels 
2. Responsible providers: Voluntary commitments, practices, standards, and 
Areas of
    initiatives in the financial sector (individually and at industry level, 
action  
    nationally and internationally)
  
3. Financial capability: Interventions aimed to build and enhance financial 
    capability of financial institutions clients – the consumers of financial 
    products and services
Consumers-
Providers of financial
Regulators (central 
individuals and
Key
services – banks,
banks, financial 
businesses – and
stakeholders
MFIs, NBFIs, others – 
regulators, consumer
advocacy 
and their associations 
protection agencies)  
organizations 
Cross-cutting
Financial markets stability, poverty reduction, access to finance, job creation and
issues
SME development, health and education, sustainable development
Source: Responsible Finance Forum 2011.
86 
The New Microfinance Handbook

associations often provide policy advocacy as a  their divergent interests pose a challenge to col-
service to members. If implemented effectively,  lective action. Although consumer associations 
advocacy can strengthen the voice of providers  try to overcome both of these challenges, they are 
and their associations and thus help to design  not yet widespread in microfinance. More effec-
rules that are tailored to their specific needs (see  tive representation occurs through the intersec-
box 3.11).
tion of client and provider interests. While the 
While clients should be the main beneficiaries  interests of providers and clients are not identical 
of financial inclusion efforts, their voice is rarely  (for example, they differ with regard to product 
heard; often, they lack the technical expertise to  pricing), the fact that providers depend on the 
lobby effectively for their interests. In addition,  satisfaction of their clients creates substantial 
Box 3.11  SEEP’s Toolkit for Policy Advocacy
The Small Enterprise Education and Promotion (SEEP) Network connects microenterprise prac-
titioners from around the world in efforts to develop practical guidance that supports their com-
mon vision of creating a sustainable income in every household. The SEEP Network has an 
advocacy planning model that seeks to develop the capacity of advocacy within microfinance. 
The following are the most common forms of advocacy it promotes:
• Engagement is a gradual process of relationship building. It is not focused on a particular 
policy goal, but rather on the development of greater familiarity, trust, and mutual under-
standing. Associations can engage stakeholders through invitations to association-sponsored 
events, educational opportunities, and formal and informal meetings.
• Facilitation and consultation are based on working with policy makers and affected stakehold-
ers to create opportunities for action. Facilitation involves creating opportunities for direct 
contact with decision makers to promote dialogue and build awareness through conferences, 
workshops, field trips, and meetings. Facilitation may also involve creating strategies for 
policy creation more directly. Consultation with a diverse base of members and a broad range 
of stakeholders is required to increase the contri bution of individuals and organizations, while 
engendering greater overall participation in policy-related discussions. 
• Oneofthemostsignificantcontributionsadvocatescanmaketopolicyreformisthrough
the dissemination of high-quality research and information. Association members have a 
direct understanding of the concerns of affected populations. By promoting credible and 
well-documented information on the sector, associations can build legitimacy as a repre-
sentative voice. Examples include industry assessments, benchmarking reports, market 
studies, and focused policy investigations.
In its most direct form, advocacy is about promoting concrete solutions to problems. 
Advocates can promote the reform of existing laws and the creation of new ones, oppose legis-
lative initiatives considered damaging to the sector, and promote changes to the implementation 
of existing policies and regulation. By lobbying decision makers as well as stakeholders who can 
influence them, advocates can directly affect policy outcomes.
Source: D’Onofrio 2010. SEEP Network, http://networks.seepnetwork.org/ppt-newhtml/Policy_Advocacy_
mar2010_web.en_.pdf.

The Role of Government and Industry in Financial Inclusion  
87

overlap. Furthermore, because clients constitute  can be challenging: There is typically no legal 
an important voting bloc, policy makers should be  consequence for failure to comply, and influential 
motivated to consider their current and potential  financial institutions may use their power to dis-
interests. 
courage the self-regulatory body (for example, a 
microfinance association) from taking action. 
The Role of Industry in Financial 
Without enforcement, such standards can only 
Inclusion
exert a weak influence. 
CGAP has developed numerous guidelines 
Financial inclusion calls for better outreach,  for the industry based on consensus from vari-
appropriate products and services, and consumer  ous stakeholders, including, for example, 
trust. Responsible finance emphasizes value,  “Microfinance Investment Vehicle Disclosure 
respect, and protection of the consumer (McKee,  Guidelines”; “Good Practice Guidelines for 
Lahaye, and Koning 2011). Efforts by providers to  Funders of Microfinance”; “Regulation and 
encourage responsible finance influence institu-
Supervision Consensus Guidelines”; “Infor-
tional behavior, market access, the range of prod-
mation Systems Implementation Guidelines”; 
ucts and services on offer, and the competitive  “Disclosure Guidelines for Financial Reporting 
landscape, all of which have an impact on the  by Microfinance Insitutions”; “The Role of 
functioning of the market and the suitability of  Funders in Responsible Finance”; “Due Diligence 
financial services. Given that financial services  Guidelines for the Review of Microcredit 
 
for the poor are most prevalent in countries with  Loan Portfolios”; “Developing Deposit Services 
limited supervisory capacity, often providers may  for the Poor”; and “Definitions of Selected 
need to take the lead in promoting responsible  Financial Terms, Ratios, and Adjustments for 
finance. 
Microfinance.”12 
Other industry representative bodies such as 
Industry Standards and Guidelines
the Social Performance Task Force, the Smart 
Standards of practice and codes of conduct that  Campaign on Client Protection Principles, and 
financial service providers and other market  Microfinance Transparency have all launched 
actors abide by can contribute to financial inclu-
initiatives and advocacy campaigns. 
sion and help to build the industry’s commitment 
to consumer protection. In recent years, multilat-
The Social Performance Task Force
eral agencies have promulgated many initiatives  The Social Performance Task Force, with more 
to provide guidelines and principles, and the  than 1,000 members in 2011, represents the pri-
titles of their documents define the targeted  mary stakeholders in financial services for the 
areas: the “United Nations Principles for  poor: practitioners, donors and investors, indus-
Investors in Inclusive Finance,” the “World Bank  try associations, technical assistance providers, 
Draft  Guidelines for Consumer Financial  rating agencies, and academics. It defines social 
Protection,” and the “Organisation for Economic  performance as the “effective translation of a 
Co-operation and Development (OECD) microfinance organization’s mission into prac-
Principles and Good  Practices for Financial  tice in line with commonly accepted social val-
Awareness and Education.” Often these are living  ues.”13  Its mission is to promote standards by 
documents, open to review and revision as mem-
which providers can manage the double (and, 
bers respond to issues raised by stakeholders and  for some, triple) bottom line that is at the core of 
better understand what is missing or inadequate  providing financial services to the poor. Seeking 
in the standards or codes. However, enforcement  to ensure that services focus on clients, the 
88 
The New Microfinance Handbook

Social Performance Task Force promotes the 
process to determine that clients have the 
following: 
capacity to repay without becoming over-
indebted. In addition, providers will implement 
• Effortstoserveincreasingnumbersofpoorer
and monitor internal systems that support the 
and more excluded people sustainably
prevention of over-indebtedness and will foster 
• Systematic assessment of the target popula-
efforts to improve market-level credit risk man-
tion’s specific needs to improve the relevance 
agement (such as sharing credit information). 
and quality of services
• Transparency. Providers will communicate clear, 
• Benefitsformicrofinanceclients,theirfami-
sufficient, and timely information in a manner 
lies, and communities, including increased 
and language that clients can understand so that 
social capital, assets, income, and access to 
they can make informed decisions. The need for 
services; reduced vulnerability; and fulfill-
transparent information on pricing, terms, and 
ment of basic needs
conditions of products is highlighted.
• Social responsibility of the provider toward • Responsible pricing. Pricing, terms, and condi-
its clients, employees, and the community it 
tions will be set in a way that is affordable to 
serves.14
clients, while allowing financial institutions to 
be sustainable. Providers will strive to provide 
Tools covering a wide range of purposes sup-
positive real returns on deposits.
port the measurement and achievement of strong 
social performance (see chapter 14).
• Fair and respectful treatment of clients. 
Financial service providers and their agents 
The Smart Campaign
will treat their clients fairly and respectfully. 
Under the broader umbrella of social performance 
They will not discriminate. Providers will 
management, the Smart Campaign, initiated in 
ensure adequate safeguards to detect and cor-
2009 by the Center for Financial Inclusion at 
rect corruption as well as aggressive or abusive 
ACCION International, advocates consumer pro-
treatment by their staff and agents, particu-
tection principles and has recruited hundreds of 
larly during the loan sales and debt collection 
organizations and individuals to endorse them. 
processes.
The shift from assumed to explicit articulation of  • Privacy of client data. The privacy of individual 
consumer protection measures followed debates 
client data will be respected in accordance 
about pricing and profits in microfinance, as well 
with the laws and regulations of individual 
as the emerging crises related to over-indebtedness 
jurisdictions. Such data will only be used for 
and abusive practices. The Smart Campaign has 
the purposes specified at the time the informa-
advanced seven consumer protection principles:15 
tion is collected or as permitted by law, unless 
• Appropriate product design and delivery. 
otherwise agreed with the client.
Providers will take adequate care to design  • Mechanisms for complaint resolution. Providers 
products and delivery channels in such a way 
will have in place timely and responsive 
that they do not cause clients harm. Products 
mechanisms for handling complaints and 
and delivery channels will be designed taking 
resolving problems for their clients and will 
client characteristics into account.
use these mechanisms both to resolve individ-
• Prevention of over-indebtedness. Providers will 
ual problems and to improve their products 
take adequate care in all phases of their credit 
and services.
The Role of Government and Industry in Financial Inclusion  
89

Of the seven principles, over-indebtedness and  are not always measured accurately or reported 
transparency receive the most attention. Efforts to  and remain widely misunderstood. Consequently, 
prevent over-indebtedness have included more  the need for the industry to improve the disclo-
careful assessments of client debt capacity, staff  sure of interest rates and the standardization 
incentive schemes focused on portfolio quality,  and communication of costs is a priority. 
and attempts to identify or limit the number of  MicroFinance Transparency (MFTransparency) 
loans a client carries from multiple lenders (see  is a global initiative committed to promoting 
box 3.12). In addition, lenders have found that  pricing transparency in the microfinance sector. 
the policies developed for markets with minimal  The organization aims to achieve its mission in 
competition need to be adjusted for more mature  the following ways: data collection, standardiza-
markets with multiple providers (Rozas 2011). 
tion, and dissemination; training and capacity 
The Smart Campaign conducts a global cam-
building for financial institutions; development 
paign to garner support for these principles. It  of educational materials; and consulting with 
also promotes activities that help providers to  regulators and policy makers on price disclosure 
move from endorsement to implementation,  legislation.17
including developing numerous tools for assess-
Microloans often have higher interest rates 
ment, training, and client protection and educa-
than mainstream commercial loans because they 
tion (Rozas 2011).16 
are more expensive to make and manage. This 
Both the Social Performance Task Force and  challenge has driven many providers to quote 
the Smart Campaign also work with microfinance  prices that are significantly lower than the effec-
rating agencies and investors to achieve align-
tive prices. Once providers in a specific market 
ment between their rating frameworks or due dil-
begin to employ confusing product pricing, it 
igence processes and consumer protection  becomes very difficult for any single provider to 
principles.
maintain transparent pricing. Standardized forms 
of disclosure can help to address this problem. 
MicroFinance Transparency
Pricing is central to the debates regarding profits  Compliance
and the broader social responsibility of financial  Industry associations and individual financial 
service providers. The true prices of microloans  providers have an important role to play in  
Box 3.12  Battling Over-Indebtedness in Azerbaijan
In addition to serious internal efforts to avoid 
loan to another MFI’s client commits to pay-
over-indebtedness among its own clients,  ing off the client’s existing loan. Thus if a 
AccessBank has been spearheading a cam-
lender wishes to issue a US$3,000 loan to a 
paign to reduce over-indebtedness at the  client who already has US$5,000 outstand-
sector level. Collaborating with the Azerbaijan 
ing with another lender, that new lender 
Microfinance Association, AccessBank has  would have to issue a US$8,000 loan, part of 
promoted a “one-client, one-lender” strat-
which would go to pay off the client’s out-
egy, in which a lender seeking to provide a 
standing debt.
Source: Rozas 2011.
90 
The New Microfinance Handbook

promoting responsible finance through stan-
intended to benefit both financial service provid-
dards. However, industry standards rely on com-
ers and their clients and pricing transparency 
pliance with self-imposed codes of conduct and  initiatives are intended to benefit clients, the 
explicit rejection of strong incentives for decep-
asymmetries between what providers endorse 
tive behavior. Furthermore, membership of  and what clients understand have the potential 
industry associations rarely comprises all rele-
to undermine those efforts. Identifying the pri-
vant providers, which limits the scope of protec-
orities of consumers and providers highlights 
tion and may place compliant providers at a  potential barriers to translating principles of 
competitive disadvantage (Chien 2012). For  responsible finance into effective practice, as sig-
example, although the consumer protection  nificant distance separates clients from financial 
principles advanced by the Smart Campaign are  institutions (see table 3.1).
Table 3.1  Potential Barriers to Effective Consumer Protection through Standards and Guidelines 
Target group and barrier 
Details
Clients
Low literacy
Illiterate clients cannot read published lists of consumer protection 
principles and client rights. They may have trouble filing complaints.
High priority assigned to accessing 
Fear of not getting a loan often drives client behavior, serving as a 
loans
deterrent to asking for product information or raising issues of 
unethical behavior.
Lack of knowledge
Clients often do not know their rights or what constitutes a 
violation. Violations are not limited to cases of borrower versus 
lender. In Bolivia, in focus group discussions, group lending 
members reported the use of abusive debt collection practices—
intended to shame defaulters—that violated members’ rights. 
Clients often do not understand the products on offer. At a basic 
level, many do not understand that interest is charged as a 
percentage of the loan; few can evaluate the difference in interest 
cost calculated using a flat rate or declining balance.
Financial institutions
Overestimation of consumer 
Institutional investments in product development have not been 
knowledge
matched by investments in client education about new offerings.
Potential conflict with profitability
Efficiency requirements and financial incentives can undermine 
staff motivation to spend enough time with clients to ensure that 
they understand the products they may purchase. Institutions have 
a bigger vested interest in product-specific marketing than in 
education that will enable customers to compare products across 
lenders. Transparent presentation of rates and fees could be a 
disadvantage if not done uniformly and universally by all lenders in 
the same market. 
Implementation of consumer 
Implementing new codes can be costly, involving revisions to 
protection principles
human resource systems, new mechanisms for customer feedback 
and complaints, and monitoring of compliance by providers in 
multiple countries (for example, by an MFI network)
Source: Nelson 2009.
The Role of Government and Industry in Financial Inclusion  
91

Box 3.13  Financial Education as Part of the Business Model
Over a period of just three years, the Kenyan 
clips, comic strips, and interactive work-
financial market experienced significant  sheets, delivered by professional trainers. 
growth, exposing many previously unbanked 
Training was supported by interactive coach-
clients to an increasingly complex array of  ing sessions with loan officers. An impact 
products. Without adequate information to  evaluation, using a quasi-experimental design, 
make informed decisions about these prod-
revealed improvements in specific indicators 
ucts, clients were often confused and vulner-
of knowledge and behavior among the treat-
able to exploitation. Faulu Kenya believed that 
ment group. Most significantly, portfolio at 
inappropriate use of financial services was  risk was lower in the four pilot treatment 
leading to over-indebtedness and default.  branches than in the nontreatment branch.
Clients lacked information on how best to use 
Training for staff was initially planned to 
credit and how to make decisions about how 
facilitate client recruitment. Yet, with the 
much and when to borrow (or not) and from 
inclusion of financial education as part of 
where. In 2009 Faulu Kenya embarked on a 
staff curriculum, the results were much 
financial education project Elewa Pesa  greater. Staff became more knowledgeable 
(Understand Your Money), co-funded with the 
and better equipped to answer clients’ ques-
Financial Education Fund. Faulu’s objective  tions and more engaged in coaching and 
was to equip nearly 50,000 clients at 26  advising them; they even began saving more 
branches with the necessary financial knowl-
themselves.
edge and skills to facilitate prudent money 
Finding that financial education has bene-
management, premised on the belief that  fits both for the client and for the institution, 
educated people are better clients. Financial 
Faulu has incorporated financial education in 
education was provided through a one-time  its loan orientation training and as a key indica-
training workshop complemented by video  tor of performance. 
Source: Alyna Wyatt, Financial Education Fund; Jacqueline Nyaga, Faulu Kenya.
The barriers noted in table 3.1 highlight the  Notes
need to understand the perspectives of both 
 providers and consumers. They also indicate   1.  As discussed in chapter 1, formal rules are 
generally the purview of government or 
another role for industry in consumer 
industry stakeholders. They include primary 
protection — developing the financial capability 
legislation (also referred to as laws), whether 
of consumers. By having direct contact with 
statutory (that is, passed by the legislature) or 
consumers, some providers are actively choos-
established by the judiciary; secondary 
ing to invest in building their clients’ financial 
legislation (which may be entitled regulations, 
capacity. Financial education is relatively new, 
guidelines, or circulars) issued by a government 
with initial efforts emerging only after 2000, 
agency or executive body pursuant to a law; 
but many institutions have embraced it,18 as 
and other legal proclamations imposed on 
illustrated by the case of Faulu Kenya, an MFI 
financial service providers and other players 
(see box 3.13). 
supporting the financial system. Formal rules 
92 
The New Microfinance Handbook

also encompass consumer protection 
Frontier Associates (2009); http://mg.co.za/
 guidelines and global standards and principles 
article/2012-02-17-mzansi-accounts-reach-  
that guide the actions of regulators and 
dead-end.
supervisors as well as industry standards, 
 9.  This section was contributed by Kate Lauer.
nonstatutory codes of conduct, and other 
10. www.fatf-gafi.org.
principles that guide the actions of financial 
service providers, even though they may not be  11.  For an example of an interest group analysis in 
legally enforceable.
microfinance regulation, see Staschen (2010, 
ch. 7). 
 2.  In some cases, market actors can be just as 
concerned about public statements (such as 
12.  See www.CGAP.org.
policies) by the regulator as about legal 
13. http://sptf.info/hp-what-is-sp.
provisions. 
14. http://sptf.info/.
 3.  And in many cases with donors playing a key 
15. www.smartcampaign.com.
role.
16.  See http://www.smartcampaign.org/
 4.  This section draws on Brix and McKee (2010); 
tools-a-resources.
Chien (2012).
17.  Contributed by Alexandra Fiorillo.
 5.  CGAP is a significant provider of information 
18.  Microfinance Opportunities, an early 
and coordination in financial services for the 
champion of financial education in developing 
poor. An industry coordinating body housed at 
countries, reports that between May 2006 and 
the World Bank, CGAP focuses on “policy and 
December 2011, 469 organizations  participated 
research representing more than 30 development 
in financial education training-of- trainers 
agencies and private foundations who share a 
workshops. It also reports outreach to more 
common mission to alleviate poverty. CGAP 
than 40 million end users through a 
provides market intelligence, promotes 
combination of direct financial education 
standards, develops innovative solutions, and 
training and delivery of financial education 
offers advisory services to governments, financial 
messages via mass media.
service providers, donors, and investors.” See 
www.cgap.org. 
 6.  Consumer protection is often discussed in 
References and Further Reading
terms of the rights and responsibilities of both 
providers and clients. Clients need to develop 
* Key works for further reading.
the capability to assess product offerings; to do  AFI (Alliance for Financial Inclusion). 2010. 
this, they have the right to ask questions about 
“Consumer Protection: Leveling the Playing 
products, and providers have the  responsibility 
Field in Financial Inclusion.” Bangkok, 
to respond respectfully. 
Thailand: Alliance for Financial Inclusion.
 7.  This would argue for setting up a market for 
*———. 2011. “G-20 Principles for Innovative 
tradable “priority sector lending certificates,” 
Financial Inclusion.” http://www.afi-global 
as the Rajan Committee argued for the case of 
.org/library/publications/g20-principles- 
India. See Planning Commission, India 
innovative-financial-inclusion.
(2009). 
Almazan, Mireya. 2010. “Beyond Enablement: 
 8.  South Africa shows that such a self-commitment 
Harnessing Government Assets and Needs.” 
by the industry can lead to the opening of many 
Global Savings Forum, Bill and Melinda Gates 
new accounts (7 million accounts within four 
Foundation, Seattle. 
years, bringing the banked population to 20 
*Bankable Frontier Associates. 2009. “The Mzansi 
million by the end of 2008). The banks now 
Bank Account Initiative in South Africa.” 
offer low-cost bank accounts. See Bankable 
FinMark Trust.
The Role of Government and Industry in Financial Inclusion  
93

*BCBS (Basel Committee on Banking Supervision). 
Objectives and Regulatory Options.” Focus 
2010. “Microfinance Activities and the Core 
Note 64, CGAP, Washington, DC.
Principles for Effective Banking Supervision—
D’Onofrio, S. 2010. “Policy Advocacy: A Toolkit 
Final Document.” BCBS, Basel, August. http://
for Microfinance Associations.” SEEP 
www.bis.org/publ/bcbs175.htm. 
Network, Washington, DC. http://networks 
———. 2011. “Core Principles for Effective Banking 
.seepnetwork.org/ppt-newhtml/Policy_
Supervision: Consultative Document.” BCBS, 
Advocacy_mar2010_web.en_.pdf.
Basel, December. http://www.bis.org/publ/
*Duflos, E. 2011. “National Strategies for Financial 
bcbs129.htm. 
Inclusion: Lessons Learned.” Unpublished 
Bester, H., D. Chamberlain, L. de Koker, C. 
presentation.
Hougaard, R. Short, A. Smith, and R. Walker. 
*Duflos, E., and J. Glisovic-Mézières. 2008. 
2008. “Implementing FATF Standards in 
“National Microfinance Strategies.” CGAP 
Developing Countries and Financial Inclusion: 
Brief, CGAP, Washington, DC.
Findings and Guidelines.” The FIRST Initiative,  *Duflos, E., and K. Imboden. 2004. “The Role of 
World Bank, Washington, DC.
Governments in Microfinance.” Donor Brief 19, 
*Brix, Laura, and Katharine McKee. 2010. 
CGAP, Washington, DC.
“Consumer Protection Regulation in Low-
EDA Rural Systems and M-CRIL (Micro-Credit 
Access Environments: Opportunities to 
Ratings International). 2011. “Of Interest Rates, 
Promote Responsible Finance.” Focus Note 60, 
Margin Caps, and Poverty Lending: How the 
CGAP, Washington, DC, February.
RBI Policy Will Affect Access to Microcredit by 
*CGAP (Consultative Group to Assist the Poor). 
Low-Income Clients.” M-CRIL, Gurgaon.
2010. “Investors Implementing the Client 
*Ehrbeck, T., M. Pickens, and Michael Tarazi. 
Protection Principles.” CGAP, Washington, DC.
2012. “Financially Inclusive Ecosystems: The 
*———. 2011. “Global Standard-Setting Bodies and 
Roles of Government Today.” Focus Note 76, 
Financial Inclusion for the Poor: Toward 
CGAP, Washington, DC.
Proportionate Standards and Guidance.” White  *FATF (Financial Action Task Force). 2012. 
paper prepared on behalf of the G-20’s Global 
International Standards on Combating Money 
Partnership for Financial Inclusion. CGAP, 
Laundering and the Financing of Terrorism and 
Washington, DC, October. http://www.gpfi 
Proliferation: The FATF Recommendations. 
.org/sites/default/files/documents/CGAP.pdf.
Paris: FATF, February.
Chatain, P.-L., R. Hernandéz-Coss, K. Borowik, 
Gibson, Alan. 2010. “The Financial Market 
and A. Zerzan. 2008. “Integrity in Mobile 
Systems Framework.” Unpublished draft. 
Phone Financial Services: Measures for 
*Hannig, A., and S. Jansen. 2010. “Financial 
Mitigating Risks from Money Laundering and 
Inclusion and Financial Stability: Current Policy 
Terrorist Financing.” Working Paper 146, World 
Issues.” ADBI Working Paper 259, Asian 
Bank, Washington, DC.
Development Bank Institute, Tokyo.
*Chien, Jennifer. 2012. “Designing Disclosure 
*Helms, Brigit, and Xavier Reille. 2004. “Interest 
Regimes for Responsible Financial Inclusion.” 
Rate Ceilings and Microfinance: The Story So 
Focus Note 78, CGAP, Washington, DC, March.
Far.” Occasional Paper 9, CGAP, Washington, 
Cohen, Monique, and Candace Nelson. 2011. 
DC, September. 
“Financial Literacy: A Step for Clients towards 
*IAIS (International Association of Insurance 
Financial Inclusion.” Workshop paper commis-
Supervisors). 2007. Issues in Regulation and 
sion for the 2011 Global Microcredit Summit, 
Supervision of Microinsurance. Basel: BIS.
Valladolid, Spain, November 14–17.
*———. 2011. Insurance Core Principles, Standards, 
*Dias, D., and K. McKee. 2010. “Protecting 
Guidance, and Assessment Methodology. Basel: 
Branchless Banking Consumers: Policy 
BIS, October.
94 
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*Isern, J., and L. de Koker. 2009. “AML/CFT: 
*Planning Commission, India. 2009. A Hundred 
Strengthening Financial Inclusion and Integrity.” 
Small Steps: Report of the Committee on 
Focus Note 56, CGAP, Washington, DC. 
Financial Sector Reforms. New Delhi: Sage.
http://www.cgap.org/gm/document-1.9.37862/
*Porter, Beth. 2011. “National Strategies: Where 
FN56.pdf.
Do They Get Us? A Roadmap for Financial 
Klapper, Leora, Annamaria Lusardi, and Georgios A. 
Inclusion.” Workshop paper commissioned for 
Panos. 2012. “Financial Literacy and the Financial 
the 2011 Global Microcredit Summit, 
Crisis.” Policy Research Working Paper 5980, 
Valladolid, Spain, November 14–17.
World Bank, Washington, DC, February. 
*Porteous, D., and B. Helms. 2005. “Protecting 
MasterCard Foundation, Microfinance 
Microfinance Borrowers.” Focus Note 27, 
Opportunities, and Genesis Analytics. 2011. 
CGAP, Washington, DC.
“Taking Stock: Financial Education Initiatives 
*Responsible Finance Forum. 2011. “Advancing 
for the Poor.” MasterCard Foundation, Toronto.
Responsible Finance for Greater Development 
*McKee, Katherine, Estelle Lahaye, and Antonique 
Impact.” Consultation draft, BMZ, CGAP, and 
Koning. 2011. “Responsible Finance: Putting 
IFC, Washington, DC, and Berlin. 
Principles to Work.” Focus Note 73, CGAP, 
———. 2012. “Global Mapping 2012: Progress in 
Washington, DC, September.
Responsible Financial Inclusion, Terms of 
*Morduch, J. 2005. “Smart Subsidy in 
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The Role of Government and Industry in Financial Inclusion  
95


CHAPTER 4 
The Role of Donors in Financial  
Inclusion
Mayada El-Zoghbi and Barbara Gähwiler

Financial inclusion is the state in which all indi-
financial inclusion, what part of the financial sys-
viduals and businesses have the choice to access  tem needs donor support, how donors can sup-
and the ability to use a range of appropriate finan-
port the attainment of full financial inclusion, and 
cial services, responsibly provided by institutions  the tools they have to do this (figure 4.1). 
permitted to offer such services. As described in 
chapter 1, demand and supply of financial ser-
vices meet in a broader financial ecosystem that  Donors That Support Financial 
includes supporting functions and rules. Donors  Inclusion
aiming for financial inclusion, as an end in itself  In this chapter we use the term donors to mean 
or as a means toward economic development or  entities that have an explicit mission to support 
poverty alleviation, can help make the financial  development goals. A spectrum exists of these 
ecosystem work better and be more inclusive.
actors in terms of their ownership, where they 
Chapter 1 makes an important distinction  raise their resources, and how they operate in the 
between actors within the market system and  market. Some donors are structured as state-
organizations that are outside the system. For the  owned agencies, whereas others are private foun-
most part, donors are outside the system, but they  dations. Some donors raise their funding from 
may enter the system temporarily to provide a  public resources such as federal or state govern-
catalytic role in market development. This chap-
ment resources (that is, taxes). Donors may also 
ter will discuss who the donors are that support  raise their resources from private donations. 
The Role of Donors in Financial Inclusion 
97

Figure 4.1  The Role of Donors in Financial Market System Development
FINANCIAL MARKET SYSTEM 
OUTSIDE THE 
MARKET
SUPPORTING
FUNCTIONS
Private
sector
Government
Facilitators
Community
Demand CORE Supply
groups
Seeking to
develop the
Donors
Representative
market system
associations
as external
catalyst
Not-for-
profit
sector
RULES
Players
Specific roles 
within the market
system
Source: Adapted from Alan Gibson, The Springfield Centre. 
Some donors are highly concessional, whereas  guarantee. DFIs should therefore enter markets 
others try to mimic private investors. Regardless  only temporarily to play a catalytic role by 
of where they sit along this spectrum of behavior,  “crowding in” other market actors such as the 
the fundamental role of donors in financial inclu-
local capital markets, banks, or depositors. If DFIs 
sion is to provide catalytic support to market  become permanent actors within a market, their 
development (table 4.1).
stay defeats the purpose of their market catalytic 
It is important to point out here that develop-
role. 
ment finance institutions (DFIs) are a distinct cat-
Although many international nongovernmen-
egory of development agency. They often see  tal organizations (NGOs), such as World Vision 
themselves as market actors (inside the market)  and CARE, raise significant amounts of private 
and try to mimic the behavior of private investors.  donations that they either allocate to partners on 
Although they may temporarily play the role of a  the ground or use for their own development 
market actor, their existence, mandate, and legal  work, we do not classify NGOs as donors. The 
status entrust upon them the same catalytic mar-
majority of NGOs rely on donor funding through 
ket development role that “traditional” donors  either grants or cooperative agreements. How-
have. DFIs are part of the public system of devel-
ever, among NGOs a large spectrum is seen of 
opment assistance and are able to raise money in  how they operate, with some acting like donors, 
capital markets benefiting from an implied state  others serving as facilitators, and others entering 
98 
The New Microfinance Handbook

Table 4.1  Spectrum of Donors in Financial Inclusion and the Way They Operate
Concessional  
Type of donor
Examples
Source of funding vs. commercial
Ownership
Foundations
Bill & Melinda Gates Foundation
Private donations
Concessional
Private
Michael & Susan Dell Foundation
MasterCard Foundation
Bilateral donors USAID (United States)
Public government  Concessional
Public
DFID (United Kingdom)
funding
GIZ (Germany)
SIDA (Sweden)
Multilaterals
UN agencies (IFAD, UNCDF)
Bilateral donors 
Concessional
Public
European Commission
(member states)
World Bank
Capital markets 
Regional banks African Development Bank
Bilateral donors 
Mixed
Public
Asian Development Bank
(member states)
Capital markets 
Development 
IFC
Bilateral donors
Mostly 
Public
finance 
KfW (Germany)
Public government  commercial 
institutions
(some 
Proparco (France)
funding
concessional)
Capital markets
the market and delivering retail or support ser-
unbalanced or unfair when the level of informa-
vices directly. This chapter will not focus on the  tion between parties engaging in an exchange is 
role of international NGOs, only noting where  skewed.
they may overlap with donors, facilitators, or 
With regard to the market for financial ser-
market actors. 
vices, information asymmetry is a common mal-
function in the market whereby suppliers do not 
Where Is Catalytic Funding Needed?
have sufficient knowledge about certain segments 
Areas within a market system that may need cata-
of clients (demand) or clients do not have suffi-
lytic support from donors tend to fall into three  cient knowledge and information to make 
categories: information, capacity, and incentives. 
informed choices among suppliers.
Solutions to the problem of information in a 
Information
market can include changing the rules, for exam-
Markets are a mechanism for exchange. For  ple, mandating disclosure about interest rates; 
exchange to occur between parties, whether this  within the supporting functions, for example, 
exchange is monetized or merely traded, certain  establishing a private credit bureau with data on 
information is required about the item being  transaction histories of all income groups; or 
exchanged, about the entities engaged in the  within the core itself, for example, making infor-
exchange, and about the terms of the exchange  mation available to suppliers about the nature 
itself. Markets can yield outcomes that may seem  and quantity of demand among specific market 
The Role of Donors in Financial Inclusion  
99

segments that may be excluded from current  vices to reach the poor. The capacity of represen-
exchange.
tative associations may be too weak to advocate 
for the regulatory reforms needed. 
Capacity
Solutions to capacity problems go beyond 
As described in chapter 1, the financial market  delivering capacity outright, but require working 
system is made up of many actors (figure 4.2).  with those in the market who can deliver capac-
These actors are at the core but are also deliver-
ity development. It requires strengthening their 
ing supporting functions and setting rules and  ability to deliver long-term support on capacity 
norms. The capacity of certain actors within this  development for the market as a whole. Many 
system may be holding back the development of  actors within the local market may be able to 
the system as a whole. For example, the capacity  fill this role, such as private consulting firms, 
of the government may be a major constraint in   
universities, trade associations, and training 
allowing for enabling regulation for financial ser-
centers.
Figure 4.2  Stylized View of the Financial Market System
MARKET FUNCTIONS
MARKET PLAYERS
SUPPORTING
FUNCTIONS
Clients
Information
Funding
Coordination
Infrastructure
Private sector
Research
Technical
assistance
Capacity
develop-
Advocacy
Government
ment
Demand
CORE
Supply
Community groups
Representative associations
Formal
Not-for-profit sector
Informal
rules
rules
RULES
Source: Alan Gibson, The Springfield Centre.
100 
The New Microfinance Handbook

In some instances, the local market may be too  above dealing with regulation, bankers may have 
small for a viable entity to deliver capacity devel-
very deep and strong relations with their tradi-
opment on a sustainable basis; searching for  tional clientele: corporate clients and high net-
regional or even global solutions may be the pre-
worth individuals. Creating a new incentive 
ferred mechanism to ensure long-term delivery of  system for financial service providers to serve 
capacity development.
low-income clients may be threatening to a regu-
latory system that is comfortable with the exist-
Incentives
ing level of risk inherent in serving the upper 
Incentives, whether material or immaterial, guide  echelons of society.
choices and behavior. Incentives can be explicit 
in that they are offered as a reward for accom-
Is Current Donor Funding Catalytic?
plishing certain goals or targets. They may also be  Over the last 30 years, we have seen considerable 
implicit in the sense that the system as a whole  progress toward financial inclusion in many 
may reward certain behavior or choices. Incen-
countries. The picture will continue to evolve 
tives can be both positive and negative. It is  because of the dynamic nature of financial ser-
important to fully understand and acknowledge  vices markets. Markets experience the entry of 
the incentives of actors to operate and deliver ser-
new providers and supporting market actors and 
vices on an ongoing basis; that is, donor subsidies  perhaps the exit of others. Demand evolves, and 
must be designed to work to ensure long-term  new approaches and products emerge to meet cli-
incentives exist to continue to deliver the service  ents’ needs. As markets grow and become more 
after the subsidies end.
sophisticated, the risks and returns for different 
A financial system may be plagued by negative  market actors change as well. Donors need to 
incentives that reduce the likelihood of actors  respond to these changes as they work to support 
within the system to think about or deliver ser-
the development of inclusive financial markets. 
vices to the poor. For example, the regulatory sys-
If we look at current donor commitments, data 
tem may incentivize the banking system to serve  on where funding is allocated raise many ques-
corporate clients at the neglect of other potential  tions as to whether donor funding is used in a cat-
market segments. A donor’s intervention may be  alytic way and allocated where it can most add 
to work with regulators to change the rules that  value. 
create the negative incentives for the banking 
system. 
Majority of Donor Funding Used for On-lending
In many markets, financial service providers  Depending on the constraints and opportunities 
have limited information on poor clients. Often  in a given market, donor interventions might be 
they need both information and incentives to  needed at different levels in the market system, 
adapt their products and services to meet these  including at the core via funding for retail finan-
market segments. Donor guarantees can be struc-
cial service providers. Without thorough market 
tured in a way so that the negative incentives for  assessments, we can therefore not make judg-
financial service providers to serve this segment  ments on whether donor funding is used in a cat-
are reduced.
alytic way. However, the amount of global donor 
Solutions to address problems of incentives  commitments still allocated to retail financial ser-
require strong awareness and understanding of  vice providers for the purpose of on-lending to 
the political economy in a country. Ultimately,  microfinance clients, a role that should be pro-
modifying incentives often confronts entrenched  vided by funders within the market system, raises 
power dynamics within a society. In the example  questions. Over the last 20 years, growing investor 
The Role of Donors in Financial Inclusion  
101

interest in microfinance as an alternative asset  allocation of funding seems unbalanced and out of 
class has led to the emergence of more than 100  touch with a catalytic approach to market devel-
specialized microfinance investment vehicles that  opment. On the contrary, the easy availability of 
channel funding from institutional and individual  donor funding can create disincentives for the 
investors, as well as from DFIs, to microfinance  development or expansion of savings services and 
institutions (MFIs). The cumulative assets of  undermines the borrowing institutions’ financial 
those vehicles are estimated at US$6.8 billion  discipline. Too much funding can push MFIs to 
(Symbiotics 2011). In addition to foreign private  embark on unsustainably steep growth paths, 
investments, mostly channeled through these  which has led to repayment crises in some coun-
microfinance investment vehicles, microfinance  tries (CGAP 2010a).
institutions increasingly have access to funding 
from local commercial banks or client deposits as  Donor Funding Concentrated on Few 
a funding source. Despite the availability of fund-
Institutions
ing from actors within the market system, 86 per-
Among donors, development finance institutions 
cent of donor commitments are still used for  are the main providers of funding to MFIs. For 
on-lending, according to a survey with the 20  young MFIs or those in nascent markets, DFIs 
largest donors and investors (Gähwiler and Nègre  can play a market development role by catalyzing 
2011).1 Capacity building at the market infrastruc-
private investment. Private sector investors are 
ture level (supporting functions) and the policy  more likely to lend to MFIs that have received 
level (rules) account for only 2 percent of total  funding from a DFI. Once an MFI has established 
commitments each (figure 4.3). Although it is dif-
relationships with private investors, DFIs’ con-
ficult to draw any conclusions only by looking at  tinued investment arguably adds less value. In 
committed amounts of a subset of donors, this  theory, DFIs should then move on and focus on 
less developed markets or riskier institutions 
with promising market development potential 
Figure 4.3  The Purpose of Donor Commitments 
(for example, innovative business models or 
underserved client groups). However, as of 
December 2009, more than 40 percent of loans 
2%
provided by DFIs are concentrated on 15 profit-
2%
able MFIs, all of which receive funding from pri-
Capacity
On-lending
vate sources (CGAP 2010b). 
building
86%
14%
10%
Geographical Concentration of Donor Funding
A CGAP survey conducted in 2010 with more 
than 60 donors found that donors supported 
projects in at least 122 different countries (CGAP 
On-lending
2010b). Out of the funding that can be allocated 
Capacity building at the policy level
to one single country (regional and global proj-
Capacity building at the market
ects excluded), 15 countries received more than 
infrastructure level
50 percent of total commitments. Among the 
Retail capacity building
countries receiving the highest donor commit-
ments are some of today’s most developed micro-
Source: Gähwiler and Nègre 2011.
finance markets, such as India, Bangladesh, 
Note: Percentage of total commitments as of December 2010, 
data from 18 public donors and one private investor.
Bosnia and Herzegovina, Morocco, and Kenya, 
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The New Microfinance Handbook

where a variety of financial institutions offer    regulation, payments systems, credit reporting, 
a range of financial services to poor and low-  and a host of other subspecialties, the donors that 
income households, and the level of financial  are making funding decisions have less and less 
access to accounts with a formal financial institu-
knowledge about the areas in which the field 
tion is higher than regional averages (Demirgüç-
needs donor funding.
Kunt and Klapper 2012). Today, local funding 
Shrinking aid budgets are also demanding that 
sources or foreign private investment are avail-
donors demonstrate their effectiveness through 
able in these countries, implying the success of  clear results. Calls for value for money are com-
the catalytic approach that many donors have had.  monplace in the media and in parliaments. For 
Nevertheless, microfinance institutions in these  some sectors, it is easier to measure the impact of 
countries continue to receive significant amounts  specific interventions; for example, in the health 
of donor funding. On the one hand, concentration  sector, one finds decades of experience and data 
of funding is considered a positive element in the  on measuring the number of children immunized 
broader aid effectiveness literature because it  or the incidence of malaria infection. For private 
enables countries to have sufficient resources to  and financial sector development, where donors 
address a particular issue.2 On the other hand,  are trying to support market development, 
to develop markets, the role of donor funding is to  demonstrating results is challenging, and estab-
leverage private investment, and as such a decline  lishing attribution is even more so. 
in donor funding should be seen over time. Thus a 
These very real constraints challenge donors 
concentration of donor funding in any set of coun-
to consider the models for channeling the right 
tries for an extended period of time is worth fur-
technical know-how, funding amounts, and over-
ther exploration because it could signal “crowding  sight without unduly distorting markets. We see 
out” as opposed to “crowding in.” 
two alternative options for donors that aim to 
achieve catalytic market development with lim-
ited market distortions: (1) act as a facilitator or 
Donor Efforts to Support Financial  (2) fund a facilitator.
Inclusion
Different donors are equipped with a different 
Internal incentives within some donor agencies  set of funding instruments, which will be dis-
run counter to many of the traits needed to sup-
cussed in greater length later in the chapter. In 
port catalytic market development. Internal sys-
understanding roles, however, it is important to 
tems often reward disbursements of large  know that roles will be closely aligned with 
amounts of funding, creating a bias toward mar-
instruments. For example, bilateral agencies tend 
kets and recipients of funding that can absorb  to have grants as their main instrument, whereas 
large amounts easily. More challenging obstacles  multilateral agencies such as the World Bank or 
for financial inclusion that may require small,  International Fund for Agricultural Development 
long-term, and patient funding are too often  work primarily through loans to governments, 
ignored. The trend in most donor agencies is to  but may also have mechanisms to offer grants for 
support larger projects in fewer countries. 
technical assistance. DFIs mostly provide debt, 
To keep overhead costs low, donors are slash-
but increasingly are also able to use equity invest-
ing staffing budgets, and the predominant staffing  ments, and some agencies, such as the Interna-
model is now one where generalists oversee large  tional Finance Corporation, also have significant 
projects in a variety of fields and disciplines. This  grant funding used for building market infra-
means that even as the field of financial inclusion  structure or technical support to investees. A few 
requires increasingly specialist knowledge in  agencies rely primarily on guarantees, such as the 
The Role of Donors in Financial Inclusion  
103

Overseas Private Investment Corporation and the  standard recipe can be followed. There is no 
Development Credit Authority, both part of the  blueprint that facilitators can take from one 
U.S. government.
country and apply to the next. However, every 
The use of the funding instrument should be  financial market can be viewed within the over-
aligned with the type of facilitation that is needed  all framework—and its multifunction and multi-
rather than requiring the market to adapt to the  player character—even if the detailed, 
instrument offered by the donor agency. For  constituent elements vary. Although it is not a 
example, a donor that has only loans to govern-
precise or formulaic model, it is an aid to strate-
ment as its main instrument should be careful in  gic analysis and decision making (see box 4.1).
how it intervenes in the private sector develop-
The market development process is necessar-
ment arena more generally and in inclusive finan-
ily dynamic, and whether a given type of inter-
cial systems development more specifically.  vention is appropriate depends strongly on the 
Ultimately, many of the actors engaged in the  market’s stage of development. Although no 
delivery of financial services are from the private  global definition is available of what it means to 
sector and thus an ability to work directly with  be a nascent market, we can assume that it is one 
private institutions is first and foremost.  where access and usage of financial services are 
Nonetheless, many aspects of the financial mar-
low, where the enabling environment is not con-
ket system are public goods where government  ducive, and where little existing market infra-
leadership is warranted. Thus donors with loans  structure is in place. At the other extreme, we can 
to governments as their main instruments should  assume that mature markets are where these 
focus primarily on their influencing role with  things exist. In between are found many other 
government on policy issues and in supporting  market development stages. The role of the facili-
public goods within the financial system. They  tator will be quite different depending on this 
should not force their instrument—loans to gov-
market development spectrum.
ernment—as a way to finance the private sector.
In nascent or “frontier” markets, facilitators 
may need to support basic retail level capacity 
Act as a Facilitator 
(the supply side of the “core”). Although MFIs 
Provided that donors have the capacity to operate  and other providers may have demonstrated their 
at the country level, they may be able to fill the  success elsewhere, local actors in a nascent mar-
role of facilitator directly. This role requires that  ket would not necessarily have any information or 
the donor understands the constraints and oppor-
share this knowledge. Thus, facilitators may need 
tunities in a given market and has the capacity  to address this market deficiency. Because basic 
and flexibility to respond to the specific needs. 
market infrastructure and the regulatory environ-
Chapter 1 noted that market development  ment are also likely underdeveloped, significant 
facilitation must start with a mapping of the  room exists for facilitators to intervene. 
financial landscape and then an identification of 
The role of facilitator becomes much more 
the opportunities within the market where facil-
nuanced in a mature market. In these markets, we 
itation will lead to expanded usage of financial  already find market actors that are functioning as 
services. This very important understanding of  well as many entrenched ways of doing business. 
the market and what is needed is at the heart of  Additionally, in these markets, facilitators may 
facilitation. Because everything starts with the  need to bring in disruptive technology or business 
condition of the market and the opportunities  models that threaten the existence of existing 
that lie within that unique market means that no  market actors. Identifying the opportunities to 
104 
The New Microfinance Handbook

Box 4.1  Shaping Intervention from an Understanding of the Market  
System
The FinMark Trust’s approach to the development of transaction banking services in South Africa 
was distinctive from the outset. Faced with the challenge of how to improve access (in the core 
of the market), FinMark sought to identify the underlying causes of poor access in the support-
ing functions and rules in the financial market system; that is, it took a systemic perspective to 
analysis and intervention to facilitate change. Although a conventional approach might have 
 emphasized engaging directly with providers—with financial and technical assistance—in prac-
tice, FinMark identified a number of priority constraint areas (see figure below):
• Rules—Numerous weaknesses in relation to, for example, consumer credit, and problem-
atic capital requirements for new providers.
• Informal rules—A prevailing culture that did not understand or emphasize low-income con-
sumers (the “unbanked”) or consider how to innovate new services.
• Coordination—Little constructive dialogue between stakeholders in relation to the low  access 
problem and how to address it.
• Information—An absence of detailed, analytical data on the low-income market as a 
whole, including its size, perceptions of services and providers, current use of money, and 
needs.
SUPPORTING
FUNCTIONS
Information
Coordination
Reduced
conventional focus
Priorities
Demand
CORE
Supply
Main focus: facilitating
systemic change
Formal
Informal
RULES
These constraints formed an agenda for action for the industry as a whole and for FinMark 
specifically. Its interventions focused on these as underlying causes—in rules and supporting 
functions—to bring about change in the core of the market and contribute to a substantial  increase 
in access from 2003 to 2010.
Source: Alan Gibson, The Springfield Centre.
The Role of Donors in Financial Inclusion  
105

push the frontier becomes the most critical step  Fund a Facilitator 
for a facilitator to make. Facilitators may also  Although relatively few examples of this model 
need to directly confront political and influential  are found, we see it as an emerging approach that 
actors that form the status quo.
has the potential to ease the internal constraints 
Facilitators’ ultimate objective is to get the  donors face while delivering catalytic market 
market to work without their support. This  support at the country level. In this role, donors 
means that their support to any one actor in the  fully outsource their funding to a facilitator at the 
market is de facto a temporary one. Because the  country level. One example of this is the Financial 
risk of overextending a stay is so acute, facilita-
Sector Deepening Trust in Kenya funded by 
tors should be extremely careful to structure  DFID, the World Bank, the Swedish International 
funding mechanisms in a way that is time bound.  Development Agency, the Gates Foundation, 
The litmus test of whether a facilitator is doing  Agence Française de Développement, and the 
the right thing is to ask “what will this look like  government of Kenya (see box 4.2).
in ‘X’ years.” If the facilitator will still be required 
This outsourced model allows donors to place 
to deliver a specific function in the market, then  a large amount of funding, thus easing disburse-
this is a sign that the facilitator is not interven-
ment pressure, into an entity that can then take its 
ing appropriately. The areas on which the facili-
time to understand the local market, identify 
tator will focus should change over time as the  which interventions can unleash market poten-
market develops and new opportunities arise.  tial, and help to build capacity among market 
To ensure that an intervention is “time bound,”  actors to fulfill their long-term role of service 
facilitators must build in a convincing exit strat-
delivery. This model allows multiple funders to 
egy in all of their interventions in the market  pool their resources and support a joint facilita-
(see chapter 19).
tor, which is a good way to harmonize funding 
Box 4.2  Financial Sector Deepening Kenya (FSD Kenya)
FSD Kenya started as a DFID project in 2001 
mittee (PIC). The PIC comprises nominees 
but was transformed into a multidonor trust in 
from supporting donors as well as indepen-
2005. The creation of this independent trust 
dent experts. A specialist technical team is 
was motivated by the desire to strengthen  responsible for developing and delivering FSD 
effectiveness by permitting a closer, more flex-
Kenya’s strategy and managing its market 
ible, and responsive engagement with market 
making investments. As the market has devel-
actors as well as to improve efficiency by pool-
oped in Kenya the depth of expertise in this 
ing donor funds within a single special-purpose 
team has expanded, with the emphasis shift-
vehicle. Fiduciary oversight is provided by a  ing from funding to guiding market actors 
firm of professional trustees (currently the  through research and technical assistance. For 
international accounting firm KPMG), and pol-
FSD Kenya to function effectively as a market 
icy guidance and strategic direction are the  facilitator, its core donors fund a single com-
responsibility of the program investment com-
mon approach, set out in its strategy paper. 
Source: FSD Kenya 2012, private communication.
106 
The New Microfinance Handbook

and increase donor coordination in a country. The  required of donors to ensure they minimize mar-
structure of this entity can be similar to FSD  ket distortions.
Kenya, an independent trust, or it can be a project, 
DFIs, some multilateral agencies, and regional 
an international NGO, or another structure that  development banks all may have internal incen-
can fulfill this facilitation function.
tives that make outsourcing their funding to a 
Multiple facilitators can be working in any one  facilitator difficult. Nonetheless, these donors 
market, each focusing on areas of core compe-
have an important influence on governments and 
tence, as long as complementarity and a common  significant funding levels and must prioritize 
vision on how to support market development are  coordination if they want to remain catalytic.
found. An example could be a facilitator that 
Coordination is the perennial development 
focuses on only capacity development. 
problem, and there are not many examples of suc-
The distinguishing characteristic of a facilita-
cess. Nonetheless, this fact does not alleviate the 
tor is that it operates at the country level. The  burden of working toward possible solutions to 
level of market knowledge that is needed pre-
improve the ways donors interact and comple-
cludes actors at the global level from fulfilling this  ment one another at the country level.
role. Nonetheless, facilitators can be aided in their 
role by global actors who share and disseminate  Donor Funding Instruments
knowledge from elsewhere, helping to inject and 
cross-breed ideas in different markets.
The ways in which donor funding is delivered will 
The key to ensuring that such an entity is able  have a profound impact on its effectiveness.3 In 
to take on the role of facilitator, without the inher-
using donor funding to develop the market one 
ent internal weaknesses of donors, lies in a few  necessarily finds an acute risk that the resources 
key design considerations. Such entities must be  provided could displace market-based activity. 
able to take risks, invest in innovations with small  Even a relatively small subsidy can distort incen-
grants, have a long-term perspective, and demon-
tives by changing expectations. Perhaps one of the 
strate their influence on the market through both  more obvious illustrations of this is in the subsidy 
direct and indirect means. We will explain below  of interest rates, which can lead borrowers across 
how facilitators intervene in the market to be  the market to expect lower rates.4 Using the right 
catalytic.
tools can mitigate this risk. Nevertheless, regard-
Donor funding to a facilitator would need to be  less of which tool is used, there is no substitute for 
structured as a medium- to long-term project;  maintaining a strong awareness of how the market 
however, the funding provided by this facilitator  is developing and ensuring that the extra-market 
to the market would need to be able to offer many  support provided by facilitation is withdrawn 
small, short-term funding agreements.
when market actors are able to take over. 
Coordination with Other Facilitators
Technical Assistance 
In light of political pressures and internal incen-
Much know-how is about tacit knowledge, which 
tives, some donors will not be able to outsource  cannot be readily generated and transferred out-
their funding decisions to a facilitator. Donors  side the circumstances in which it is generated. 
that continue to fund interventions directly must  For example, although classroom learning can play 
work closely with other facilitator(s) at the local  a useful role, the successful management of soli-
level for access to the market knowledge that is  darity groups is learned by credit officers through 
required to identify market-enhancing interven-
actually doing it. Working with specific organiza-
tions. This is the minimum level of responsibility  tions to generate key aspects of know-how is often 
The Role of Donors in Financial Inclusion  
107

essential. However, wherever possible the aim  grants are increasingly relevant for building 
should be to find channels to disseminate this  market infrastructure and supporting policy and 
knowledge to other players, both to increase  regulatory reforms, particularly when we begin 
impact and to minimize the risk of  tilting the play-
to think beyond microcredit.
ing field in favor of the institutions receiving 
Challenge funds provide a valuable way to use 
support.
grants, particularly for encouraging the private 
sector to innovate to reach the poor. The terms of a 
Grants 
challenge fund are set up transparently in advance, 
Grants are commonly used to support the devel-
seeking applications for grants on a competitive 
opment of microfinance. On the positive side,  basis to undertake initiatives with specified end 
grants can be used to deliver a time-limited nudge  objectives. Applicants propose how they want to 
to the market. Beyond the requirement to use the  use the grants and compete for a limited pool of 
grant for the agreed purpose and usually rela-
resources. Often the terms require that those 
tively modest reporting requirements, grants do  applying for awards match the grant resources 
not convey any reciprocal obligations to the donor  sought with their own funds and show in their 
on the part of the recipient. 
applications how the development will be sus-
However, perhaps more than any other tool  tained after the award funding has been exhausted. 
used, grants carry the risk of distorting markets  This structuring helps mitigate some of the com-
and incentives. Grants can be used as a simply  mon problems associated with grants. Challenge 
bottom-line subsidy—enabling the survival of an  funds can be especially helpful in encouraging 
activity or business where there is no real busi-
innovation by offering a simple way to share the 
ness case or, worse, providing an advantage to one  inherent risks, with open competition defusing 
player over another. It is not uncommon to see  the risk of unfairly favoring some players. 
loss-making, inefficient MFIs continue for very 
Grants may also be essential for research- 
long periods simply by acquiring a sequence of  related work, whether impact studies to under-
donor grants. Unlike an equity investment, a grant  stand the effects of interventions on clients or 
does not necessarily (and rarely does) tie the  data collection on market segments and client 
donor into a long-term relationship with the   demand. Although, in the long term, markets 
supported institution. This has the potential to  should be able to deliver this kind of information 
weaken governance if there is no real owner of  without donor assistance, donors may be needed 
the capital value created in the MFI business. The  to build the capacity of the research institutions 
role of ownership is critical within a market econ-
or demonstrate to private actors that this infor-
omy for providing a long-term incentive frame-
mation is useful for their business. It sometimes 
work for management to use scarce capital  seems surprising how frequently existing market 
resources efficiently. 
players (or those in a linked market) are simply 
One encounters very limited circumstances  unaware of the potential in a market. Financial 
in which grants to build retail institutions  sector research can be an important first step in 
remain relevant in the current financial inclu-
creating greater awareness in the industry and 
sion landscape. In some nascent markets, such  helping to guide players toward opportunities to 
as postconflict countries, the use of grants to  expand inclusion. The FinScope surveys, pio-
help kick-start an industry may still be relevant.  neered by the FinMark Trust in South Africa 
Grants may also be relevant to help institutions  (and now used across Africa and in some parts of 
extend outreach  in difficult-to-reach market  Asia), have been very successful in this respect, 
segments, such as remote rural areas. However,  helping commercial banks in seeing entirely new 
108 
The New Microfinance Handbook

areas of the market. This type of research can be  which might involve defining new processes, 
argued to have the key characteristics of a sec-
deploying new technology, or training credit offi-
toral public good,5 which is likely to be under-
cers and risk management departments. The risk 
provided without external support. Therefore a  is that without a clear development plan, the 
strong case can be made for its financing by  institution will simply revert to its earlier prac-
donors in the short term. Ultimately informa-
tices once the guarantee is removed.
tion providers should also seek to be viable 
commercially.
Equity and Quasi Equity
Providing risk capital using equity or quasi-equity 
Guarantees
instruments can be valuable in supporting the 
Guarantees are very commonly used by govern-
development of retail (or other) institutions and 
ment and donors in supporting financial mar-
avoiding some of the problems with grants relat-
kets. Many different forms of guarantee are used,  ing to market distortion discussed earlier. If creat-
but the core concept is the agreement to provide  ing substantial new organizational capacity, 
financial resources in the future contingent on  whether at the retail or market infrastructure 
specified conditions. Probably the most com-
level, is essential to achieving progress, then 
monly seen form is a simple guarantee to repay  investing by way of equity is often preferable. An 
part or all of a loan (or more often a portfolio of  objection is sometimes raised that a new institu-
loans) should the borrower default. A major  tion may be loss making in the early years of its 
attraction to the providers is that funding is often  development. This can easily be overcome by sim-
not required up-front and a diversified portfolio  ply rolling up the projected losses into the overall 
of guarantees offers the prospect of consider-
level of equity investment required. Many busi-
able leverage. USAID’s Development Credit  nesses are commercially financed in which inves-
Authority, a well-established and managed pro-
tors do not expect to break even for several years. 
gram, has been able to build a strong portfolio 
Equity as a form of financing has important 
leveraging the earmarked resources 28 times. A  advantages over other instruments in relation to 
guarantee can be used to help cautious institu-
governance and creating appropriate incentives 
tions enter new markets where they lack knowl-
for managers (McKee 2012). It also potentially 
edge and proven techniques to manage credit  mitigates the problem of market distortion and 
risk. The premise of their effective use to support  can be more efficient allowing the eventual return 
market developments is that institutions will  of capital to the market facilitator where success-
learn through the process and change as a result.  fully invested. However, use of investment instru-
For this to be credible one must have both suffi-
ments carries substantially higher transaction 
cient incentives and realistic potential for the  costs, requiring careful structuring at the outset 
institutions receiving the guarantee to change.  and ongoing management of the investment. The 
Simply reducing or eliminating the risk will not  skills to undertake this effectively may not be 
necessarily achieve this. To be effective the insti-
possessed by many broad-based market facilita-
tution receiving the guarantee must generally  tion organizations. Specialist impact investing 
bear part of the risk. Equal sharing often proves a  funds that have the capacity and local presence 
good starting point. However, if behavior change  required are better placed to manage a portfolio 
is to occur, it may be necessary to ensure that a  of equity investments and play an active role in 
realistic plan is in place for this to happen.  the governance of institutions they invest in. 
Typically this will require developing new 
Planning for exit may also be problematic, 
approaches to measuring and controlling risk,  especially where capital markets are thin. Quasi 
The Role of Donors in Financial Inclusion  
109

equity (various forms of debt with equity-like  their relationships with governments and/or con-
characteristics) is one way to address this diffi-
ditions specified in lending agreements, funders 
culty if it is possible to credibly structure a repay-
can influence the use of the funds by the govern-
ment. A long-term engagement will nevertheless  ments. However, loans to governments are not 
typically be required because the capital repaid  adapted to provide support for private sector 
will need to be replaced—through either new  actors, and the funder has little control of how 
investment capital or retaining earnings.
projects are managed and implemented. 
The danger faced in using investment instru-
ments is that a market facilitator investing in a  Conclusion
company crosses the line to become, in effect, a 
player. A risk exists of displacing commercial cap-
Donors have played an important role in much of 
ital, especially where the investment funds used  the progress achieved in inclusive finance. The 
derive from a concessional source. In the long  large number of private funds that serve the 
term the aim should be to see concessional capital  financial needs of MFIs are a testament to this 
(or capital with an explicit or implicit state guar-
success. This role in helping to “crowd in” private 
antee, as is the case with DFIs) replaced by com-
capital was arguably the market weakness that 
mercial sources. It should also be noted that  needed correcting in the past. Today it is far less 
considerable heterogeneity exists in the sources  common to identify a weak domestic funding 
of commercial capital. The objectives of investors  market as the overarching problem that requires 
vary considerably. On a purely commercial level  catalytic donor assistance.
investors will have differing appetites for risk, 
Donors must thus respond and focus their 
minimum returns, and time horizons. Beyond  attention on ways they can remain catalytic in 
this there is growing interest in looking at the  building financial markets that serve the poor. 
social and environmental impact of investment,  This chapter presented ways in which donors can 
which is clearly highly relevant to inclusive  try to do this by working through or with facilita-
finance. The availability of long-term social  tors or behaving themselves like facilitators at the 
investment provides an opportunity for earlier  local market level. In all cases a facilitator on the 
exit by the market facilitator. 
ground with market knowledge is key to making 
this role a success. Because one finds few donors 
Loans to Governments
who structure their support in this way today and 
Loans to governments are an instrument typically  because of the real internal challenges in being 
used by multilateral organizations, regional devel-
catalytic, much still can be done to realign inter-
opment banks, and some bilateral agencies.  nal incentives within funding agencies to mini-
Overall, they represent about 25 percent of total  mize negative market distortions. Much also can 
donor commitments for financial inclusion. Loans  be learned in practice to improve how donors can 
to governments can have maturities of 11 years or  fulfill this catalytic role.
more, which makes them a good tool for long-term 
support, but bears the risk of subsidizing functions 
that the local government or the market could take  Notes
over. Loans to governments can be used for several   1.  The largest 20 donors and investors include  
purposes, including budget support, on-lending to 
10 DFIs, three multilaterals, three bilateral 
retail financial services providers via wholesale 
donors, two regional development banks, one 
financial institutions, or strengthening the market 
private foundation, and one private  
infrastructure and  policy environment. Through 
institutional investor. 
110 
The New Microfinance Handbook

 2.  See, for example, work by Bill Easterly and 
———. 2010b. “Growth and Vulnerabilities in 
Tobias Pfutze (2008), which uses level of 
Microfinance.” Focus Note 61, CGAP, 
fragmentation as one of the criteria to rank 
Washington, DC.
donor effectiveness. 
Demirgüç-Kunt, Aslı, and Leora Klapper. 2012, 
 3.  This section was originally drafted by David 
“Measuring Financial Inclusion: The Global 
Ferrand.
Findex.” Policy Research Working Paper 3628, 
 4.  This is one reason why price subsidies should 
World Bank, Washington, DC. 
usually be avoided. Price-based signaling is a 
Easterly, William, and Tobias Pfutze. 2008. 
key mechanism in effective market operation, 
“Where Does the Money Go? Best and Worst 
and a supply-side subsidy can disrupt the 
Practices in Foreign Aid.” Journal of Economic 
signaling. Furthermore, given that in the 
Perspectives 22 (2): 29–52.
financial services market one rarely finds a 
El-Zoghbi, Mayada, Barbara Gähwiler, and Kate 
public policy case or the resources to support 
Lauer. 2011. “Cross-border Funding in 
universal subsidies, targeting is the norm. 
Microfinance.” Focus Note, CGAP, Washington, 
Practically these often prove difficult to deliver 
DC, April.
cost-effectively and to control the potential for 
FSD Kenya. 2005. “Policies and Procedures.” 
rent seeking created.
Financial Sector Deepening Project, Nairobi, 
 5.  Research data of this kind are certainly 
Kenya. 
nonrival, and the nature of the type of  
Gähwiler, Barbara, and Alice Nègre. 2011. “Trends 
information is such that it rapidly becomes 
in Cross-border Funding.” Brief, CGAP, 
nonexcludable (because it is difficult to keep 
Washington, DC, December. 
the results private).
McKee, Katherine. 2012. “Voting the Double 
Bottom Line: Active Governance by 
Microfinance Equity Investors.” Focus Note 79, 
References and Further Reading
CGAP, Washington, DC.
CGAP (Consultative Group to Assist the Poor). 
Symbiotics. 2011. “Symbiotics 2011 MIV Survey 
2010a. “2010 CGAP Funder Survey.” CGAP, 
Report: Market Data & Peer Group Analysis.” 
Washington, DC. 
Symbiotics, Geneva, August. 
The Role of Donors in Financial Inclusion  
111


CHAPTER 5
Measuring Financial Inclusion 
and Assessing Impact
Joanna Ledgerwood

To make financial markets work better for the  inclusion and the importance of continuing to 
poor, it is valuable to understand what is taking  invest in achieving it. 
place in the core of the financial market 
This chapter focuses on measuring and moni­
system—what services are provided by whom,  toring financial inclusion—that is, supply and 
to whom, and how—and what is the impact.  demand—and on assessing outcomes leading to 
Measuring financial inclusion helps us to  impact. In doing so, it provides an overview of 
understand which segments of the population  tools to measure and monitor financial inclusion 
lack what types of financial services, why they  and to conduct research. It seeks to inform stake­
lack access, and which financial services they  holders, including development agencies, regula­
use. Monitoring financial inclusion allows us  tors, and providers, who are increasingly 
to determine if inclusion is improving over  modifying policies, services, delivery channels, 
time and to compare countries within peer  and outreach models, to capitalize on insights 
groups. Assessing impact helps us to under­
provided by databases and research findings. 
stand the quality of services—convenience,  These modifications can occur either at the macro 
affordability, safety, dignity—and, ultimately,  level, initiated by governments and regulators, or 
the long­ 
term outcomes of using financial  at micro levels, affecting financial service struc­
services. This provides a much better under­
tures within communities and financial service 
standing of the value of increased financial  providers themselves (see box 5.1).
Contributions to this chapter were made by Ines Arevalo and Alyssa Jethani. 
Measuring Financial Inclusion and Assessing Impact 
113

Box 5.1  Using Data to Increase Financial Inclusion
Better data can increase awareness of the  bank’s decision to allow Safaricom to launch 
problem of financial exclusion and motivate pol-
the M-PESA platform, an e-money transfer  
icy makers to enact market-expanding reforms.  and payment system. M-PESA now reaches 
Data can also give the private sector the infor-
55 percent of all Kenyan adults. After the first 
mation it needs to expand and develop new  FinScope data for Zambia were released in 
products and can stimulate new research into  2005, several institutions reported being moti-
the drivers and impacts of financial inclusion.
vated to launch new ventures. Barclays 
At the Alliance for Financial Inclusion’s 2009 
reopened some of its rural branches, Zambia 
Global Policy Forum in Nairobi, Gerald Nyoma,  National Commercial Bank launched a mobile 
director of the Central Bank of Kenya, credited  banking venture, and Dunavant, a cotton com-
the first FinAccess survey in 2006, which  pany, created a mobile payment linkage for 
showed that only 14 percent of Kenya’s popu-
150,000 of its growers. Similar reports have 
lation had access to banking services, with  come from policy makers and market players 
having a significant influence on the central  in other countries.
Source: Kendall 2010.
Measuring Financial Inclusion
it is necessary to determine the current state of 
the financial market and to identify population 
Financial inclusion refers to people and busi­
segments that are excluded from it. Measurement 
nesses having access to appropriate and afford­
also indicates the frequency of services accessed 
able financial services. Defining financial  from various types of providers and allows for 
inclusion may also include factors such as prox­
comparisons between countries or regions and 
imity (being within a 20­kilometer range of an  among poverty levels within an area. This 
access point, for example, a bank branch, auto­
enables stakeholders to be better informed and 
mated teller machine [ATM], microfinance insti­
to respond with appropriate policies and regula­
tution [MFI], or agent) or choice (having access  tions. According to the Global Partnership for 
to multiple providers with varied and relevant  Financial Inclusion (2011), “A comprehensive set 
products and services) and being financially  of financial inclusion indicators should serve 
capable of understanding the available choices  three purposes: i) to inform financial inclusion 
and how best to use them. However, increased  policy making both domestically and interna­
access and choice of financial services do not  tionally; ii) to provide a basis for measuring the 
always translate into increased use. In addition to  current state of financial inclusion on a global 
studies that measure access, studies that attempt  scale and at country level; and iii) to provide a 
to understand the use and quality of services, and  basis for monitoring and evaluation of financial 
ultimately their impact, are also important. 
inclusion policies and targets, both domestically 
As discussed in chapters 3 and 4, the govern­
and internationally.” 
ment, industry, and others, including develop­
Measuring financial inclusion is not a straight­
ment agencies, have a role to play in expanding  forward exercise, however. Financial inclusion 
financial inclusion. In order to achieve this goal,  has to be clearly defined according to the needs of 
114 
The New Microfinance Handbook

the country. The Alliance for Financial Inclusion 
Measuring access and usage requires assessing 
(AFI) puts forth four dimensions of financial  both the supply of and the demand for financial 
inclusion—access, usage, quality, and welfare,  services. Supply­side studies and databases such 
each requiring increasingly complex data collec­
as Financial Access 20101 or Microfinance 
tion and analysis—and proposes indicators for  Information eXchange (MIX)2 use aggregate data 
each (AFI 2010a, 2010b). 
to understand the total outreach and perfor­
• Access refers to the ability to use financial  mance of various types of providers and to enable 
 services, taking into consideration physical  comparative analyses over time. Demand­side 
proximity, affordability, and eligibility. Under­
surveys such as FinScope3 or Findex4 seek 
standing levels of access may require insight  detailed information about what and how finan­
and analysis of potential barriers to access.  cial services are used at the individual, household, 
Indicators include number or percentage of  or community level. 
people who access a certain type of service 
Demand­side research offers richer informa­
(credit, savings, payments, insurance) from  tion than supply­side research and provides new 
whom (formal or informal provider), client  avenues for analyzing how the poor manage their 
touch points within a certain distance, and  financial lives, highlighting the multifaceted 
poverty levels.
nature of financial management. It normally 
requires household surveys and therefore is more 
• Usage refers to the actual use of financial ser­
costly and thus less frequent. Furthermore, 
vices and products. Determining usage looks  demand­side information can be susceptible to 
at the regularity, frequency, and patterns of use  sampling bias and omissions by respondents, 
over time, including the combination of ser­
making it less comparable over time or across 
vices. Indicators include frequency of use or  countries (Global Partnership for Financial 
percentage of active accounts.
Inclusion 2011). Supply­side data can be collected 
more frequently and allow for comparisons; how­
• Quality considers the attributes or relevance of  ever, such information often only includes formal 
the financial service or product to consumer  and regulated providers, which can miss a signifi­
needs. Quality is determined by the nature and  cant portion of what is taking place in the finan­
depth of the relationship between the financial  cial market system. Demand­side research, in 
service provider and the consumer, including  contrast, can provide insight on the value and 
the choices available, the financial capabilities  vibrancy of the informal sector, highlighting the 
of the consumer, and how those capabilities  flexibility and innovations inherent in family, kin­
affect the experience. Indicators include the  ship, and community­based financial services.
financial capability of consumers, choice of 
services and providers within a reasonable  Supply-Side Research
 distance, and frequency of complaints.
Supply­side research collects and aggregates data 
• Welfare, the most difficult outcome to mea­
on number of providers, services used (primarily 
sure, focuses on the impact that financial  credit and savings accounts and sometimes pay­
 services have on the welfare of consumers,  ments and insurance products), and access points 
including changes in consumption, business  (for example, bank branches and ATMs) and may 
productivity, and quality of life. Indicators  also collect data on volume and costs. Supply­side 
include increased savings, increased consump­
data are generally gathered by regulators, other 
tion, and increased decision making in the  government bodies, or development agencies 
household.
(such as the financial access studies conducted by 
Measuring Financial Inclusion and Assessing Impact 
115

the World Bank) or are self­reported by providers  demographic outreach of financial services in 
to global databases such as MIX. Supply­side data  about 160 countries.
are, for the most part, publicly available and gen­
Financial Access 2010 is the second in a series 
erally accessible online. Supply­side data indicate  of annual reports by CGAP and the World Bank to 
the scale and trending of activities of financial  monitor statistics for financial access around the 
service providers, allowing insight into the  world and to inform the policy debate. The series 
growth, depth, and scale of outreach. Databases  was launched in response to the growing interest 
also provide a valuable source of secondary data  in financial inclusion among policy makers and 
to support impact assessments and understand  the development community. The first report, 
key outcomes and may help to uncover pressing  Financial Access 2009, introduced statistics on the 
issues in the industry, for example, over­  use of financial services in 139 economies and 
indebtedness, improper pricing, or poor financial  mapped a broad range of policies and initiatives 
and social performance of providers—and some­
supporting financial inclusion. Building on the 
times consumer abuse (see box 5.2).5 
previous year’s data, Financial Access 2010 
reviews survey responses from 142 economies, 
Global Supply Surveys
updates statistics on the use of financial services, 
Two relevant global supply surveys (sometimes  and analyzes changes that took place in 2009—a 
referred to as landscape supply data) are (i) the  turbulent year for the financial sector” (CGAP 
Financial Access 2009 and 2010 of the  and World Bank 2010). Financial Access 2010 
Consultative Group to Assist the Poor (CGAP)   contributes to efforts to measure financial access 
and the World Bank Group, which gathers data  at the country level worldwide, to develop a con­
from financial regulators in about 150 countries,  sistent database, and to present the data in a 
and (ii) the Financial Access Survey (FAS) of the  coherent manner for future analyses.
International Monetary Fund (IMF), which 
The IMF conducts the Financial Access 
reports on key indicators of geographic and  Survey annually and makes the data available to 
Box 5.2  Evidence of Over-Indebtedness through Research
Over-indebtedness has become a cause for  with the growing levels of default. The evi-
concern and a new focus of research and  dence to date is not clear-cut. The high levels 
data collection. Strong competition in some  of default in Bosnia in the late 2000s are 
markets and the expectation of excessive  proof of too much debt and a lack of financial 
returns on the part of some investors have  capability to manage the credit. By contrast, 
led to predatory lending, with rising levels of  in Ghana many possess the financial capabil-
portfolios at risk. Explanations for these  ity to juggle multiple loans, even when the 
behaviors are many, including the absence of  personal cost is high. What has not changed 
credit bureaus, limited due diligence by lend-
is that over-indebtedness has long been an 
ers, or the assumption that clients assume  attribute of poverty and that a life of perpetual 
more debt than they can manage. Multiple  shocks without protection keeps many stuck 
loans from an array of lenders are associated  in the vicious cycle of poverty.
Source: Monique Cohen, Microfinance Opportunities.
116 
The New Microfinance Handbook

the public through an online database. The FAS  forming country­level aggregates and are prone 
database disseminates key indicators of geo­
to multiple counting (Global Partnership for 
graphic and demographic outreach of financial  Financial Inclusion 2011). Also, generally no 
services as well as the underlying data. It mea­
information is provided on income levels or liveli­
sures outreach by bank branch networks and  hood segments of those accessing services 
ATMs as well as the availability of three key  (Kendall 2010).
financial instruments: deposits, loans, and insur­
ance. New data on outstanding deposits and  National Supply Surveys
loans of households were added for the 2011 FAS.  Regulators and others are beginning to measure 
The database helps policy makers and research­
financial inclusion at the national level. 
ers to understand the determinants and implica­
According to AFI (2011), “More and more, pol­
tions of financial access and usage. The financial  icy makers are recognizing the importance of 
access indicators can help researchers and  evidence­based policy making and the critical 
authorities to identify knowledge gaps, to devise  role data play in the policy­making process, 
appropriate policies for broadening financial  from design and implementation to monitoring 
access, and to monitor the effectiveness of poli­
and evaluation. With rigorous, objective, and 
cies over time (IMF 2011).
reliable data, policy makers can accurately 
About 140 countries participated in the 2011  diagnose the state of financial inclusion, judi­
FAS, and the FAS website now contains annual  ciously set targets, identify existing barriers, 
data for about 160 respondents covering a seven­
craft effective polices, and monitor and assess 
year period (2004–10), including data for all G­20  policy impact.” 
countries.
When determining how to measure financial 
Global supply surveys provide useful country­  inclusion at the country level, the first step is to 
level data. As many are conducted annually, these  define financial inclusion—that is, what providers 
data can indicate progress toward increasing  and which services are considered financially 
financial inclusion. However, most supply­side  inclusive.7 The next is to define the data needs, to 
surveys rely primarily on information from regu­
look at the information available from secondary 
lators or regulated financial institutions, which  sources (on both supply and demand), and then to 
effectively excludes unregulated (or nonformal)  determine how to obtain missing data. Options 
providers. Use of services from other providers—
include enhancing an existing survey or creating 
for example, nongovernmental organization  a new one (AFI 2010a). 
(NGO) MFIs, cooperatives, Savings Groups (SGs), 
In an attempt to create a consistent set of 
and the informal sector as a whole—is not  indicators that are defined in the same manner 
counted.6 The resulting picture is distorted, par­
and therefore can be tracked in national surveys 
ticularly in Africa, where only five countries—the  and compared across countries, AFI’s Financial 
Comoros, Ethiopia, Madagascar, Mauritius, and  Inclusion Data Working Group developed a 
Rwanda—report data on credit outreach to the  “core set” of indicators for use by regulators at 
FAS (Linthorst and Gaul 2011).
the country level. The AFI core set of indicators 
In addition, because the data track accounts  provides a framework to guide country­level 
rather than individuals, there is potential for dou­
data collection and to support policy making by 
ble counting. Furthermore, the general lack of  creating a standard for what to measure and how 
financial identity in many developing countries  (AFI 2011).
weakens the reliability of supply­side data on 
The core set is a list of five quantitative 
usage; users cannot be uniquely identified in  indicators that measure the most basic and 
Measuring Financial Inclusion and Assessing Impact 
117

fundamental aspects of financial inclusion:  remains a key challenge. Global databases and 
access and usage: 
provider networks are helping to fill this gap. 
In addition to supply­side surveys conducted 
• Access indicators include the number of access  at the global and national (or regional) levels, 
points per 10,000 adults at the national level   supply­side data are also collected through 
and segmented by: type and by relevant admin­
self­reported databases such as MIX, the Savings 
istrative units; the percentage of administra­
Groups Information Exchange (SAVIX), the 
tive units with at least one access point; and  Microcredit Summit, the World Council of Credit 
the percentage of total population living in  Unions (WOCCU), and the World Savings Banks 
administrative units with at least one access  Institute, among others. 
point. 
MIX is a global, web­based platform for 
• Usage indicators include  the percentage of  information on microfinance. It provides infor­
adults with at least one type of regulated  mation on MFIs worldwide, public and private 
deposit account and the percentage of adults  funds that invest in microfinance, MFI net­
with at least one type of regulated credit  works, raters and external evaluators, advisory 
account. The following proxies may be used  firms, and governmental and regulatory agen­
where data for usage indicators are not  cies. Institutions self­report to MIX, with data 
 available: number of deposit accounts per  checked by in­house analysts. While MIX col­
10,000 adults and number of loan accounts  lects data on nonregulated entities, the informa­
per 10,000 adults.
tion requested is geared more toward sustainable 
institutions with the capacity to report pre­
It does not measure quality and welfare, which  scribed indicators on a consistent basis. 
require more qualitative studies.9
Consequently, the majority of smaller MFIs, 
savings and credit cooperatives (SACCOs), and 
Global Databases
others do not participate. However, the MIX 
While surveys continue to provide information  database covers an estimated 85 percent of clients 
useful for establishing scale, expanding sup­
served by specialized microfinance providers 
ply­side data to include nonregulated providers  (see box 5.3).
Box 5.3  Microfinance Information eXchange
Committed to strengthening financial inclu-
the information for comparability. Its pub-
sion and the microfinance sector by promot-
lished data track development of the industry, 
ing transparency, MIX provides information on 
both for its operators and for those supporting 
the performance of MFIs, funders, networks, 
it through funding, policy, or analysis. Its 
and service providers serving low-income   
primary data platform, MIX Market, has 
clients.
 delivered MFI profiles and annual standard 
Incorporated in 2002, MIX collects and  performance reports since 2002. Between 
reviews financial, operational, product, client, 
2002 and 2012, its public database has grown 
and social performance data, standardizing  from covering just over 100 MFIs to more than 
(continued next page)
118 
The New Microfinance Handbook

Box 5.3  (continued)
2,000 providers around the world. Its platform 
Active partners include the Small 
data include benchmarks and comparative  Enterprise Education and Promotion (SEEP) 
analysis, along with quarterly results. In addi-
Network for developing financial reporting 
tion, MIX publishes annual regional updates  standards and the Social Performance Task 
and topical analysis of the sector through the 
Force for measuring MFI social performance. 
long-standing MicroBanking Bulletin
In addition, MIX encourages local microfi-
The data available on MIX Market has  nance associations to embed these reporting 
evolved with the industry. In the early years, 
standards in local markets and connects asso-
data focused on outreach and financial perfor-
ciations with a global network of analysts 
mance as the sector sought to understand the 
working with MFIs to collect, standardize, 
dynamics of building sustainable institutions. 
analyze, and disseminate data on MFI perfor-
As funding sources and products diversified, 
mance. More than 30 associations have joined 
MIX’s data evolved to capture information on 
the network. 
the nature and terms of MFI funding as well 
Since 2011, MIX has published country 
as the growing array of credit and deposit  briefings, quarterly updates on market devel-
products. In recent years, a renewed focus on 
opments, and market forecasts for major 
understanding the social mission and results 
microfinance markets. These additional tools 
of the sector led MIX to work with industry 
and analysis are available through paid 
peers to standardize, collect, and analyze data 
subscriptions.
on MFI social performance. 
Source: Blaine Stephens, MIX; www.mixmarket.org.
The SAVIX is a centralized reporting system  the mission of promoting transparent pricing in 
that provides transparent, standardized data on  the microfinance industry.12 
SGs (see chapter 6). Data are collected and sub­
The World Council of Credit Unions, the 
mitted on a quarterly basis (see box 5.4).
global trade association and development agency 
The Microcredit Summit database contains  for financial cooperatives, promotes the develop­
information on more providers than other data­
ment of financial cooperatives worldwide and 
bases but only collects information on the num­
advocates for improved laws and regulations. It 
ber of borrowers (totaling 137.5 million in 2010),  maintains a database on its members, providing 
the number of “poorest” borrowers, and profit­
information annually on the number of credit 
ability.10 Summary information is published  unions (by country), total members, savings bal­
annually.11 
ances, loan balances, reserves, and total assets.13 
Microfinance Transparency is an NGO estab­
The World Savings Banks Institute represents 
lished to promote pricing transparency of provid­
savings and socially committed retail banks or 
ers. It maintains a database with microfinance  associations. It maintains a database for savings 
interest rate data for individual country markets  and postal banks that globally tracks total assets, 
and publishes the information as a series of inter­
loans, deposits, capital adequacy, outlets, employ­
active tables and graphs. The database supports  ees, and customers annually.14 
Measuring Financial Inclusion and Assessing Impact 
119

Box 5.4  Savings Groups Information Exchange
SAVIX is an online reporting system that pro-
22 countries were reporting to SAVIX on a vol-
vides transparent and standardized data on  untary basis and uploading quarterly program 
the performance of SGs and the agencies that 
data to the website. 
promote them. In 2012 it collected and vali-
SAVIX enables users to conduct compara-
dated financial and operational data from more 
tive, trend, and geographic analysis with a 
than 80,000 SGs representing over 1.8 million 
choice of filters and metrics. Informed deci-
members in all regions of the developing  sion making improves program planning and 
world. Metrics include measures of outreach 
management, and SAVIX seeks to facilitate 
(for example, number of groups), membership 
analysis, develop norms, and improve the per-
data (for example, percentage of women  formance of institutions that promote SGs. 
members), portfolio indicators (for example,  The site also provides donors and facilitating 
value of loans outstanding), and performance 
agencies with industry benchmarks and analy-
ratios (for example, annualized return on 
 
sis that support planning and investments 
assets). As of mid-2012, 142 projects in 
 
across the sector.
Source: David Panetta, Aga Khan Foundation; www.thesavix.org.
For the most part, these databases collect  (RCTs), and focus group discussions, for exam­
information on outreach and financial perfor­
ple. Demand­side research may identify unmet 
mance used by various stakeholders (see box 5.5).  demand as well as reasons why the uptake of 
However, some databases have recently begun to  services offered (supply) may be lower than 
collect nonfinancial information. Since 2005, the  anticipated. Researchers may also analyze 
industrywide Social Performance Task Force has  structural deficiencies in markets that prevent 
developed ways to measure social performance  the poor from accessing financial services and 
(see chapter 14), creating 22 social performance  explore the opportunities for increased finan­
indicators to assess how an MFI aligns its systems  cial inclusion.
to its mission and measures its social perfor­
Demand­side research often begins with client 
mance. MIX began collecting information on  behavior, attempting to assess transaction vol­
these social performance indicators in 2009, with  umes at the individual and household levels and 
212 MFIs reporting. SAVIX is considering adding  identify links between use and quality of services. 
social performance indicators once they are  This is in contrast to institutionally driven 
established for SGs.
information­ gathering techniques that focus on 
provider performance as a metric for financial 
Demand-Side Research
access. 
Demand­side research seeks detailed informa­
Overall, demand­side research considers how 
tion about how financial services are used and  poor households use financial services and who is 
from what providers. It can be carried out at the  excluded, sometimes also looking at the nature of 
individual, household, or community level and  household cash flow and how money is spent. 
uses a variety of tools, including national sur­
Examples of demand­side studies include the 
veys, panel studies, randomized control trials  World Bank’s Access to Finance, Living Standards 
120 
The New Microfinance Handbook

Box 5.5  Who Uses Landscape Supply Data?
Knowledge is power only if it is used produc-
into a new market or a new product. What 
tively. Who uses the data collected so pains-
types of competition might they encounter? 
takingly by hundreds of organizations? And  Which populations are most underserved? A 
who should be using the information?
subnational view on the data—especially at a 
So far, much activity on financial inclusion 
branch or district level—can be valuable in 
has taken place in the high-level policy sphere. 
addressing such questions. 
Regulators and policy makers use data on 
Networks also use and potentially contrib-
financial inclusion to develop policy and to  ute to landscape data. Landscape data can 
monitor progress. For instance, the Superinten-
give members the big picture and place their 
dency of Banking and Insurance in Peru uses 
activities in context, whether the network 
benchmarks on financial inclusion to measure 
itself has a broad or a narrow focus for mem-
progress in reaching underserved areas.  bership. Networks can also use landscape 
However, MFIs can also use landscape data to 
data to highlight gaps or opportunities for 
support business planning when expanding  donors and investors.
Source: Linthorst and Gaul 2011.
Measurement Study, Global Findex, and FinScope  helping policy makers and others to understand 
databases—the latter two being the most relevant.  the behaviors and constraints regarding consum­
Most financial diaries studies also conduct  ers’ access to and use of financial services. Key 
demand­side research.
characteristics include cross­country compatibil­
ity, availability of demographic covariates, and 
Global Findex 
regular measurement of the entire set of coun­
The Global Financial Inclusion (Findex) database  tries over time (Demirgüç­Kunt and Klapper 
is a detailed demand­side survey covering 150,000  2012). Findex provides a baseline for benchmark­
individuals in 148 economies, measuring how  ing financial inclusion and tracking progress over 
adults use financial services. According to  time, leading to the identification of priorities 
Demirgüç­Kunt and Klapper (2012), “The Global  (see box 5.6): “One of the most fascinating parts of 
Findex fills a major gap in the financial inclusion  the results are people’s answers to obstacles they 
data landscape and is the first public database of  face in getting access to finance, which range 
demand­side indicators that consistently mea­
from too expensive, document requirements, 
sures individuals’ usage of financial products  and too far to travel” (Latortue 2012). 
across countries and over time. Covering a range 
of topics, the Global Findex can be used to track  FinScope
global financial inclusion policies and facilitate a  FinMark Trust is an independent trust based 
deeper and more nuanced understanding of how  in South Africa that seeks to extend financial 
adults around the world save, borrow, and make  access by strengthening the market system. In 
payments.”
2003 FinMark Trust launched FinScope, a 
Findex provides demand­side data by gender,  consumer survey that seeks to understand 
age, education, geography, and income levels,  consumer demand with regard to access  
Measuring Financial Inclusion and Assessing Impact 
121

Box 5.6  Core Indicators of Global Findex
The core set of Global Findex indicators addresses five dimensions of individual use of financial 
services: accounts, savings, borrowing, payment patterns, and insurance. Use of financial ser-
vices refers to how different groups (poor, youth, and women) use financial products. Financial 
inclusion also refers to how easily individuals can access available financial services and prod-
ucts from formal institutions (defined as institutions that are authorized or licensed to offer finan-
cial services and that may or may not be actively supervised). The demand-side data provided by 
Global Findex complement existing supply-side data collected by the IMF’s Financial Access 
Survey and the AFI’s core set of financial inclusion indicators.
The following core set of indicators and subindicators of financial inclusion is based on the 
Global Findex database:
  Use of bank accounts. Percentage of adults with an account at a formal financial institution 
(such as a bank, credit union, post office, or MFI that is registered with the government and 
possibly regulated), purpose of accounts (personal or business), frequency of transactions 
(deposits and withdrawals), percentage of adults with an active account at a formal financial 
institution, and mode of access (such as ATM, bank branch, retail store, or bank agent)
 Savings. 
Percentage of adults who saved within the past 12 months using a formal financial 
institution (such as a bank, credit union, post office, or MFI), percentage of adults who 
saved within the past 12 months using an informal savings club or a person outside the 
family, and percentage of adults who otherwise saved (for example, in their home) within 
the past 12 months
 Borrowing. Percentage of adults who borrowed within the past 12 months from a formal 
financial institution such as a bank, credit union, post office, or MFI (a flow measure), per-
centage of adults who borrowed within the past 12 months from an informal source (includ-
ing family and friends), and percentage of adults with an outstanding loan to purchase a 
home or an apartment (a stock measure)
 Payments. Percentage of adults who used a formal account to receive wages or government 
payments within the past 12 months, percentage of adults who used a formal account to 
receive or send money to family members living elsewhere within the past 12 months, and 
percentage of adults who used a mobile phone to pay bills or send or receive money within 
the past 12 months (not collected in high-income countries)
 Insurance. 
Percentage of adults who personally purchased private health insurance and per-
centage of adults who worked in farming, forestry, or fishing and personally paid for crop, 
rainfall, or livestock insurance.
Source: Demirgüç-Kunt and Klapper 2012.
to transactions, savings, credit, and insurance  their income and manage their financial lives. The 
from both formal and informal providers. 
sample covers the entire adult population, rich and 
FinScope, an initiative of FinMark Trust,  poor, urban and rural, in order to create a seg­
"is a nationally representative study of consum­
mentation, or continuum, of the entire market 
ers’ perceptions of financial services and issues,  and to lend perspective to the various market 
which creates insight into how consumers source  segments." 15
122 
The New Microfinance Handbook

Primarily a demand side­survey, FinScope also   informal, and financially excluded) and enables 
integrates supply­side information, leading to a  comparison of levels of financial  inclusion across 
more holistic understanding of usage. FinScope  countries and market segments (see figure 5.1). 
data sets can be used to inform policies, commer­
Once the “formally unserved” is identified 
cial strategies, and product development as well  through the FinScope survey, the FinScope 
as development agendas (see box 5.7). Donors   livelihoods framework is applied to assess the 
have traditionally financed the surveys, although  individual and factors that affect usage of finan­
costs in some countries are partially recovered by  cial services, leading to a better understanding 
a syndication process whereby stakeholders  of the interventions required to increase finan­
(often commercial but also public) purchase  cial inclusion, specifically the needs of consum­
access to the final results.
ers.16 The result is the access frontier, which 
FinScope data are used to create three key  provides an estimate of the percentage of people 
access indicators including the financial access  who are unserved but could be financially 
strand, the access frontier, and the financial access  included over time. This serves to identify both 
landscape. The financial access strand provides  potential new market opportunities as well as 
detailed analysis of the financial market based on  specific development needs to increase financial 
customers’ level of financial access (formal,  inclusion (see figure 5.2).
Box 5.7  FinScope Surveys
The FinScope survey information supports private and public sector initiatives to improve the 
policy environment and stimulate commercial innovation. For example, 
• Bank Windhoek in Namibia used FinScope to develop its low-income savings product called 
EasySave. 
• In South Africa, the Financial Services Board has used FinScope to improve consumer finan-
cial literacy. According to the board, “The FinScope surveys have played a major role in iden-
tifying consumer financial education needs by following consumer financial behaviour over 
time and in making valuable information available to others for their consumer financial edu-
cation programmes.” The National Treasury in South Africa also used FinScope data to sup-
port the development of a policy of financial inclusion to feed into government processes for 
wide-ranging social security reform. 
• According to African Life Assurance Zambia, “From the time we started using FinScope, we 
have been able to develop a funeral insurance policy for the informal market ... and by under-
standing the current coping mechanisms and the recurrent costs of such mechanisms used 
by the informal sector, we have been able to determine an affordable price.”
• ABSA, South Africa’s largest retail bank, stated, “Until FinScope there was no single source 
of information that provided us with an in-depth understanding of the life styles of different 
segments of South Africa’s population … [FinScope] really gave us that edge in terms of 
getting such an insight that we could really develop a customer value proposition for the 
mass market.”
Source: http://www.finscope.co.za/new/pages/About-FinScope/Using-FinScope.aspx?randomID=d2e9237a-4bf9- 
4272-92ec-8c82443013ea&linkPath=2&lID=2_2; Makanjee 2009.

Measuring Financial Inclusion and Assessing Impact 
123

Figure 5.1  FinScope Financial Access Strand: Defi nitions
The percentage of adults who are banked.
The percentage of adults who are formally served
Adults using commercial bank products.
but who are not banked. Adults using financial
May also be using informal products.
services from providers which are not banks,
such as microfinance institutions or insurance
companies. May also be using informal products.
Banked
Other formal
Formally included
Informally served
Financially excluded
The percentage of adults who are not formally
The percentage of adults who are excluded/
served but who are informally served
unserved. Adults using no financial services
(informal only). Adults using informal financial
to manage their financial lives neither
products or mechanisms only, such as savings
formal nor informal and depend only on
clubs or burial societies.
family/friends for borrowing or saving at home.
Source: Adapted from FinScope, “From Data to Action Brochure,” http://www.fi nscope.co.za/new/scriptlibrary/getfi le.aspx?fi le
name=FS w
orkshop 2011_brochureFNL.pdf&fi le=../module_data/71e3e62d-1eeb-412e-893b-970e98f6a3fa/downloads/03bcf1fe-
0fd2-40de-95f4-ffb73c12f1f0.fi le.
Figure 5.2  FinScope Access Frontier
Current
Market
frontier
potential
Already use
Have access but
Could have access
Unlikely to ever
do not use
but do not
have access
Current market
Enablement
Development
Redistribution
Source: FinScope, n.d.
The fi nancial access landscape provides fur-
savings, credit, insurance or remittance fi nancial 
ther information on access to specifi c products by  products or services. 
creating a diagram with fi ve axes, illustrating the 
While the access strand is a key comparative 
percentage of adults who have used transactional,  measure to see how access has changed over time, 
124 
The New Microfi nance Handbook

it is less successful in accounting for the use of  sector of certain geographic areas, such as the 
multiple products and services. For example,  research reported in Collins et al. (2009) and 
individuals who use both formal and informal  summarized in chapter 2. 
services are only counted as formally included 
Financial diaries use detailed micro­level 
(see box 5.8).
consumer data to paint a complex, realistic pic­
ture of the financial lives of the poor. Data are 
Financial Diaries
gathered on income, consumption, savings, 
Financial diaries also assess demand, albeit of a  lending, and investment over an extended 
(usually) much smaller group (and thus unlikely  period of time (usually one year). A team of 
to be statistically representative at the national  local field workers, trained and supported by 
level) because of the costs involved. Primarily  the research organization, visits every partici­
longitudinal surveys, financial diaries are used to  pating household each week or fortnight and 
understand consumer behavior in the financial  asks members to recount all resources that 
Box 5.8  Interpreting Financial Access Strands
The top-line findings for the access strands from the FinAccess Kenya 2009 survey show that 
the proportion of individuals included in the formal sector increased from 18.9 percent in 2006 
to 22.6 percent in 2009 and that the proportion using “formal other” services (such as SACCOs, 
MFIs, and money transfer services) increased dramatically from 7.5 to 17.9 percent, while those 
using the informal sector (mainly informal financial groups such as rotating savings and credit 
associations, ROSCAs) declined from 35.2 to 26.8 percent. Hence services included in the “for-
mal other” category increased, while informal services declined (see figure B5.8.1). 
Figure B5.8.1  Access Strand Analysis
2006
2009
100%
38.4%
32.7%
26.8%
35.2%
17.9%
7.5%
18.9%
22.6%
0%
Excluded
Informal
Formal other
Formal
Source: FSD Kenya and Central Bank of Kenya 2009.
(continued next page)
Measuring Financial Inclusion and Assessing Impact 
125

Box 5.8  (continued)
However, the access strand classifies a person according to the “most formal” service used. 
A service-by-service analysis presents some contrasting points. Figure B5.8.2 disaggregates the 
“formal other” category and shows a fall in the use of SACCOs, a small increase in the use of 
MFIs, and a large increase in the use of M-PESA. The data also suggest an increase in the use 
of services in the informal sector (ROSCAs, ASCAs, buyers, hire-purchase, local shops, informal 
moneylenders). Although the use of formal sector services rose, so did the use of informal sec-
tor services. This is not apparent in figure B5.8.1, which does not count the use of informal 
services once a person uses a more formal service (moves up the continuum). 
Figure B5.8.2  Service-by-Service Analysis
35
30
25
20
15
10
% of adult population 5
0
y
MFI
SACCO
ROSCA
ASCA
Local shop
Family or friend
M-PESA registered
Bank or building societ
2006
2009
Source: FSD Kenya and Central Bank of Kenya 2009.
Thus the access strand approach needs to be used carefully. First, increased use of “formal” 
sector services does not necessarily mean that the use of “other formal” or “informal” services 
has declined. Second, it is very important to know how services in these studies are classified. In 
Kenya, M-PESA is classified as “formal other,” which implies a significant increase in financial inclu-
sion. However, M-PESA does not intermediate funds in the way that SACCOs and MFIs do, and 
research suggests that many use it simply as a cash-in, cash-out mechanism. Hence being included 
in the category “formal other” via M-PESA use alone does not signal the same quality of inclusion 
as having access to a SACCO or an MFI and may result in misleading classifications of inclusion.
Source: Susan Johnson, Centre for Development Studies, University of Bath.
126 
The New Microfinance Handbook

entered or left the household or business over  financial service providers.17 To identify strate­
the prior period (week or fortnight). Financial  gies for improving access, financial landscape 
diaries enable researchers to examine the  studies focus on the needs of consumers. They 
dynamics of financial behavior by capturing  do not have a bias toward any institutional form 
transactions data in near “real time” and to  of provision; they use a supply­side survey 
examine data in sequence, providing a view  (providers and products) and a demand­side 
inside the “black box” of the household budget  survey (clients) to understand demand for and 
(MFO 2010). 
use of both formal and informal providers as 
Financial diaries can also be used to test a  well as the enabling environment. They also 
new product or delivery channel for a specific  may examine the rules and supporting func­
financial service provider to better understand  tions needed to develop financial markets and 
its target market, such as the work carried out by  expand inclusion of the poor. Based on this 
the Opportunity International Bank of Malawi  understanding, they propose interventions to 
(see box 5.9). 
increase appropriate access. Most often, land­
scape studies are conducted in smaller geo­
Financial Landscape Studies
graphic areas rather than nationally and 
Financial landscape studies combine demand­  sometimes in more than one location for com­
and supply­side data to document what finan­
parative purposes. Financial landscape studies 
cial services are available (both formal and  also may focus on one type of institution or ser­
informal) and how they are used, including  vice innovation, placing it in the context of 
consumer preferences and changes over time,  local competition to examine how these inter­
drawing on data from both consumers and  actions dampen or multiply its impact.
Box 5.9  Cash-In, Cash-Out: Financial Diaries in Malawi
Using financial diaries, Microfinance 
The study determined that the mean 
Opportunities (MFO) undertook research to  number of weekly transactions per house-
explore the extent to which the introduction of 
hold was 19. Cash exchanges between indi-
a mobile “bank-on-wheels” serving rural loca-
viduals were ubiquitous, largely from men to 
tions in central Malawi provided value in areas 
women, suggesting gender-based depen-
without branch offices of the Opportunity  dency on cash gifts and a pervasive informal 
International Bank of Malawi (OIBM). MFO  safety net among family and friends. Savings 
collected transaction data (all inflows and out-
transactions dominated bank use. Although 
flows, including use of financial services) from 
the mobile van was popular initially, OIBM 
just under 200 low-income households, half of 
services rarely replaced informal finance 
whom were OIBM clients using the mobile  and use of the van dropped off markedly. Yet 
bank, for 18 months over 2008–09. The sample 
the OIBM van added value for women cli-
was mostly a mix of poor farmers and micro-
ents; furthermore, the analysis of aggregate 
entrepreneurs. Eight field workers interviewed 
transaction data helped the OIBM to under-
participants at the van stops and recorded  stand client behavior and develop better 
their financial transactions once a week.
products. 
Source: Stuart, Ferguson, and Cohen 2011.
Measuring Financial Inclusion and Assessing Impact 
127

Financial landscape studies seek to answer the  assessment tools), livelihood types, gender, and 
following questions: 
age segmentation. Data are analyzed for descrip­
tive patterns, and regression analysis is used to 
• Supply. What is the landscape of financial ser­
 establish key socioeconomic, demographic, and 
vice supply? Who are the providers of financial  geographic factors determining access and use, 
services? What are the key products offered by  including consumer preferences and changes over 
existing providers? What are the key charac­
time. In addition to the surveys, a comprehensive 
teristics of different types of providers (for  desk review of secondary sources covering finan­
example, prices, volumes, market share, struc­
cial service outreach data (for example, FinScope 
ture of products offered)? What are the limita­
studies, if available) is generally included.
tions of providers reaching the poor?
The financial landscape approach provides 
insight into the behavior of consumers and their 
• Access. What are the level and type of access to  use of financial services and allows results to be 
financial services? What are the key barriers,  contextualized within local profiles of provision—
opportunities, and constraints to accessing  for example, understanding the nature of local 
financial services? What interventions can be  providers and how they fit into the market sys­
considered to improve access and improve  tem. Combining quantitative and qualitative data 
livelihoods in the proposed regions?
allows much deeper insight into consumer pref­
• Use. What financial products and services do  erences and strategies and greater understanding 
the poor use? Which providers do the poor  of their engagement with the market (see box 
use? Are these providers in the formal or infor­
5.10). Financial landscape studies begin to look at 
mal sector or both? To what extent do the poor  the quality aspect of financial inclusion as defined 
use various financial services? Would the poor  by AFI.
use certain products or services that they do 
Financial landscape studies also examine the 
not have access to? Do the characteristics of  wider environment and supporting functions at 
demand provide programming insights?
local and national levels. Information is gathered 
through in­depth interviews with key informants 
• Rules and supporting functions. What rules (for­
(including policy makers, regulators, clients, pri­
mal, informal) and supporting functions (for  vate sector providers, and donors). Rules and reg­
example, infrastructure, funding) do or do not  ulations, infrastructure and delivery channels, 
exist in the market? For example, do weak sup­
information, and funding are all examined; sec­
porting functions constrain access? What role  ondary research is used to support information 
does the government play, and do opportunities  obtained from the interviews. 
exist to improve it? Is there sufficient telecom­
Sometimes financial landscape studies are 
munications and physical infrastructure to  supplemented with further research carried out 
benefit from innovative delivery channels?
through financial diaries, for example, or liveli­
On the supply side, as many providers as pos­
hood landscape studies (see box 5.11).
sible are interviewed to establish what products 
and services they offer, prices and volumes  Monitoring and Evaluation
(accounts, savings, and loans), and competition 
and dynamics of their business. On the demand  In addition to supply and demand research, 
side, a one­time access and use survey is carried  monitoring outcomes and evaluating impact are 
out on a random sample to map existing pat­
important to understanding financial inclusion. 
terns of use against poverty levels (using poverty  In particular, they help to assess quality and 
128 
The New Microfinance Handbook

Box 5.10  Financial Landscapes in Kenya
Landscape research maps the supply and demand sides of financial service provision—both 
formal and informal—and seeks to understand the patterns of use and the reasons for them. 
Financial Sector Development (FSD) Kenya commissioned a landscape research study in 
2010–11 to examine what was occurring in smaller towns and their rural environs. The goal 
was to understand to what extent and in what ways the dynamic changes in the market evi-
dent at the national level were being experienced in specific contexts and by people whom the 
financial sector finds it hard to reach (because of both low incomes and rural context). 
The research was conducted in three towns chosen to reflect different poverty profiles.  
A supply-side survey collected data from banks, SACCOs, MFIs, and informal groups on prod-
uct profiles, number of clients, volume of savings and loans, competition, and local market 
context. On the demand side, questionnaires were completed with small samples (20 house-
holds and multiple users in each household where possible) in each town and in two rural  
sites at different distances from the town, yielding an overall sample of 337 individuals in  
194 households across the three sites. The surveys were followed by in-depth qualitative 
 interviews with 148 individuals. 
Supply-side data were compiled to develop a profile of service provision and products and 
provide insight into competition dynamics. The analysis involved probit regressions to  understand 
socioeconomic characteristics most associated with the use of particular services (for example, 
employment type, poverty level, age, gender, marital status, and distance) and analysis of 
qualitative data to identify the reasons people gave for their service use and preferences. 
The results revealed the following:
• Bank accounts and SACCOs are used to manage payments more than to make voluntary 
savings. 
• Financial groups are used extensively because they offer structure but also flexibility and 
liquidity—in particular, easy access to loans of sizes that individuals need on a frequent basis 
rather than the much larger loans offered by formal providers.
• Mobile money services are used extensively because they allow access to liquidity through 
social networks but are not used for saving beyond an emergency reserve. 
Source: Susan Johnson, Centre for Development Studies, University of Bath.
welfare, the last two dimensions of financial 
Generally four main components are included 
inclusion as defined by AFI. 
in monitoring and evaluation—inputs, activities, 
Monitoring involves the regular collection of  outputs, and outcomes. Inputs are the basic 
data, generally quantitative, while evaluation  resources used, activities are the set of actions 
involves periodic or one­time in­depth analysis of  taken, outputs are the deliverables, and out­
performance against objectives and anticipated  comes are the net result of the outputs over time. 
outcomes. Impact assessment attempts to deter­
Long­term outcomes are sometimes referred to 
mine if there is a change in consumer welfare and,  as impacts. These can all be viewed within a 
if so, what the change is and if it can be attributed  logic model (see figure 5.3).
to the use of financial services (or an intervention 
The logic model (also known as the theory of 
seeking to enhance financial inclusion). 
change or results chain) links the results that we 
Measuring Financial Inclusion and Assessing Impact 
129

Box 5.11  Livelihood Landscape Studies
Livelihood landscape studies are similarly qual-
Special attention is paid to understanding the 
itative in orientation and employ the same  composite livelihood strategies that individuals 
methods as financial landscape studies, but  pursue (for example, small business, plus 
with a focus on the livelihood strategies of the 
farming, plus support from family), how the 
target population, including the range of occu-
pieces fit together, and the reasons for com-
pations and perceived advantages and disad-
bining them. These studies also attempt to 
vantages of each. Livelihood landscape studies 
understand differentiated access to livelihood 
move beyond occupation to encompass the  strategies and the factors that boost or inhibit 
full range of activities that contribute to the  access to financial services—for example, 
subsistence of individuals and households.  class, gender, or ethnicity. 
Source: Microfinance Opportunities.
Figure 5.3  Logic Model Definitions
Long-term outcomes – Change of state: includes factors beyond
what program can achieve on its own; program contribution
Decreasing control and increasing time
Medium-term outcomes – Change in behavior or practice; highest
level for program accountability; measured at end of program
Short-term outcomes – Change in skills, awareness, access, or
ability, measured during program; often intangible
Outputs – Completed activities
Activities – Actions taken or work performed
Inputs – Financial, human, material, and information resources
Source: Aga Khan Foundation 2011.
would like to see with the activities and inputs  client welfare, help funders to understand the 
that are in place (see box 5.12).18
impact of their investments, and, coupled with 
measuring financial inclusion, help policy makers 
Assessing Impact
to adjust policies and make budget allocation 
Impact assessments evaluate long­term outcomes.  decisions. Academics use impact assessments to 
They help providers to understand the effect  answer rigorous academic questions regarding 
of their services (both positive and negative) on  the role and function of financial services in the 
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The New Microfinance Handbook

Box 5.12  Measuring Outcomes of Facilitating Savings Groups
Facilitators of SGs generally anticipate outcomes in multiple domains that take hold within the 
first two years of group participation and deepen with time. The five domains of outcomes are 
as follows: 
1.  Stronger economic capacity. Asset accumulation, consumption smoothing, income- 
generating investment, income, management of finances, savings
2.  Increased social capital. Solidarity (with other members), collective activities taken on by 
members, increase in leadership roles taken on by members in the community
3.  Increased self-empowerment. Increased self-confidence, greater decision-making power in 
the household
4.  Greater food security. Increased food consumption or more varied diet
5.  Other. Changes due to targeted activities, such as increased specific knowledge or changes 
in behavior. 
Source: Gash 2012. 
lives of the poor. With the increased interest in  assets, power, or decision making at the house­
and emphasis on financial inclusion, stakeholders’  hold level. For example, if credit or crop insur­
interest has moved beyond increasing the number  ance is concentrated on more profitable but risky 
of account holders to understanding if consumers  cash crops mostly controlled by men, it is impor­
are benefiting from financial services and if those  tant to assess the potential welfare effects of shift­
are provided using fair and prudent practices.
ing resources away from crops that are controlled 
Traditional impact assessment measures the  largely by women (Copestake 2004).
developmental outcomes intended (and unin­
Historically, impact assessment was often con­
tended) by the use of financial services; it tries to  ducted to determine if a particular provider’s ser­
identify links between product use and client  vices or delivery were having any impact on its 
welfare.19 Impacts can be economic, sociopoliti­
clients. The purpose was to improve their prod­
cal, or cultural. Economic impacts include broad  ucts and services based on findings from the 
changes in economic growth—for example, move­
assessments. While there are benefits to this 
ments from a barter to a monetized economy  approach, the following section provides a 
(particularly in rural settings), business expan­
broader discussion on impact assessment and 
sion or transformation of enterprises, net gains in  research methodologies, some of which may not 
income within subsectors of the informal econ­
be used extensively by individual providers (for 
omy, or a reduction in the vulnerability of poor  example, RCTs; see box 5.13).
people through consumption smoothing and risk 
management. Sociopolitical impact could include 
changes in policies that enhance the business  Research
environment or improvements in human devel­
Generally all research begins with an over­
opment indicators within a region (such as  arching question that guides the focus, meth­
changes in nutrition or educational outcomes).  odologies, and tools used to carry out the 
Cultural impact may include redistribution of  research. The research question may be in the 
Measuring Financial Inclusion and Assessing Impact 
131

Box 5.13  The Changing Focus of Impact Assessment
The audience for microfinance impact assess-
The need for cash to smooth consumption 
ments is diverse. The original stakeholder  and provide working capital trumps all.
group—providers, donors, and academics—
Thus the tension persists between credi-
has expanded to include investors, policy  bility born of research rigor and useful infor-
makers, and regulators. Yet despite stake-
mation. The ongoing, rapid evolution of the 
holder diversity, the reasons to invest in  industry has fed the need to prove impact. 
impact assessment have not changed that  Rigorous approaches to research are seen as 
much. Proving impact was, and still is, needed 
essential to generating credible results, and, 
to justify the allocation of public and private 
consequently, interest in conducting RCTs 
resources. However, impact assessments  has exploded. An important pool of knowl-
can also play a role in market research because 
edge has thus been generated, albeit one that 
client data can help providers to improve their 
seems disconnected from the dynamics of 
products and services. These two agendas  the industry or institutional practicalities of 
form the prove-improve continuum that  delivering services. 
guides the design and use of assessment. 
Despite several recognized “good” and 
For those seeking to prove impact, the  credible studies, the industry still has much 
methodological challenges of causality, selec-
progress to make. While it is no longer a 
tion bias, and fungibility of money persist. In 
 single-product industry focused exclusively on 
the mid-1990s, these difficulties led some to 
working capital loans, the bulk of impact 
reject impact assessment, arguing that those 
assessments still addresses the effects of 
who want to prove the causal relationship  microcredit. Recognition of market segmenta-
between microcredit and poverty alleviation  tion and product differentiation has yet to 
face an uphill battle. Instead, they proposed 
spawn products and services that respond to 
easier, more practical proxies. Early advocates 
clients’ changing life-cycle requirements. 
of commercialization, for example, argued  Broader impact assessment and financial 
that repeat loans are a good indicator of the 
inclusion studies are needed. 
positive value that borrowers ascribe to micro-
What has perhaps changed is how impact 
credit and can serve as a reasonable proxy for 
assessment findings have played out in the 
difficult-to-obtain impact data. In the interven-
public arena. As the audience has grown, this 
ing years, both arguments have shown their 
information has, in some countries, become 
weaknesses, the welfare effects of access to 
more politicized, and the results of the new cri-
credit have proven marginal, and repeat bor-
tiques have been co-opted by politicians to the 
rowing reflects the scarcity of capital available 
detriment of providers and their clients. The 
to low-income populations more than the  microfinance crisis in India between 2009 and 
appropriateness of the products they use.   2011 reflected this misalignment of interests. 
Source: Monique Cohen, Microfinance Opportunities.
form of a hypothesis, which is a proposed  will lead to a lower incidence of theft (Nelson 
explanation for a phenomenon or a presumed  n.d.). A hypothesis can be confirmed, denied, 
correlation between cause and effect—for  or proposed for further investigation via qual­
example, the provision of payment services  itative or quantitative research. A research  
132 
The New Microfinance Handbook

question can also be open ended. For example,  • Sensitive. Capable of demonstrating changes 
research can be conducted (or commissioned) 
and capturing change in the outcome of inter­
by an investor to assess the financial landscape 
est (national per capita income is unlikely  
in an area to determine constraints and opportu­
to be sensitive to the effects of a single 
nities for funding, by a donor to determine the 
intervention)
impact of a particular intervention, or by a pro­
• Timely. Possible to collect relatively quickly
vider to better understand the needs of their cli­
ents or potential clients.
• Cost-effective. Worth the cost to collect, pro­
cess, and analyze
Indicator Selection
• Ethical.  Acceptable to those providing the 
Indicators are specific data that are linked to 
information. 
objectives and hypotheses (if applicable). These 
indicators allow defined changes to be measured 
Indicators help researchers to measure what 
or analyzed, help to develop an understanding of  they believe to be affected; however, if the focus 
whether the hypotheses are correct, and highlight  is only on measuring indicators, the research 
other unexpected changes or processes. Indicators  may miss unintended or unanticipated impacts, 
need to relate closely to the changes that an orga­
both positive and negative. Ideally research 
nization or researcher hopes to observe. Wider  efforts track indicators for consistency and 
impacts—those beyond the immediate financial  accountability and pose a broader set of ques­
and social benefits for the individual or house­
tions for understanding wider or unanticipated 
hold—are difficult to identify and assess. Since  impacts.
many of the wider changes examined are difficult  Research Approaches
to measure directly, proxies are often used instead. 
In addition to being SMART (specific, measur­
The overall approach taken to proving the 
able, achievable, realistic, and time­bound), indi­
research hypothesis or answering the research 
cators ideally have the following characteristics  question is influenced by the research objectives, 
(Dunn, Kalaitzandonakes, and Valdivia 1996):
the quality of information required, the interests 
of various stakeholders, and the research bud­
• Valid. Measure what they are intended to mea­
get.20 Many decisions need to be made about the 
sure and capture effects due to the interven­
scope of the study, including size (number of  
tion rather than external factors
individuals, households), time frame (a one­time 
survey or a longitudinal study), unit of study 
• Reliable. Verifiable and objective, so that, if  (transactions, individuals, households, or enter­
measured at different times or places or with  prises), and geographic coverage (local, national, 
different people, the conclusions will be the  regional, or global). 
same
Choices also include whether the research 
• Relevant. Directly linked to the objectives of  should be an ongoing process of collecting infor­
the intervention 
mation for a period of time (such as financial 
diaries), a one­off survey, or a survey with two or 
• Technically feasible. Capable of being assessed  more rounds, such as baseline or endline, that is 
and measured
repeated after a period of time; whether the 
• Usable. Understandable and ideally providing  research will study the financial sector as a 
useful information to assess performance and  whole or will focus on an individual provider or 
inform decision making
a particular product (or potential product); 
Measuring Financial Inclusion and Assessing Impact 
133

whether it will look at demand or supply or the  Quantitative Research
overall financial landscape; and who will carry  Quantitative research collects data to create gener­
out the research. A key decision is the balance  alizable results from a sample of the population of 
between qualitative and quantitative approaches  interest. It measures the reactions of many subjects 
or a combination of the two. Combining differ­
to a set of predetermined questions. The process of 
ent tools can increase the credibility and useful­
measurement is central to quantitative research 
ness of the research, but adds complexity and  because it provides the fundamental connection 
cost.
between empirical observation and mathematical 
expression of quantitative relationships. Thus 
Qualitative Research
sampling (choosing which persons, households, or 
Qualitative research is undertaken to gain an  enterprises) must be random and large enough to 
understanding of human behavior and the rea­
represent the population adequately. Properly 
sons for it. Qualitative methods investigate the  designed quantitative studies can provide reliable 
why and how of decision making, not just the  results because of the statistical validity of the find­
what,  where, and when. Qualitative methods  ings and the lack of bias in the sampling methodol­
capture what people have to say in their own  ogy. But these approaches are not as flexible as 
words and describe their experiences in depth.  qualitative methods, so they are best suited when 
Qualitative research helps us to discover what  there is some idea of the situation on the ground. 
we do not know we do not know because it is 
Quantitative research commonly uses 
flexible and adaptable, which allows us to fol­
 surveys—predesigned and pretested question­
low up on interesting, unanticipated findings.  naires administered in formal interviews. Surveys 
Hence, qualitative research uses small, focused  contain questions with a limited set of answers so 
samples, whereas quantitative research uses  that the results can be quantified, compared, and 
large samples. Sampling is generally purpo­
analyzed statistically. Because quantitative 
sive—that is, respondents are chosen because  research is associated with statistical analysis of 
they have specific characteristics and can pro­
responses from a large number of clients, it is con­
vide information on the specific focus of the  sidered a more “scientific” approach than qualita­
research. The type of information the researcher  tive methods. Quantitative methods allow 
is looking for will determine the type of individ­
researchers to determine how extensive a phe­
uals chosen, the time spent with each individ­
nomenon is and if it exists with statistical cer­
ual or group, and the size of the sample. In cases  tainty, but they are less able to measure unforeseen 
of very small samples, selecting “informa­
impacts or phenomenon. 
tion­rich” clients to interview is critical (Patton 
Quantitative research methodologies can be 
1990).
nonexperimental, quasi­experimental, or exper­
Qualitative research is generally carried out  imental. Nonexperimental studies look at the 
using individual in-depth interviews, focus group  differences in behavior between different peo­
discussions,  or participant observation. These  ple and relate the degree of access to variations 
interviews and discussions can form the basis  in outcomes. Quasi­experimental and experi­
for case studies, which assess the needs, condi­
mental studies look at what changes take place 
tions, opportunities, and limitations of a small  over time between a treatment group (who 
number of individuals. Participatory rapid  accesses services) and a control group (who does 
assessment (PRA) expands on the traditional  not access the service and who, otherwise, is 
focus group discussion, making it particularly  believed to be identical to the treatment group). 
interactive (see box 5.14).
Baseline and follow­up surveys are conducted 
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The New Microfinance Handbook

Box 5.14  Participatory Rapid Assessment 
PRAs are derived from classic sociological and anthropological approaches in that they involve 
the use of semistructured interviews with key informants, participant observation, and the 
methodological principles of triangulation and open-endedness. However, compared to tradi-
tional approaches, PRA techniques are more interactive. Workshop activities engage respon-
dents by using drawings, stories, and theater, encouraging them to identify significant changes 
that have occurred in their lives as a result of access to financial services. PRAs use the following 
techniques:
• Social mapping and modeling drawn by participants, indicating which institutions and struc-
tures of their community are important in their lives
• Seasonality maps or calendars, allowing communities to show how various phenomena in 
their lives vary over the course of a year
• Daily time-use analysis to track how participants use their time, allowing participants and 
researchers to obtain a sense of responsibilities, challenges, and opportunities for structuring 
interventions 
• Participatory linkage diagrams, showing chains of causality
• Venn diagrams, showing the relative importance of different institutions or individuals in the 
community
• Wealth ranking
• Product attribute ranking
• Life-cycle needs analysis
• Cash mobility mapping, providing an understanding of where the community goes to 
acquire or spend cash (markets, wage labor, cooperatives) and leading into a discussion of 
supply and demand.
Source: Ledgerwood 1998.
with both groups, and results are compared to  the use of a financial service should affect both 
show what happened as a result of using the  populations equally, so any difference in how 
financial services and what happened in the  these populations change over time can be 
absence of using them. 
attributed to the effects of the financial services 
Quasi­experimental studies are nonrandom­
being studied. 
ized, while experimental methods, or RCTs, ran­
No one method is perfect, however, because 
domly assign groups or individuals to treatment  various methodological challenges are inherent 
or control groups. While no one can ever know  in research: 
what would have happened to a specific individ­
ual had they not participated in an intervention,  • Attribution. The difficulty of attributing 
a random control group forms a counterfactual 
changes to a specific activity (access to or use 
(what would have happened in the absence of 
of financial services), given the complexity of 
whatever is being studied) for the group of indi­
environments shaped by an array of factors, 
viduals or households who use the service or 
including economic forces, social and cultural 
receive the benefit. Changes that are not due to 
norms, and the political climate 
Measuring Financial Inclusion and Assessing Impact 
135

• Fungibility. The exchange or substitution of  control and treatment groups are selected ran­
one thing for another—in this case, fungibility  domly, the households in those groups should be 
means that money can be used for many pur­
equivalent, on average, on all observable (for 
poses, with changes in intention occurring  example, education levels) and unobservable 
quickly. Assessing the impact of borrowing for  (for example, an individual’s entrepreneurial 
a business, for example, assumes that the bor­
skills, organizational ability, or access to social 
rower used the loan capital for the business  networks) characteristics (Bauchet and Morduch 
and that the borrower did not just reduce his  2010). Randomized designs make it possible to 
or her borrowing from other sources (that is,  uncover the net impact of the intervention, free 
substitution)
of selection bias.22
However, experimental methods only esti­
• Selection bias. The systematic differences in  mate the average impact of accessing services or 
characteristics of people self­selecting to 
  other interventions. They do not provide an 
participate in an intervention or access a finan­
understanding of the median impact, and in prac­
cial service and whether these characteristics  tice they say little about the distribution of 
make them more likely to benefit from use of  impacts. For example, if access makes one person 
the service (Gash 2012) 
much better off and all others a little worse off, an 
• Causality. The relationship between an event  RCT might conclude that the average impact is 
(the  cause)  and a second event (the effect),  positive if the positive impact for that one person 
where the second event is understood to be a  is large enough to offset the sum of negative 
consequence of the first. The difficulty of iso­
impacts for everyone else (Bauchet and Morduch 
lating a variable causal impact is commonly  2010). That said, if the sample is large enough, 
referred to as a causality bias
data can be disaggregated into subcategories to 
While these challenges have persisted  see the impact on certain groups. 
through decades of social research, some new 
Furthermore,  spillovers (or leakage)  can 
techniques are being used to address, in particu­
occur when randomiz ing at the individual level, 
lar, issues of sampling bias and causality. Overall,  for example, when someone transfers from the 
nonexperimental and quasi­experimental designs  treatment group to the control group or vice 
are generally considered better at showing associ­
versa (leakage) or when mem bers of the control 
ation or correlation than at proving causation  group are inadvertently affected by the treat­
(Gash 2012). By randomly assigning people to  ment. This could happen, for example, when a 
treatment and control groups (experimental  borrower gives part of her loan to a friend in the 
design), RCTs attempt to overcome the causality  control group or when a client receiving train­
bias; since the selection bias is removed, it is pos­
ing shares some of the lessons with someone 
sible to attribute the impact to use of the service  not assigned to the training (Bauchet and 
(see box 5.15).
Morduch 2010). 
RCTs are very good at providing an estimate of 
Randomized Control Trials
impact, but the results may be difficult to general­
At the time of writing, randomized control trials  ize to other settings. This means they may have 
are relatively new in microfinance and thus are  high internal validity (estimates are credible on 
described in more detail here.21 In addition to  their own terms), but not external validity (con­
overcoming selection biases, RCTs are one of the  clusions are applicable to a wider range of situa­
few methods (if not the only method) that can  tions). For example, when conducting RCTs, 
account for unobservable factors. Because the  researchers are sometimes forced to use a 
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The New Microfinance Handbook

Box 5.15  The Difficulty of Proving Causation
One significant issue to consider is the ability of a study design to prove causation or eliminate 
outside factors that could otherwise explain the results. A useful way to think about the link 
between methodologies and their ability to prove causation is to consider where the methodol-
ogy would fall on a spectrum, as shown in figure B5.15.1. The farther the methodology is to the 
right-side arrow, the better it proves causality, and the farther it is to the left-side arrow, the less 
it proves causality and only shows association (or correlation). In general, the more rigorous the 
method, the more likely that cause can be attributed to the intervention.
Figure B5.15.1  The Spectrum of Evidence
ASSOCIATION
CAUSALITY
Field experience, anecdotes
Interviews, case studies
Client surveys
Quasi-experimental with nonrandomized
comparison group
Randomized control trials
Source: Gash 2012; provided by Kathleen Odell, Brennan School of Business, Dominican University.
Quasi-experimental and nonexperimental studies indicate where impact may lie and help to 
identify important questions that can be answered more confidently with experimental studies. 
They are more flexible in terms of identifying unanticipated impacts and can sometimes more 
easily incorporate the context of the situation. Their results can also hint at the “why” of results 
that are not explained otherwise. The longer-term nonexperimental studies give us an idea of 
additional impacts that may emerge as participants use services for longer than the one- to 
three-year span of some RCTs. On a practical level, quasi-experimental and nonexperimental 
studies can be less expensive and easier to implement. Quasi- and nonexperimental studies, or 
even monitoring systems, can be used to check for similar results elsewhere. In essence, all 
three designs complement each other by filling in gaps and triangulating data. 
Source: Gash 2012.
 
nonstandard population, making the results 
  intermediate outcomes and considering other 
less valid externally. While nonrandomized  contexts to which the conclusions would apply 
approaches may collect data on larger geographic  (or conduct multiple studies in different contexts).
areas or diversified populations, thus having 
RCTs are sometimes considered unethical 
fewer problems with external validity, the  because they require that a portion of the popula­
internal validity of these methods is often far less  tion does not receive access to the intervention 
satisfactory. To reduce external validity prob­
being evaluated. Furthermore, the choice of who 
lems, well­designed RCTs try to understand the  does or does not receive the intervention cannot 
“why” of impacts by gathering information on  be made based on who needs it the most or who 
Measuring Financial Inclusion and Assessing Impact 
137

deserves it the most. However, sometimes ran­
phenomenon and to verify something as more 
domly selecting participants can be “fairer” than  likely to be true and not due to just one or a few 
other selection mecha nisms when, for example,  respondents who could be biased. Similarly, sec­
funding is too limited to serve everyone who is  ondary sources and desk reviews of existing find­
eligible. In this case, publicly randomizing who  ings can supplement primary research. 
benefits and who does not can improve fairness 
Table 5.1 summarizes the various research 
(Bauchet and Morduch 2010). 
methods and their usefulness. 
Mixed Methods
Poverty Assessment Tools
A combination of quantitative and qualitative 
methodologies often provides more comprehen­
Poverty assessment tools (or calibrated income 
sive findings than one approach alone. Mixed  proxy tools) are used to determine the poverty 
methods can be carried out simultaneously, using  levels of groups or individuals being studied.23 
different research teams or mixed methods in one  While most often associated with social perfor­
study. For example, combining quantitative  mance monitoring, they are discussed here 
household surveys to track changes with qualita­
because they are often used in various research 
tive focus group discussions and key informant  efforts (for example, financial landscape studies 
interviews expands the understanding of contex­
or impact assessments) to assess the level of pov­
tual factors and may lead to unexpected ideas.
erty of a group being studied. They allow 
A mixed approach can also be sequential.  researchers (or providers or others) to estimate 
Qualitative work can inform what questions  the rate of poverty incidence in a population  
should be measured with quantitative work or  (or their clients) without having to measure 
explore unusual findings from quantitative stud­
income or consumption directly through time­
ies. Different studies can build on one another in  consuming household budget surveys. 
expected or unexpected ways. For example, qual­
Poverty assessment tools include short, coun­
itative studies indicate that SG members seem to  try­specific surveys with indicators that have 
increase their saving rates from the first to the  been identified as the best predictors of whether a 
second cycle because, by the end of the first cycle,  given set of households is very poor, according to 
members have come to trust the model, under­
the legislative definition of extreme poverty 
standing that they are able both to save and to  applicable to the country in question. Once the 
earn profits on their savings. However, comple­
gathered data are entered into a template, soft­
mentary quantitative data show that this increase  ware can estimate the share of households living 
in saving from the first to the second cycle is much  below the applicable poverty line. The construc­
stronger for the first group in the village than for  tion of the tool relies on a set of indicators that are 
later groups in the same village. Having learned  correlated most strongly with poverty in the 
from the experiences of the first group, later  nationally representative expenditure surveys. 
groups understand better how the model works  Each tool is meant to be administered by mini­
and tend to start out with higher saving rates and  mally trained staff in 20 minutes or less.
thus do not experience as great an increase 
Table 5.2 presents an overview of poverty 
(Cojocaru and Matuszeski 2011).
assessment tools commonly used in microfinance 
All research benefits from triangulation—  to measure absolute and relative poverty. Absolute 
that is, checking data with respondents and  measures classify people as poor or nonpoor in 
cross­checking the information with others to  relation to a defined poverty line (national or 
confirm different points of view of the same   international, like purchasing power parity of 
138 
The New Microfinance Handbook

Measuring Financial Inclusion and Assessing Impact
Table 5.1  Research Methods and Their Usefulness 
Method
Application
Advantages
Disadvantages
Usefulness
Randomized control 
Uses structured 
Regarded as the 
Difficult to design and administer if the 
Useful for measuring the effects of 
trials (RCTs) comparing  surveys to measure 
most rigorous 
treatment group is self-selecting (that is, 
specific innovations where 
treatment and control 
variables and changes 
statistical method; 
buying a service). In the case of a self-
randomization is possible and for 
groups
attributable to the 
avoids “selection 
selecting treatment group, encouragement 
measuring the impact variables of 
steps in a 
bias” because the 
design can be used, which allows anyone to  interest (for example, specific 
presuggested chain of  treatment and  
take up the treatment, but randomly  
products or services such as 
results when samples 
control groups are 
assigns the encouragement. Study 
savings accounts, weather 
are sufficiently large 
identical on average
questions cannot be changed mid-study
insurance)
Quasi-experimental 
Uses structured 
More approximate in  Easier to implement than RCTs; results are  Similar to RCTs, useful for 
research comparing 
surveys to measure 
that the control 
similar, but control group is not a perfect 
investigating specific interventions 
before and after 
changes attributable to  groups method is  
counterfactual because it is not randomly 
and where the sample is 
characteristics in 
a step in the results 
not an exact control 
selected. The costs of the survey design, 
sufficiently large but, for 
treatment and control 
chain; could be useful 
implementation, and analysis are identical 
operational reasons, RCTs are  
groups (before-after 
for pilot projects 
for RCTs and for nonrandom control 
not feasible 
with control group; 
groups. Careful design and measurement 
 
also control variables 
are needed to ensure accuracy. Not valid 
before-after studies)
when the control group is significantly 
different from the treatment group, 
especially with regard to underlying  
trends in both groups 
Participatory 
Used where the 
Might be the only 
Might be subjective, open to bias 
Useful for understanding access to 
approaches (for 
change in behavior 
way to show 
and use of financial services at the 
example, focus 
might have been 
attribution; can 
local level; complements RCTs in 
groups)
caused by different 
uncover 
understanding causal pathways 
factors
unanticipated 
impacts
Opinions of key 
Might be used when 
Low cost
Might be influenced by interviewer; open 
Especially useful for understanding 
informants and expert 
the key change is 
to subjective interpretation
processes of policy change and 
interviews
driven by one person 
where causes of market changes 
(for example, policy 
are being established (for example, 
change)
demonstration effects) and are 
necessary for assessing 
development of rules and 
supporting functions 
Case studies analyzing  Used where qualitative  Low cost; can be a 
Might not represent the universe of 
Very useful at all stages of logic 
changes in behavior  
understanding is 
good indication of 
beneficiaries; can be time-consuming;  
model or results chain and 
and performance 
needed to interpret 
attribution, if well 
might be influenced by interviewers
especially important for 
139
quantitative data
designed and 
understanding changing patterns of 
executed
use by clients 
Source: Johnson 2009.

140
Table 5.2  Main Poverty Assessment Tools Available for Microfinance Practitioners 
 
Tool
Purpose
Description
Implementation
Pros
Cons
Grameen 
Estimates the % of poor  Country-specific poverty 
Scorecard can be 
Good balance of ease of  Makes no urban-rural 
Foundation 
clients, based on one or 
scorecard with 10 questions 
applied to a sample of  use and accuracy; can be  distinction;b not 
Progress out of 
two poverty lines and 
(socioeconomic indicators 
clients or to the entire  used for targeting and 
available for all 
Poverty Index 
the probability of an 
that correlate with poverty); 
client base; 
for assessing changes in  countries; validity of 
(PPI)
individual falling below 
indicators are derived from 
implemented by field 
poverty levels; a results 
indicators changes  
the poverty line; 
large-scale nationally 
staff and can be used 
can be compared across  over time
measures absolute 
representative surveys 
before, during, or after  regions
poverty 
service delivery
USAID poverty 
Estimates the % of poor  Country-specific poverty 
Scorecard can be 
Good balance of 
Data cannot be 
assessment tool  clients, based on one or 
scorecard of 16–33 questions  applied to a sample of  accuracy and ease of 
disaggregated and are 
(USAID PAT)
two poverty lines; 
(socioeconomic indicators 
clients or to the entire  use; results can be 
not available for all 
provides an absolute 
that correlate with poverty); 
clientele; implemented  compared across 
countries; validity of 
measure of poverty
indicators are derived from 
preferably after clients  countries and regions
indicators changes  
large nationally 
join the program
over time 
representative surveys
FINCA client 
Broad client assessment;  A 130-question survey 
Surveys a sample of 
Provides a 
Relies on clients’ recall 
assessment tool  allows classification of 
divided in sections: 
clients, interviewed  
comprehensive 
of past expenditures to 
(FCAT)
the population according  demographic and loan 
at periodic intervals
assessment of clients’ 
measure poverty levels, 
to different poverty lines,  information, household 
well-being and a fair 
which is prone to 
based on expenditure 
characteristics, expenditures, 
amount of information 
measurement errors
data; provides an 
assets, access to facilities 
that can be used for 
absolute measure of 
(water, electricity, health 
management 
poverty
care), business types, and 
client satisfaction and exit 
CGAP poverty 
Assesses the poverty 
Questionnaire includes a 
Surveys a sample of 
Uses multidimensional 
Lengthy survey; 
assessment tool  levels of MFI clients 
range of indicators (adapted 
200 clients and 300 
definition of poverty 
demanding of technical 
(CGAP PAT)
compared to nonclients 
to local context): 
nonclients; 
input (highly qualified 
The New Microfinance Handbook
within the operational 
demographic characteristics;  implemented by 
staff) that does not 
area of an MFI, based on  housing quality; assets (type,  external consultants
build internal capacity 
a multidimensional 
number, and value); 
for future in-house 
index; provides a relative  educational level and 
replication
measure of poverty; can 
occupation of family 
use secondary data to 
members; food security and 
put relative measures 
vulnerability; household 
into a regional, national, 
expenditures on clothing  
or even international 
and footwear (poverty 
context
benchmark)

Measuring Financial Inclusion and Assessing Impact
Housing index
Identifies poor 
Uses a simple index that is 
MFI staff visit the 
Easy to verify; can be 
Limited definition of 
households in relation to  adapted to the local 
communities and 
used for targeting, 
poverty; accuracy 
the community where 
conditions, in terms of 
apply the index to 
monitoring, and 
depends on the actual 
they live, based on the 
housing conditions
identify potential 
assessment
link between poverty 
structure and conditions 
clients; applied before 
status and housing 
of their dwelling; 
or after service 
conditions
provides a relative 
delivery
measure of poverty
Means test
Assesses the level of 
Uses household surveys  
Short interviews 
Combines simple 
Indicators may or may 
poverty of households 
with a small number of easily  conducted by field 
indicators with short 
not be closely linked to 
based on a composite 
verifiable indicators; includes  staff with all potential 
survey and standard 
poverty; accuracy is 
index; provides a relative  asset ownership (land, 
clients; applied before  scoring system, 
unknown
measure of poverty
livestock, radio, television), 
or after service 
simplifying 
sociodemographic 
delivery
implementation; good 
characteristics, and others 
for targeting, monitoring, 
and assessing
Participatory 
Identifies the poor in a 
Involves mapping the 
Participatory appraisal 
Provides a rich picture of  Requires staff with 
 
wealth ranking 
community, based on 
community, ranking 
carried out in the 
livelihood strategies, 
strong participatory 
community perceptions 
individuals by level of wealth,  community; facilitated  nature, and causes of 
facilitation skills; 
of wealth (measures 
triangulating results, and 
by experts and MFI 
poverty; can be highly 
accuracy is unknown
relative poverty)
classifying individuals 
staff before or after 
correlated with national 
the program; 100–500  poverty lines
households
Source: Ines Arevalo, consultant to the Aga Khan Agency for Microfinance drawing from Social Performance Task Force (2009); CGAP (2003); IFAD (2006); Simanowitz, 
Nkuna, and Kasim (2000); SEEP Network (2008); www.progressoutofpoverty.org; www.povertytools.org; http://www.microfinancegateway.org/p/site/m/template.rc/ 
1.11.48260/1.26.9234/
a. Does not establish causality.
b. While the urban-rural indicator has been tested for power of prediction, it has never been included in a PPI. It was found that adding a rural-urban indicator did not  
improve the PPI accuracy as much as other indicators that are also correlated with the geographic location of the household (including ownership of agricultural land, type 
of dwelling, access to electricity). Geographic variation has also been accounted for by adjusting the poverty line that is used to construct the scorecard to the cost of 
living in different regions of a country (Grameen Foundation 2008, 13; personal communication with Mark Schreiner). 
141

US$1.25 a day). Relative measures classify people  robust relationship be expected. In general, 
in relation to other people of the same community  this over­simplification of the definition of pov­
or geographic area. Absolute measures allow  erty leads to less accurate assessments. Other 
comparisons across providers, countries, and so  tools rely on a wider set of indicators (for exam­
forth and are useful for impact assessment (Zeller  ple, participatory wealth ranking), but these are 
2004). In general, tools that measure absolute  derived subjectively, which means that the rate 
poverty perform better at the aggregate level—
of poverty cannot be compared across regions. 
that is, they are more accurate when they mea­
An important caveat applying to most tools 
sure the rate of poverty in a group of people and  included in table 5.2 is their validity over time. 
not the poverty status of an individual. If the pur­
As the underlying relationship between the set 
pose is to target beneficiaries, relative measures  of indicators and poverty changes, the accuracy 
are a better alternative. However, the Progress  of the tool is reduced. This means that tools need 
out of Poverty Index (PPI) of the Grameen  to be updated (more recent national surveys 
Foundation, unlike the poverty assessment tool  need to be conducted in the case of PPI and PAT 
(PAT) of the USAID or the client assessment tool  or the participatory wealth ranking exercise 
(FCAT) of the Foundation for International  needs to be conducted again) and extra effort 
Community Assistance (FINCA), which all  made to allow inference of conclusions from the 
 measure absolute poverty, can also be used for  application of the tools to different points in 
targeting because of the methodology used to  time.
derive the indicators. 
None of the tools included in the table uses 
income as an indicator of well­being, as con­
Notes
sumption is generally considered a better indica­
 1. http://www.cgap.org/p/site/c/template 
tor of welfare than income and is preferred as a 
.rc/1.26.14235/.
poverty measurement.24 Of the tools presented in   2. www.theMIX.org.
table 5.2, two attempt to measure expenditure as   3. www.finscope.co.za.
well (FCAT and CGAP PAT). However, large   4. http://data.worldbank.org/data­catalog/
samples and advanced techniques that do not rely 
financial_inclusion.
on recall over large periods of time are required to   5.  For example, see http://www.themix.org/
reduce the error in estimations. To overcome this 
publications/microbanking­bulletin/2012/ 
issue, most tools use indicators that are correlated 
02/over­indebtedness­and­investment­ 
with poverty, such as household characteristics, 
microfinance.
dwelling structure, ownership of assets, human   6.  Regulated financial service providers are 
capital, and access to service facilities (Zeller 
required to report to central banks, but their 
2004). 
reporting is not standardized across countries. 
The two tools whose set of indicators has 
The reporting of unregulated providers can be 
the strongest correlation with poverty are the 
especially complicated. Credit unions often 
Grameen Foundation’s PPI and USAID’s PAT, 
report to their own apex body. Mobile money 
as they derive the final set of indicators from 
providers are governed by specific legislation 
and thus may or may not be captured in 
large nationally representative income and 
reports from regulators. Further, there is no 
expenditure household surveys. Other tools 
systematic method for tracking outreach and 
such as a housing index rely on a single indica­
contribution to financial inclusion of NGOs 
tor to predict poverty; only when there is a very 
and non­bank financial institutions (Linthorst 
strong correlation with that one indicator can a 
and Gaul 2011). 
142 
The New Microfinance Handbook

 7.  AFI defines three levels of “formal” providers, 
US$1 or less per day. Profitability is measured 
each with implications for regulatory  
as “operating self­sufficiency,” which is income 
reporting: (a) registered institutions, such as 
divided by cash costs for a given period, with 
cooperatives or loan companies, that offer 
no standardization of loan loss provisioning 
financial services but are not required to 
and no adjustments for the effects of subsidies. 
provide information to a regulator,  
Operating self­sufficiency is self­reported by 
(b) institutions, such as remittance agents, 
the MFIs, unverified, and not reported 
that are authorized (or licensed) to offer 
publicly, although the Microcredit Summit 
financial services but are not actively  
independently verifies MFIs’ reported number 
supervised and have limited or no reporting 
of borrowers, where possible. 
obligations, and (c) institutions that are 
11. http://www.microcreditsummit.org.
authorized and directly supervised on an 
ongoing basis. This is the most restrictive 
12. http://www.mftransparency.org/. 
definition, but is also the level at which 
13. http://www.woccu.org/memberserv/
financial regulators have the most influence.
intlcusystem.
 8.  The Global Partnership for Financial 
14. http://www.wsbi.org/.
Inclusion subgroup is proposing G­20 basic 
15. www.finscope.co.za.
financial indicators built on the AFI core  
16.  FinScope brochure, “From Data to Action,” 
set of indicators (Ardic, Chen, and  
http://www.finscope.co.za/new/scriptlibrary/
Latortue 2012).
getfile.aspx?filename=FS workshop 2011_ 
 9.  Administrative unit is defined by each country 
brochureFNL.pdf&file=../module_data/ 
and could, for example, refer to municipality, 
71e3e62d­1eeb­412e­893b­970e98f6a3fa/
township, county, or other (depending on the 
downloads/03bcf1fe­0fd2­40de­95f4­ffb73c 
country). Access points are defined as 
12f1f0.file.
regulated access points where cash­in 
17.  This methodology was developed for financial 
(including deposits) and cash­out transactions 
services by Susan Johnson, University of 
can be performed. This would include 
Bath.
traditional bank branches and other offices of 
18.  The logic model, combined with the plan to 
regulated entities (such as MFIs) that perform 
assess progress toward expected outcomes, is 
these functions. Depending on the type of 
often expressed in a log frame analysis or a 
transactions permitted, this could include 
performance monitoring framework.
agents of regulated entities and ATMs (only 
those that perform cash­in as well as cash­out 
19.  Transactions­level analysis, for example, can 
transactions). Regulated entities are entities 
isolate unusually large household expenses 
that are prudentially regulated and 
and study the transaction patterns  
supervised. Since regulations vary by country, 
surrounding them. When looking at the value 
a country should disclose which types of 
and frequency of transactions, it is possible to 
financial institutions are included in the 
identify previously unseen trends and 
calculation (for example, banks, cooperatives, 
opportunities to design and deliver improved 
MFIs). Adults refer to the population 15 years 
financial services.
of age and older; if a different age is used 
20.  This section draws from Nelson (n.d.).
because of country­specific definitions, a 
21.  This section was contributed by Alyssa 
country should disclose the age threshold 
Jethani and is summarized from Bauchet and 
used. See AFI (2011). 
Morduch (2010).
10.  “Poorest” borrowers are defined as individuals 
22.  Some variations of quasi­experimental 
among the lowest half of individuals living 
research can approximate experimental 
below the national poverty line or living on 
methods, such as regression discontinuity 
Measuring Financial Inclusion and Assessing Impact 
143

design, which relies on an arbitrary cutoff or 
Aga Khan Foundation. 2011. “Monitoring, 
rule to produce two populations that are 
Evaluation, and Learning Plan.” Internal 
essentially similar except that only one has 
document, Aga Khan Foundation, Geneva. 
access to or has used the service; natural 
*Ardic, Oya Pinar, Gregory Chen, and Alexia 
experiment, which is an RCT that occurs 
Latortue. 2012. “Financial Access 2011: An 
without any intent to create a research 
Overview of the Supply­Side Data Landscape.” 
situation; and encouragement design, which is 
Access to Finance Forum Reports by CGAP and 
a form of RCT that can be used when it is 
Its Partners 5, CGAP and IFC, Washington, DC, 
illegal or unethical to deny a service to 
May. 
participants. Here, the randomization pertains  *Bauchet, J., and J. Morduch. 2010. “An 
to who gets extra “encouragement” to take up 
Introduction to Impact Evaluations with 
a service that everyone is free to join (Janina 
Randomized Designs.” Financial Access 
Matuszeski). 
Initiative, New York, March.
23.  This section was contributed by Ines Arevalo, 
CGAP (Consultative Group to Assist the Poor.) 
consultant to the Aga Khan Agency for 
2003. “Microfinance Poverty Assessment 
Microfinance. 
Tool.” Technical Tools Series 5, CGAP, 
24.  Income is widely believed to be inappropri­
Washington, DC. 
ate as a welfare indicator because, first, it 
CGAP and World Bank. 2009. Financial Access 
does not capture emergency coping strategies 
2009: Measuring Access to Financial Services 
(for example, borrowing, selling assets, and 
around the World. Washington, DC: CGAP and 
consumption smoothing) and, second, it is 
World Bank.
prone to large measurement errors—in 
———. 2010. Financial Access 2010: The State of 
economies with large informal markets, 
Financial Inclusion through the Crisis. 
people might find it difficult to recall their 
Washington, DC: CGAP. 
earnings or might be unwilling to report 
*Chaia, Alberto, Aparna Dalal, Tony Goland, Maria 
parts of their income (Haughton and 
Jose Gonzalez, Jonathan Morduch, and Robert 
Khandker 2009).
Schiff. 2009. “Half the World Is Unbanked: 
Financial Access Initiative Framing Note.” 
Report, Financial Access Initiative, New York. 
References and Further Reading
Cojocaru, Laura, and Janina Matuszeski. 2011. 
* Key works for further reading.
“The Evolution of Savings Groups: An Analysis 
*AFI (Alliance for Financial Inclusion). 2010a. 
of Data from Oxfam America’s Savings for 
“Financial Inclusion Measurement for 
Change Program in Mali.” Draft, Oxfam 
Regulators: Survey Design and 
America, Boston, November.
Implementation.” Policy paper, Data Working 
*Collins, Daryl, Jonathan Morduch, Stuart 
Group, AFI, Bangkok.
Rutherford, and Orlanda Ruthven. 2009. 
———. 2010b. “Financial Inclusion Measurement 
Portfolios of the Poor: How the World’s Poor 
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Live on 2 Dollars a Day. Princeton, NJ: 
Kuala Lumpur. http://www.afi­global.org/sites/
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default/files/fidwg_measurementoverview_
*Copestake, J. 2004. “Impact Assessment of 
porteous_0.pdf.
Microfinance Using Qualitative Data: 
———. 2011. “Measuring Financial Inclusion: Core 
Communicating between Social Scientists and 
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Practitioners Using the QUIP.” Journal of 
Working Group, AFI, Bangkok. http://www 
International Development 16 (3): 355–67.
.afi­global.org/sites/default/files/afi%20
*———. 2011. “Microfinance Impact and Innovation 
fidwg%20report.pdf. 
Conference 2010: Heralding a New Era of 
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MIX (Microfinance Information eXchange). 2010. 
Identifying the Poorest Families.” http://www 
“Social Performance Indicators.” Report, MIX, 
.microcreditsummit.org/papers/povertypa­
Washington, DC, January 11. 
perH.pdf.
*Nelson, Candace, ed. n.d. “Learning from Clients: 
*Social Performance Task Force. 2009. “Poverty 
Assessment Tools for Microfinance 
Targeting and Measurement Tools in 
Practitioners.” SEEP Network, Washington, DC. 
Microfinance.” SPTF User Reviews, vols. 8–9. 
CGAP, Washington, DC, October.
Patton, Michael Quinn. 1990. Qualitative 
Evaluation and Research Methods. 2d ed. 
Stuart, Guy, Michael Ferguson, and Monique 
Newbury Park, CA: Sage Publications.
Cohen. 2010. “Managing Vulnerability: Using 
Financial Diaries to Inform Innovative 
Schreiner, M. 2010. “Seven Extremely Simple 
Products for the Poor.” Report, Microfinance 
Poverty Scorecards.” Enterprise Development 
Opportunities, Washington, DC, January. 
and Microfinance 21 (2): 118–36.
———. 2011. “Cash In, Cash Out: Financial 
SEEP (Small Enterprise Education and 
Transactions and Access to Finance in Malawi.” 
Promotion) Network. 2008. “Social 
Microfinance Opportunities, Washington, DC, 
Performance Map.” Social Performance 
January. 
Working Group, SEEP Network,  
Washington, DC. 
World Bank. 2011a. “Household Financial Access: 
Using Surveys to Understand Household 
Simanowitz, Anton. 2000. “Making Impact 
Financial Access: The Research Agenda.” 
Assessment More Participatory.” Working 
World Bank, Washington, DC. 
Paper 2, Imp­Act, University of Sussex, June.
———. 2011b. “Living Standards Measurement 
———. 2004. “Issues in Designing Effective 
Study.” World Bank, Washington, DC.
Microfinance Impact Assessment Systems.” 
Working Paper 8, Imp­Act, University of 
Zeller, M. 2004. “Review of Poverty Assessment 
Sussex, January.
Tools.” Report submitted to IRIS and USAID as 
part of the Developing Poverty Assessment 
Simanowitz, Anton, Ben Nkuna, and Sukor Kasim. 
Tools project.
2000. “Overcoming the Obstacles of 
146 
The New Microfinance Handbook

PART II
FINANCIAL SERVICE 
 
PROVIDERS


CHAPTER 6 
Community-Based Providers
Candace Nelson

“There are many devices for turning small savings 
Informal financial services tend to be flexible, 
into usefully large lump sums—the main money-  convenient, and close to where the poor live; how-
management task of the poor. Most of it is done in  ever, they may not always be available when or in 
the informal sector” (Rutherford 2009). People  the amounts needed. As discussed in chapter  1, 
often borrow from or save with a friend or a rela-
informal financial service providers are referred 
tive to help smooth cash flow, take advantage of  to as community-based providers (see figure 6.1). 
an opportunity, prepare for a life-cycle event, or 
Community-based providers offer flexible ser-
address an emergency. Informal groups, formed  vices that can accommodate uncertain cash flows 
for the purposes of mutual aid or savings and  and provide discipline to encourage  regular sav-
credit, are also common. An early analysis of  ings and loan payments. One of the greatest 
the Global Financial Inclusion (Global Findex)   benefits of community-based providers is acces-
database 2012 reports, “Community-based sav-
sibility, determined by both proximity and prod-
ings methods such as savings clubs are widely  uct features (for example, minimal administra tive 
used in some parts of the world but most com-
procedures, no collateral requirements, low trans-
monly in Sub-Saharan Africa. Among those who  action costs, flexible terms) that suit the needs of 
reported any savings activity in the past 12 months,  poor women and men. However, limited product 
48 percent reported using community- based sav-
offerings and potential unreliability are some of 
ings methods”; of these, 34 percent reported hav-
their disadvantages. Somewhat more so than 
ing saved using only a community savings club  institutional providers (discussed in chapter  7), 
(that is, not in addition to a formal account)  community-based providers are vulnerable to  
(Demirgüç-Kunt and Klapper 2012).
collapse or fraud, whether because of corruption, 
Community-Based Providers 
Community-Based Providers
149

Figure 6.1  The Range of Financial Service Providers
Community-based providers
Institutional providers
Community-based groups
Individuals 
Indigenous groups:
Registered institutions
Regulated institutions
Moneylenders
ROSCAs, ASCAs
Financial cooperatives
Deposit-taking MFIs
Deposit collectors
Burial societies
SACCOs
Savings and postal banks
Pawnbrokers
Facilitated groups:
Suppliers, buyers
State banks
Traders
CVECAs
NGO MFIs
Commercial microfinance banks
Shop owners
Savings groups
Mutual insurers
Non-bank financial institutions
Friends, Family
Self-help groups
Money transfer companies
Commercial insurers
Financial service associations
Mobile network operatorsa
Level of formalization
Note: ROSCAs = rotating savings and credit associations; ASCAs = accumulating savings and credit associations; CVECAs = caisses 
villageoises d’épargne et de crédit autogérées
; SACCOs = savings and credit cooperatives.
a. Mobile network operators are regulated as communication companies; most are not licensed to provide financial services.
lack of discipline, or collective shocks—for exam-
type of expense, such as a funeral). Group 
ple, a natural disaster or a bad harvest (Robinson  members determine the rules that govern the 
2001). Borrowing from family and friends can also  group. 
be associated with stigma or loss of dignity, espe-
Facilitated providers are groups (not individu-
cially if borrowers become dependent on others  als) that receive external training or assistance, 
or over-indebted (Ruthven 2002).
typically provided by nongovernmental organiza-
Informal or community-based financial ser-
tions (NGOs) or government, to develop and 
vice providers can be divided into two broad  implement a process for saving and lending. Many 
 categories: indigenous and facilitated.
forms of facilitated groups have been introduced 
Indigenous providers, both individuals and  over the years, but perhaps the largest, most well-
groups, emerge within communities with no  known are India’s Self-Help Groups (SHGs). 
external input or training. Individual providers  Most facilitated groups follow a set of procedures 
such as moneylenders generally offer basic  designed to help them to save regularly, pool their 
credit services using their own capital. As local  savings, and make loans. Some operate solely 
 residents, they offer convenience and a rapid  within their community; others federate, borrow 
response. Indigenous groups are different;  from banks to on-lend to their members, and take 
their most common goal is to combine small  on other development activities in addition to 
sums into bigger ones, the purpose of which  financial services. Despite their diversity, facili-
varies with the type of group. A rotating savings  tated groups serve people who typically may not 
and credit association (ROSCA) pools money to  have access to other financial services. They have 
circulate among the members in turn, while a  a relationship with an external facilitator (often 
mutual aid society pools member contributions  time-bound) that introduces an approach or 
to have funds available to respond to unex-
model with procedures and systems to guide their 
pected or emergency expenses (often a specific  financial activities.
150 
The New Microfinance Handbook

Indigenous Providers
loans (Demirgüç-Kunt and Klapper 2012). In addi-
tion to personal relations, individual community- 
Individual indigenous providers include money-
based providers such as moneylenders or shop 
lenders, deposit collectors, informal traders, pawn-
owners are common and operate either as licensed 
brokers, store owners, and informal money transfer  providers or completely informally. 
providers. Some traders, processors, and input 
As part of the local community, moneylenders 
 suppliers also operate informally, while others are  are not only easily accessible to borrowers, but 
more formal in nature (and thus are discussed  often have personal relationships that enable 
briefly in chapter 7 as well). Indigenous groups  them to evaluate the borrower’s repayment 
include ROSCAs, accumulating savings and credit  capacity. These factors allow for fast transactions 
associations (ASCAs), and burial societies. Table 6.1  in locations convenient to the client. However, 
summarizes their key characteristics. 
moneylenders can be very expensive. For exam-
ple, in many countries a standard loan from a 
Individual Providers
moneylender is a “5/6 loan”—that is, for every 
Family and friends are the most common providers  five units borrowed, six must be repaid. This 
of financial services in the informal sector in all  amounts to a periodic (daily, weekly, monthly) 
developing-economy regions, but especially in  interest rate of more than 20 percent (Helms 
Sub-Saharan Africa, where 29 percent of adults  2006). Individuals are often willing to pay high 
report friends and family as their only source of  prices in exchange for receiving cash quickly and 
Table 6.1  Characteristics of Community-Based Financial Service Providers: Indigenous Groups
Individual  
Community-based groups 
(money lenders, deposit 
Money transfer  
(ROSCAs, ASCAs,  
Characteristic
collectors, traders)
(hawala systems)
burial societies)
Legal form
No formal legal form; 
No formal legal form, 
May be registered with 
adhere to local customs; 
adhere to local customs; 
local authorities or 
sometimes registered
sometimes registered
community leaders
Regulation and  Typically not regulated; 
Not regulated
Not regulated
oversight
sometimes local oversight 
or registration
Ownership
Owner operated
Owner operated
Member owned
Governance
Self-governing
Self-governing
Self-governing; sometimes 
an elected committee
Target market
Poor and very poor needing  Poor and very poor needing  Poor and very poor needing 
credit or a place to save
quick and accessible 
small amounts of credit and 
transfer services
a safe place to save 
frequently
Products
Basic credit and savings; 
Informal money transfer 
No capital costs; user fees 
contractual savings with 
across geographic 
to cover operating costs 
some collectors
distances
and profits
Funding
Own capital; interest and 
No capital costs; user fees 
Member contributions or 
fees collected to cover 
to cover operating costs 
savings; sometimes external 
operating costs and profits
and profits
borrowing; interest and fees 
(no operating costs)
Community-Based Providers 
151

 conveniently, particularly in an emergency when  basis, while money guards generally expect 
there are no other options. 
 clients to come to them (see box 6.1). Collection 
Pawnbrokers are also characterized by a high  normally occurs over a specified period of time, 
volume of small advances made for a relatively  after which the depositor’s savings are returned 
short period. In contrast to most moneylenders,  net of fees. Fees are charged either as a percent-
pawnbrokers take physical possession of collat-
age of the amount deposited or as a flat fee per 
eral when lending. In some countries this  deposit. Research shows that the amount 
 practice has become more formalized, with  charged is similar to the total cost, direct and 
rules, standards, and registration required. Loan  indirect, of depositing directly with a bank or 
amounts are normally significantly smaller in  saving in real assets (Ashraf, Karlan, and Yin 
value than the collateral pledged. Given the  2006). Clients may use deposit collectors for 
 necessary processing, valuing, and storing of  various reasons, including convenience, lack of 
collateral, a pawnbroker’s transaction costs may  connectivity, or cultural restrictions. Deposit 
seem high given the small amounts borrowed.  collectors provide structure to accumulate sav-
These transaction costs, however, are partly off-
ings, offering both safety and discipline. Saving 
set by the fact that the pawnbroker does not take  with a deposit collector is not without risk, how-
time to evaluate the borrower or monitor the  ever, as clients may not be able to access funds 
loan (Skully 1994). Loans are made strictly on  when needed or the collector may disappear 
the basis of collateral, which can be sold to  with their savings. 
recover the loan amount (most pawnbrokers 
Shop owners sometimes hold cash they receive 
also operate a retail store to sell goods that are  from clients who want it out of the house; they 
not collected). 
also often provide credit to trusted clients who 
Deposit collectors or money guards—people  take goods “on credit” and pay for them at a later 
who collect and store savings—are common-
date. 
place in the developing world. They offer a con-
Especially in agriculturally dependent rural 
venient way to put cash safely out of reach  areas, traders may be important sources of infor-
without having to spend money and time on  mal credit for farmers. For example, credit may 
travel. Deposit collectors travel to their clients,  be extended to purchase raw materials with the 
visiting their homes or businesses to collect a  promise that they will sell the product back to the 
predetermined amount on a daily or weekly  trader. 
Box 6.1  Ghana’s Susu Collectors
Ghana is home to a large number of susu col-
basis. The susu club is a variation on this col-
lectors in the informal sector who go door to  lection system, wherein members go to a 
door collecting savings for a fee, mostly from  designated place on a scheduled day of the 
female market vendors and microentrepre-
week to deposit their savings with the susu 
neurs.  Susu  collectors  have an average of  collector, who uses the group format to ser-
150–200 clients and collect deposits at  vice a much larger number of clients.
homes within the village on a daily or weekly 
Source: Gallardo 2001.
152 
The New Microfinance Handbook

While credit and savings are the most  because they are discreet and involve little to no 
 common services associated with individual  paperwork. They are also more accessible, espe-
providers in the informal sector, money transfer  cially for those without documentation in the 
providers—individuals specializing in transfer-
sending country, and may seem more trust-
ring money from one person to another—offer a  worthy because they are underpinned by per-
fast, usually safe, and cost-effective way to trans-
sonal relationships (see box 6.2).
fer funds domestically and internationally. 
Individual providers in the informal sector 
Informal fund transfer systems vary in structure  offer advantages associated with operating inside 
and complexity. Hand carrying cash, usually by  the community, including accessibility, conve-
migrants who are often family or friends, is the  nience, small transactions, and familiarity. They 
most basic system and especially common in  provide direct cash-in, cash-out services, with all 
 situations of seasonal or circular migration,  transactions taking place on a personal basis usu-
when migrants frequently return to their homes.  ally right in the village. This makes transaction 
Internationally, cash is physically transferred by  costs relatively low, although the price of ser-
couriers; domestically, it is transferred by bus  vices is normally quite high. As individual pro-
companies and taxi drivers (Isern, Deshpande,  viders are often the only option available, the 
and Van Doom 2005). Many senders and 
  poor are forced to accept both their costs and 
receivers prefer informal transfer mechanisms  risks, including theft and fraud. Association with 
Box 6.2  Beyond Carrying Cash: Informal Money Transfer Systems
More sophisticated informal systems exist  the payment to the beneficiary upon sub-
under different names around the world,  mission of the code.
 including  hundi (South Asia), fei-chen (China), 
After the transfer, hawaladars settle 
hui kwan (Hong Kong SAR, China), padala 
 
accounts through payment in cash or in 
(the Philippines), phei kwan (Thailand), and  goods and services. They are remunerated by 
hawala (the Middle East). Many of these systems, 
senders through a fee or an exchange rate 
such as those common in African mineral- 
spread. Hawaladars often exploit fluctuations 
exporting countries like Angola, evolved as  in demand for different currencies, which 
mechanisms for financing trade and transfer-
 enables them to offer customers better rates 
ring net funds against the movement of  than those offered by banks (most of which 
goods.
only conduct transactions at authorized rates 
The  hawala system used in the greater  of exchange). Since many hawaladars are also 
Middle East is representative of how such  involved in  businesses where money trans-
systems work. Typically, a migrant makes a 
fers are necessary, such as commodity 
payment to an agent (hawaladar) in the coun-
 trading, transfer services fit well into their 
try where he works and lives, and the   existing activities. Remittances and business 
 hawaladar provides a code to authenticate 
transfers are processed through the same 
the transaction. The hawaladar asks his  bank accounts, incurring few, if any, additional 
counterpart at the receiving end to make  operational costs.
Source: Isern, Deshpande, and Van Doom 2005.
Community-Based Providers 
153

illegal  activities is also a risk, even though most  tontines (West Africa), chit funds (India), kibati 
people are not aware that they are taking place.  (Tanzania),  stockvel (South Africa), and esusu 
Informal providers require minimal documenta-
(Nigeria). ROSCAs are the simplest form of finan-
tion and, by definition, are not regulated.
cial intermediation: several people form a group 
and contribute an agreed amount on a regular 
Indigenous Groups
basis. At each meeting (or round), the money is 
Member-owned community groups have proven  collected, and the total is given to one member on 
effective in providing basic financial services,  a rotating basis. When the last member has 
especially in remote areas or urban slums char-
received the lump sum, the group can choose to 
acterized by inadequate infrastructure and low  start a new cycle or disband. 
savings and debt capacity. They provide mem-
Easy to form and manage, ROSCAs are com-
bers mutual encouragement to save and to use  mon in many countries. A study by the Institute 
money wisely, as well as an economic safety net  for Financial Management and Research in India 
to protect them in the event of sudden hardship.  estimates that the registered chit fund industry 
In so doing, they promote savings discipline,  could be as large as 10–50 percent of all lending to 
build social capital, increase assets, and decrease  priority sectors; the unregistered chit fund mar-
household vulnerability to financial and other  ket could be as large as 15 times the registered 
shocks.
market (Linder 2010). 
Poor women and men find these groups easily 
ROSCAs are structured to allow for financial 
accessible because they are local and offer few  services overseen entirely by group members. 
barriers to entry. Members know each other and  Since all members contribute the same amount at 
learn to rely on each other to achieve financial  each meeting, each individual member accesses 
goals together that would be unattainable alone.  the same sum of money at some point during the 
A common goal of community-based financial  life of the ROSCA for use at her discretion.1 
groups is accessing a lump sum of money, either  Transactions take place only during regularly 
through saving or borrowing, where embedded  scheduled meetings (often monthly) and are typ-
social relations reinforce repayment. Some  ically witnessed by every member. In addition, 
groups establish social funds to help members in  since no money is retained by the group, often no 
times of crisis. This experience of managing  records are required (other than possibly the list 
funds together and using their collective strength  of who is to receive the funds when), and there is 
both to enhance household finances and to help  no need to safeguard funds. The system further 
friends in need builds solidarity within groups—
reduces risk to members because it is time 
one important reason why people often maintain  limited— typically lasting no more than 12 months. 
their membership in community-based groups  This mitigates potential losses should a member 
even after they have gained access to formal  take the funds early and stop contributing. These 
financial services. 
characteristics make the system transparent, 
There are three predominant types of indige-
flexible, and simple, providing a financial service 
nous groups: ROSCAs, ASCAs, and informal  well suited to poor communities with low literacy 
microinsurers. 
rates. At the same time, many people who are 
better- off financially also join ROSCAs, both to 
Rotating Savings and Credit Associations
save for a specific purpose and to take advantage 
ROSCAs exist in developing countries around the  of the social capital that develops. While ROSCAs 
world and are known locally by many names:  typically attract more women than men, mixed 
merry-go-rounds (Kenya), tandas (Mexico), 
  ROSCAs also exist. 
154 
The New Microfinance Handbook

However, a ROSCA’s simplicity is counterbal-
save regularly, but the combined contributions 
anced by risk and lack of flexibility:
are not distributed at each meeting; instead, sav-
ings are pooled for the purpose of lending to 
• AllROSCAmembersreceivethesameamount members. While all members save, not everyone 
of money in a predetermined order. Each must  borrows. Members borrow only when needed, in 
wait her turn regardless of need, and there is  amounts that they and the rest of the members 
no flexibility to contribute more or less than  are confident will be repaid. 
the agreed amount.
Since members do not all transact in the same 
• Thefunddoesnotgrowinvalue,asnoloans way, ASCAs are more complex than ROSCAs. 
are made and no interest is paid. 
Members may borrow different amounts on 
 different dates for different periods. Interest 
• Thosewhoarelastinlinerisknotreceiving  payments provide a return on savings that is 
their payout if the group disbands. When a  shared fairly among the group. ASCAs may be 
ROSCA collapses, members who have not yet  “time-bound,” with members saving, borrowing, 
received their proceeds have no recourse.
and repaying for a predetermined amount of 
As a result of these limitations, informal sec-
time, usually 6–12 months. However, given the 
ondary markets may be created, whereby one  diversity of indigenous ASCAs, the cycle can 
member pays a premium to another member to  vary in length, with some choosing to operate 
switch turns. These premiums sometimes  indefinitely (see box 6.3). Depending on the time 
exceed 50 percent or more of the value of the  frame and the simplicity of their structure, 
proceeds. 
ASCAs can operate without keeping any records 
by periodically dividing the accumulated funds 
Accumulating Savings and Credit Associations
equally. However, more complicated ASCAs 
While still indigenous, an ASCA is a more flexible  require bookkeeping, particularly those that 
and more complex group savings mechanism  deal in large amounts or operate for long periods 
than a ROSCA. Like a ROSCA, group members  of time. 
Box 6.3  Rural ASCAs in India
In northern India, the good ASCA leaders  • They take top-up contributions, often
and bookkeepers are known in the commu-
Rs100 per share, during start-up. 
nity, so setting up a new ASCA involves little 
• During lean seasons members can defer
more than identifying reliable members 
contributions by converting the required 
with a shared need for financial services. 
savings amount into short-term loans of up 
Further more, ASCAs have adopted several 
to two months. 
measures to address the seasonality of rural 
• Theyaremuchstricteraboutloanrepay-
cash flows: 
ment at the end of the cycle (usually 
 another surplus season) than they are in 
• They start operations during surplus
the middle.
seasons.
Source: Abhijit and Matthews 2009.
Community-Based Providers 
155

Informal Microinsurers
offer an important service at the community 
The third category of community-based financial  level. The risk of fraud is potentially high, how-
service providers focuses on the provision of  ever, as leaders may abscond with the accumu-
insurance. Community-based organizations that  lated funds (Churchill and Frankiewicz 2006). 
provide insurance are owned and managed by 
Stretcher clubs are indigenous community 
their members. Their closeness to the market  groups, often found in rural areas, that address 
enables them to design and market products more  health emergencies. Members contribute small 
easily and effectively, yet they are disadvantaged  amounts weekly or monthly, as determined by 
by their small size and scope of operations. They  club rules and the structure of the group. When 
normally only operate in a limited geographic  a member falls ill and needs to be transported to 
area, creating a high risk that the same misfortune  medical care, the costs of transport and other 
will befall a large number of clients at the same  ancillary fees associated with medical care are 
time (covariance risk). The resulting simultane-
covered. In a few cases, members are literally 
ous claims can deplete the organization’s fund or  carried on stretchers to the appropriate health 
substantially reduce individual payments. By def-
center, but the club normally provides cash to 
inition, they are unlicensed and therefore cannot  cover other relevant costs. Stretcher clubs are 
obtain reinsurance (see chapter 11). Some  managed within the community, with leaders 
community- based microinsurers create federa-
determining formation, rules, contributions, and 
tions with others, which can improve oversight  benefits. 
and management, but this is not common. 
According to Roth, McCord, and Liber  Facilitated Groups
(2007, 24), “There are numerous [types] of infor-
mal insurers throughout the poorest 100 coun-
In many parts of the world, indigenous ROSCAs, 
tries, covering tens of millions of low-income  ASCAs, and informal insurance schemes have 
people through hundreds of thousands of tiny  been enhanced through facilitation (training and 
informal groups.” Two of the most common are  capacity-building support), often provided by 
burial societies and stretcher clubs.
nongovernmental organizations (NGOs) or other 
Burial societies assist members during bereave-
external agencies. Training supports improved 
ment. They can consist of a few households or  governance, recordkeeping, security, and, some-
several thousand people from different neighbor-
times, access to additional services. Examples of 
hoods in a large city. A burial society is managed  facilitated groups in the informal sector include 
at the community level; members draw up a con-
Savings Groups (SGs), SHGs, and community 
stitution specifying operations, contributions,  associations (see table 6.2). 
participation, and benefits policies. Members 
SGs are essentially “time-bound distributing” 
make their payments monthly or weekly and—
ASCAs. They have grown significantly since their 
similar to commercial insurance—do not receive  emergence in Africa in the early 1990s. SHGs are 
benefits if their payments are not up to date. In  generally not time-bound and are most often 
the event of death, benefits are paid to the mem-
linked to banks for access to wholesale loans. 
ber’s family to cover funeral costs. Certain burial  They exist in various forms in many countries, 
societies lend out the money they collect in  but are most common in India. Less prevalent but 
order to generate additional resources. Burial  more formalized groups include Financial Service 
societies offer financing in times of great eco-
Associations (FSAs) and caisses villageoises 
nomic and personal uncertainty and, as such,  d’épargne et de crédit autogérées (CVECAs). While 
156 
The New Microfinance Handbook

Table 6.2  Characteristics of Community-Based Financial Service Providers: Facilitated Groups
Community 
associations  
Characteristic
SGs
SHGs
(FSAs, CVECAs)
Legal form
May be registered with local  May be registered with local  Registered with a 
authorities or community 
authorities or community 
central authority
leaders
leaders
Governance
Self-governing via an elected  Self-governing via an 
Self-governing via an 
committee
elected committee
elected committee
Target market
Poor and very poor, requiring  Poor and very poor, 
Poor and often rural
small amounts of credit and 
requiring credit and a safe 
a safe place to save 
place to save
frequently
Products
Basic savings and credit; 
Basic savings and credit; 
Basic savings and 
often insurance; sometimes 
sometimes nonfinancial 
credit products
nonfinancial services
services
Management  
Self-managed with initial 
Often outsourced to literate  Ongoing external 
and reporting
technical assistance from  
members of the community  support provided for  
a facilitating agency
or to an SHG federation
a fee
Funding
Member savings
Member savings and often 
Member savings and 
external credit
sometimes external 
credit
Sustainability: 
Groups independent after 
Need minimum of three 
Varied sustainability 
overall 
9–18 months
years to function 
and independence
independence
independently; often 
federations provide  
ongoing support
still community-based, they are larger and behave  associated with costly life-cycle events. Regular 
more like financial cooperatives, remaining rela-
meetings keep financial management at the front 
tively informal. They generally rely on ongoing  of members’ minds, leading them to think criti-
external management, unlike other community-  cally about their fiscal behavior. In short, they 
based groups, where the facilitation process nor-
learn by doing in a relatively safe and reliable 
mally ends (although SHGs may also require  environment. Yet some advocates believe that 
ongoing assistance).
facilitated financial groups can do more to 
By offering financial services to members,  improve members’ financial capabilities and 
many of whom have had limited access to sav-
thereby increase financial inclusion. Offering 
ings and loans, these facilitated groups support  financial education to group members is a proac-
financial inclusion. In the process, they also  tive strategy that can enhance the benefits of 
build members’ financial capability. Through  facilitated groups. Financial education  intro-
participation in groups, members have an oppor-
duces people to good money management prac-
tunity to save and borrow, to generate more sta-
tices with respect to earning, spending, saving, 
ble cash flows, and to manage the challenges  borrowing, and investing. Thus there is a  natural 
Community-Based Providers 
157

fit between the experiential learning linked to  12-month cycles. Members develop their own 
group participation and the content of financial  rules for meeting frequency (usually weekly, but 
education. Financial education can help to  sometimes fortnightly or monthly), savings 
achieve the following:
requirements, and loan terms. In some variants of 
Savings Groups, every member saves the same 
• Increasemembers’knowledgeofhowtoman-
amount, which the group can decide to vary dur-
age money, especially as they have access to  ing the cycle to reflect the seasonality of the local 
small loans and lump sums that were not avail-
economy. In other variants, members save 
able to them prior to joining the group
through the purchase of shares; the share price is 
• Enablememberstoplanforfutureexpenses
decided by the group and cannot be changed dur-
ing the cycle. At each meeting, every member has 
• Allowmemberstocompareproducts,anespe-
the opportunity to buy one or more shares, usu-
cially critical skill for those who use their  ally to a maximum of five. Their pooled savings 
group experience to gain access to formal  (the loan fund) are lent to members, with loan 
microfinance institutions (MFIs) and banks 
size often limited to a maximum multiple of sav-
• Help members to understand the costs and ings, often three times. The circulation of capital 
benefits of the various forms of mobile money  earns interest for the loan fund. 
and electronic wallets to which they will 
At the end of every cycle, the accumulated sav-
increasingly have access (Ledgerwood and  ings and earnings are shared among the members 
Jethani 2012).
according to a formula chosen by the group. The 
“share-out” gives members access to lump sums 
for investment or other purposes. This end-of-
Savings Groups
cycle distribution simplifies accounting and 
Savings Groups began in Niger in the 1990s to  serves as an “action audit,” providing members 
improve on traditional ROSCAs. They are now  immediate verification that their savings are 
facilitated by numerous international and local  intact and that the process is profitable. After 
NGOs, which mobilize groups, train members,  each annual share-out, groups begin another 
and supervise their operations for a limited time.2  cycle of saving and borrowing. At this time, mem-
These facilitating agencies introduce governance  bers can leave and new members can join. They 
and recordkeeping systems designed to ensure  can make changes, such as adjusting the share 
effective self-management. The methodology  price, and may decide to make an exceptional 
promotes democratic participation with clear  contribution (that is, a one-off contribution that 
and transparent procedures that foster members’  exceeds the normal limit for share purchase) to 
trust in the group as a safe place to save and bor-
recapitalize the loan fund. As groups mature, sav-
row. Minimal risk, maximum transparency, a  ings can easily exceed tens of thousands of 
profitable structure for saving, access to small  dollars.
loans, and an annual lump sum of capital are the 
Groups elect officers annually, including posi-
hallmarks of the SG methodology. Most SGs are in  tions specifically to handle money and hold keys. 
Africa, but they are beginning to spread to Asia  A treasurer or recordkeeper records member sav-
and Latin America.3 
ings and loans in passbooks, a central ledger, or 
both, often with a symbol to accommodate illiter-
Savings Group Methodology
ate or innumerate members. Some groups use 
Groups are composed of 15 to 25 self-selected  memory-based systems that require no paper 
individuals and generally operate in nine- to  records at all. 
158 
The New Microfinance Handbook

Security and transparency are essential to suc-
fund is set at a level that covers the minimum 
cess. Most SGs, but not all, keep their records and  emergency needs of the group members and gen-
any extra cash in a strongbox—typically locked  erally is not intended to grow.
with keys that are kept by separate group mem-
bers who open the box only during meetings and  Role of Facilitating Agencies
in front of all the members present—the only time  Facilitating agencies organize SGs and carefully 
that group funds are handled. Multiple locks and  train and supervise them during their first cycle. 
multiple elected key holders minimize the risk  Facilitators are trainers, not service providers. 
that records or money will be tampered with  They do not manage the group’s activities and 
between meetings. Members report that they  never touch its money or manage its recordkeep-
trust the group because they see what happens to  ing. Facilitators train the groups intensively at 
their money and receive it all back at the end of  start-up, after which they simply supervise proce-
the cycle.
dures and routine operations as the group con-
Many SGs also have an insurance fund (often  ducts its business. The frequency of visits 
referred to as a social fund) that serves a variety of  diminishes as the groups demonstrate their abil-
emergency and social purposes according to rules  ity to run organized, disciplined meetings and 
set by the group. Groups set their own policies for  maintain accurate records. Facilitating agencies 
the social fund, notably how it is capitalized and  are funded by donors and do not generate any rev-
the terms of disbursement (for example, as a grant  enue from the group. While SGs are sustainable in 
or no-interest loan). The insurance fund is sepa-
and of themselves, facilitating agencies may con-
rate from the loan fund, and normally all mem-
tinue to provide groups with other development 
bers contribute the same amount. The insurance  interventions (see box 6.4).
Box 6.4  Savings Groups and Other Activities
SGs are ultimately created to provide  financial 
 activity truly benefit members and constitute 
services. However, where launched, they  an  appropriate role for the NGO to play, or is 
have grown, through external facilitation and 
it a way for the NGO to attract additional 
spontaneous replication, into a visible net-
 
funding?). Will it undermine the indepen-
work of rural groups that increasingly serve 
dence of Savings Groups? Additional costs, 
as a platform for other development (non-
ongoing  dependency on external service pro-
financial) services. They are natural vehicles 
viders, diversion of group funds to the “ex-
for initiatives ranging from agricultural pro-
tra” service(s), and spreading of group re-
duction and crop marketing to training in  sources (members’ time, energy, focus, and 
 business skills, literacy, and health. Yet the 
funds) too thinly are risks that practitioners 
addition of nonfinancial services to SGs is 
must consider. Furthermore, with limited 
not straightforward. It is important to   
resources, facilitating agencies face the 
 determine whether the “add-on” is truly   difficult choice  between strengthening exist-
driven by demand and to examine the  ing Savings Groups with additional program-
 incentives for adding it (that is, does the  ming or creating new ones.
Source: Ashe and Nelson 2012; Rippey and Fowler 2011.
Community-Based Providers 
159

Facilitating agencies have assumed the respon-
through community-based trainers (CBTs), also 
sibility for tracking SG performance using a  known as village agents or replicating agents—
 standardized management information system  individual members whom the facilitator trains 
(see chapter 13). In addition, they report to the  to operate independently. Eventually, the paid 
Savings Groups Information Exchange (SAVIX),  facilitator shifts to a more supervisory role and 
an online database that provides transparent and  CBTs are paid directly by the community, either 
standardized data on SG performance and out-
through cash, shares, or in kind (such as free labor 
reach (see chapter 5). 
during planting season). This fee-for-service 
model is taking hold in many variations across 
Savings Group Sustainability and 
multiple SG programs. It significantly reduces 
Replication
facilitation costs and establishes a market-based 
Sustainability and simplicity are key strengths of  system for communities to promote new groups 
this model, enabling self-management and spon-
and support existing ones after the facilitating 
taneous group replication. After an initial training  agency leaves (see box 6.6). 
period, SGs manage themselves; early research 
While fee-for-service seems like the next log-
indicates that most groups continue to operate  ical step from a market development perspec-
indefinitely. Furthermore, members introduce  tive, it is not yet clear whether the market for 
the model to others, leading to the multiplication  training services will be sufficient in the longer 
of groups; an investment in one group often  term to support local trainers. If replication is 
results in the formation of two or three others  robust, the most cost-effective option for sup-
(Anyango et al. 2007; see box 6.5).
porting the emergence of SGs may be to invest in 
Most facilitating agencies build into their  building a critical mass of them and to rely on a 
methodology a system of purposeful replication  combination of spontaneous fee-for-service and 
Box 6.5  Paths to Savings Group Replication
Field research in Kenya found that SGs replicate “spontaneously” without any external facilita-
tion in the following ways:
  Fission of large groups. As groups add members, they get unwieldy and sometimes split into 
two or more groups. 
• Splinter groups. Members object to some aspect of their group and start a new one. 
• Social entrepreneurs. Dynamic group members form additional groups, usually as a civic 
service, but sometimes for a fee. 
• ROSCA upgrading. An SG member introduces the approach to her ROSCA or another group.
• Natal village. Women who move to their husband’s village visit their families back home and 
introduce the SG model. 
• Inspired by. Neighbors carefully observe meetings and copy the procedures. 
• Clusters. Groups often meet at the same time and in the same place, forming a cluster of 
groups. The visibility and dynamism of clusters attract new members, encouraging the 
formation of new groups.
Source: Rippey and O’Dell 2010; Digital Divide Data 2011.
160 
The New Microfinance Handbook

Box 6.6  Fee-for-Service: Variations on a Theme
In India, the Aga Khan Foundation initially  which they work are prepared from the begin-
 operated its SG program through local partner 
ning for the eventuality that they will assume 
NGOs using paid staff. However, as the pro-
responsibility for paying the private service 
gram matured, the local partners began using 
provider. 
CBTs to ensure continued expansion and sus-
In western Kenya CARE piloted the use of 
tainability. CBTs are remunerated at a rate of 
independent contractors—both individual entre -
Rs 1 per member per meeting and are paid 
preneurs and faith-based organizations— 
exclusively by members of the groups they   that contracted their own CBTs to mobi lize 
mobilize and train. The funds are deposited in 
and train SGs in return for a fee per successful 
a separate bag held in the cash box and may 
group trained. The pilot dramatically reduced 
be withdrawn by the CBT at any meeting. 
the cost per member trained, and the critical 
In Kenya, Uganda, and Tanzania, Catholic 
mass of SGs created under the project has 
Relief Services has built a private commer-
raised their visibility, whereby communities 
cial system for training and supporting SGs. 
are slowly agreeing to pay the trainers to help 
It hires field agents who spend one year  them to establish their own groups. Further 
learning to perform their duties. After a rigorous 
demand for CBT services comes from exist-
certification process, these agents become  ing groups seeking intermittent assistance 
 private service providers. The communities in 
even after graduation.
Source: David Panetta, Aga Khan Foundation; Ferrand 2011.
voluntary replication to spur group expansion  lockbox, at significant risk.4 However, the need 
(Ferrand 2011).
for formal savings vehicles to manage liquidity 
may exist throughout the cycle; according to 
Financial Linkages
SAVIX, in the first quarter of 2012, globally, 
Although advocates of SGs have championed  loans outstanding represented only 53.2 percent 
their simplicity—locally based, accessible,  of total performing assets of SGs, indicating that 
transparent, autonomous financial service pro-
there may be significant excess liquidity.5 
viders that are free of debt obligations to exter-
Innovations are emerging that will enable SGs 
nal lenders—as groups mature, access to formal  to deposit excess liquidity through members’ 
financial services may be important. SGs do  mobile phones (see box 6.7).
not, nor are they designed to, meet all the finan-
While SGs have been linked to other financial 
cial needs of their members, and some of their  service providers for savings, credit, payments, 
limitations can be addressed by linking to for-
and, in some cases, insurance products, the wis-
mal financial service providers. Among the  dom and benefits of doing so are still debated.6 
most urgent needs is the ability to store cash  Advocates suggest that such financial linkages 
assets safely; this arises primarily near the end  put Savings Groups one step higher on the ladder 
of a cycle, when all loans are due in anticipation  to formal financial inclusion, while others are 
of the share-out. At this time, groups have been  concerned about elite capture, loss of autonomy, 
known to hold thousands of dollars in their  and group sustainability, arguing that SGs are 
Community-Based Providers 
161

Box 6.7  Bank Linkages through Mobile Phones
A partnership between CARE, Equity Bank, and  allows groups the same type of secure mobile 
Orange allows CARE Savings Groups in Kenya  access. 
to open an Equity Bank account (pamoja) and 
The second feature, which was in the final 
deposit cash into an interest-bearing group  stage of testing in 2012, is that all group mem-
savings account without visiting a physical  bers can register their cell phones enabling 
branch. This is made possible by the extensive  them to receive a text message announcing 
network of Equity Bank and Orange agents  any transaction made to the group account. 
throughout Kenya.
This assures them that no one has tampered 
To ensure account security, CARE, Orange, 
with the group’s resources between 
and Equity Bank developed a first-of-its-kind  meetings.
security verification system that requires 
Equity Bank’s pamoja savings account of-
three members to provide personal identifica-
fers a safe place to save, a 2.5 percent annual 
tion numbers for every transaction—the elec-
interest rate, no account maintenance or 
tronic equivalent of the three-padlock metal   deposit fees, and minimal withdrawal fees. 
lockbox that prevents any one person from  SGs have 24-hour access to their accounts us-
accessing the group’s cash. Although individu-
ing the Eazzy 24/7 mobile phone platform. 
als have accessed bank accounts with mobile  Using the same system, Equity will soon offer 
phones before, this is the first system that  loans to SGs. 
Source: CARE 2012; www.savings-revolution.org.
financial service providers in their own right and  Self-Help Groups
should be left alone. These debates center on the  Initiated in India in the 1980s, SHGs are groups of 
following questions: 
10–20 people—the vast majority of whom are 
women and marginal farmers or landless 
• Shouldlinkagesbecreatedforthepurposesof  agricultural laborers—who save and borrow 
savings, credit, or both? 
together. They are facilitated by a diverse set of 
• Should the focus be on linking individual external organizations that include NGOs, farm-
members only to formal financial institutions  ers clubs, government agencies, and even banks 
or on linking the whole group?
(see box 6.8). These facilitators are collectively 
referred to as self-help promotional institutions. 
• Isthereawaytopreservetheoriginalgroup
Initially, SHGs function much like indigenous 
and its characteristics, while simultaneously  ASCAs; members save regularly and use pooled 
fostering new relationships with other  savings for loans. However, within a relatively 
providers? 
short amount of time (six to eight months), most 
• Whataretherolesandresponsibilitiesofthe access credit from banks. In fact, they are essen-
facilitating agency in financial literacy and  tially credit driven; they save primarily as a pre-
consumer protection as it fosters formal  requisite for a bank loan. They also serve as a 
linkages? 
community platform from which women become 
162 
The New Microfinance Handbook

Box 6.8  Banks as Facilitators
In a program of the Oriental Bank of Commerce 
loans to cover the costs of funds, support 
in India, the only role of the bank’s Rudrapur 
services, and overhead. Individual “facilitators” 
branch is to service SHGs. The branch’s two 
provide day-to-day transaction and bookkeep-
officers oversee about 1,000 five-member  ing services directly to groups. Each facilitator 
SHGs and perform most support functions.  is contracted by about 200 SHGs and is paid 
The bank charges groups 11 percent a year on 
1 percent of each group’s outstanding loans.
Source: Isern et al. 2007.
active in village affairs, stand for local election,  tribes. Self-Help Groups are often single-caste 
or take action to address social or community  groups. A study of 214 SHGs in four states found 
issues, such as the abuse of women, alcohol, the  that two-thirds of the groups sampled are single 
dowry system, schools, and local water supply  caste, reflecting both the practical advantages of 
(Sinha et al. 2010).
neighborhood proximity and the greater ease of 
Self-Help Groups have achieved impressive  organizing people by affinity (EDA Rural Systems 
outreach—by 2010, nearly 7 million groups  and APMAS 2006). The formation of SHGs—in 
were serving more than 80 million members,  which villages and with whom—is influenced by 
making them the dominant form of microfi-
the targeting policies of the self-help promotional 
nance in India and perhaps the world. Although  institutions. Some target only poor areas and poor 
pioneered by NGOs, the SHG model was taken  people, some have a softer target of some  poor 
to scale by the National Bank for Agriculture  people, and some pursue a community-inclusive 
and Rural Development (NABARD), a govern-
approach (EDA Rural Systems and APMAS 2006).
ment wholesale lender, through its flagship 
Self-Help Group Bank Linkage Program, intro-
Self-Help Group Methodology
duced in 1992 (Lee 2010).7 The potential for  Members join SHGs both to save (at least initially) 
this relationship was catalyzed by govern-
and to access loans. During the initial months, 
ment-mandated, priority sector lending for  members focus on building the group fund to 
banks (40 percent of all bank credit must be  increase the amount available for internal lending 
lent to borrowers from priority sectors such as  and, more important, to become eligible for larger, 
agriculture, microenterprises, and low- income  external loans. Once the group has saved the 
populations). Banks, most of which are govern-
amount that the bank requires to access whole-
ment owned, maintain an active presence in  sale loans, members often stop saving with the 
densely populated rural areas, facilitating  group (Isern et al. 2007). 
access by rural clients.8 Since launching the 
An SHG typically qualifies for a bank loan 
program, NABARD has lent billions of dollars  after it has deposited savings with the bank for a 
to hundreds of banks to on-lend to SHGs, sig-
minimum of six months. Banks make one loan to 
nificantly expanding their number. 
the group, which on-lends to members. Initial 
SHG membership is open to all and covers all  loans usually start at Rs 10,000 (about US$186 
social groups, including scheduled castes and  as of October 2012), with repayment within six 
Community-Based Providers 
163

months to one year. Banks charge SHGs 8–10  Self-Help Group Formation and 
percent interest, and groups typically charge  Technical Assistance
members 24 percent. Subsequent loans can be  Self-help promotional institutions train, moni-
larger and longer term (three to five years).  tor, and support SHGs and often help with 
Loan size is normally based on a ratio of the  recordkeeping. Most are funded by government 
group’s savings on deposit, and the average is 4:1;  banks to carry out this role, which varies greatly 
however, this ratio varies from 1:1 to as high as  by institution; some are committed to grass-
20:1 (Isern et al. 2007; EDA Rural Systems and  roots social mobilization and change, while oth-
APMAS 2006; Srinivasan 2010).
ers are more narrowly focused on establishing 
Because members’ savings are used as a   permanent financial services at the village level. 
guarantee against funds borrowed from the  Their diversity is reflected in the activities they 
bank, they have limited access to them. Generally,  offer. In addition to training and facilitating 
SHGs “roll over” or retain some earnings at the  bank linkages, they may offer services related to 
end of the cycle. That they do not “cash out”  reproductive health, conflict resolution, school 
entirely allows them to have longer loan terms,  construction, sanitation, watershed manage-
but requires more sophisticated bookkeeping  ment, and social initiatives to advance the dis-
(Lee 2010). The fact that they are not time-
enfranchised (for example, advocating for the 
bound also distinguishes them from other types  rights of lower castes, against child marriage, 
of ASCAs. Yet with millions of SHGs, diversity is  and for educating female child laborers).9 
a given; some SHGs do cash out on a regular 
Similar to participation in an SG, participation 
basis, and many do not take external loans. An  in an SHG sometimes leads to employment, as 
estimated 25 to 30 percent of SHGs are not  individuals can also serve as facilitators for other 
linked to a bank (Lee 2010). 
groups (see box 6.9). 
Box 6.9  Individuals as Facilitators
Sudesh is a “promoting individual” who works 
manager said that he needed a few groups, 
directly with more than 30 SHGs, most of 
so I gave him a few [in exchange for Rs 800 
which she has “given” to a local bank manager 
for each SHG]; then DRDA [the District 
or a government program to contribute to their 
Rural Development Agency] needed some 
targets:
groups, so I gave them some [also for Rs 
800 for each SHG]. Now, DRDA’s targets 
I was leader of a group under the govern-
are achieved, so they don’t need any more 
ment’s program. The staff asked me to 
groups, and the banker needs SHGs from 
form a few more groups in my village . . . 
time to time. I still have eight groups. I 
Since then, I have promoted more than  
charge each group Rs 20 a month for writ-
30 groups in neighboring villages. This is 
ing the records, which gives me a good 
my main job, since I am working with all 
income.
these groups at the same time. The bank 
Source: EDA Rural Systems and APMAS 2006.
164 
The New Microfinance Handbook

In addition to forming SHGs, some promo-
technical assistance (such as help with bookkeep-
tional institutions contribute grants or revolving  ing), and the lender often maintains a dedicated 
funds to member savings for internal lending  staff for assisting SHGs. 
(EDA Rural Systems and APMAS 2006). Although 
most do not intermediate loan funds from the  Challenges
bank to the group, they can be instrumental in  Well-managed SHGs can be profitable in their 
establishing the linkage; on average, SHGs rely on  quest to bring financial services to the poor and 
their assistance for three years before being able  marginalized. Their promotional costs compare 
to operate independently. 
favorably with those of other approaches to 
The government has encouraged SHGs to  microfinance (Isern et al. 2007). Yet few are well 
 federate into larger organizations to ease the  managed, and many perform poorly. Their 
withdrawal of promotional institutions from their  recordkeeping systems are complex, partly due 
financial and nonfinancial roles. Such federations  to the exigencies of external loans and partly due 
can also support banks that wish to on-lend to  to the fact that most carry on their financial 
SHGs by serving as an intermediary and provid-
activity from year to year without stopping peri-
ing a single point of contact. In this role, some  odically to distribute funds. Without full cash-
federations intermediate funds, borrowing from  out, SHGs need to have some level of transactional 
banks to on-lend to member groups (Srinivasan  analysis to keep track of different terms and pay-
2010). They also build capacity, monitor perfor-
ments, arrears (sometimes exceeding one year), 
mance, and provide policy guidance. 
and the complexity of liquidity and risk manage-
Although several state governments actively  ment (Lee 2010). The number of records, and the 
promote and fund SHG federations (there are  amount of work to maintain them, prompts many 
1,100 in Andhra Pradesh, 12,000 in Tamil Nadu,  to rely on their promotional institution or feder-
and 7,800 in Orissa) with the expectation that  ation to keep their records. One specialized sup-
banks will provide them with loans for on-  port institution for SHGs—the Andhra Pradesh 
lending, federations face significant financial  Mahila Abhivruddhi Society—reported in 2002 
and, especially, organizational challenges  that the records of only 15 percent of SHGs were 
(Srinivasan 2010; Lee 2010). Furthermore, some  good, while the records of nearly 40 percent of 
question their added value, given that India has  SHGs in Andhra Pradesh were grossly neglected 
the largest network of bank branches in the  or nonexistent (Isern et al. 2007). Furthermore, 
world, and most villages are close to some type  since external loans are linked to savings, SHGs 
of branch. Some have suggested that the ratio-
have a strong incentive to overstate their savings 
nale for federating may be more social than  and understate their losses (Matthews and Devi 
financial. Federating affords groups more visibil-
2010). Researchers have called recordkeeping 
ity and gives them experience with public inter-
the “dark side of Self-Help Groups” (EDA Rural 
actions. Yet to achieve either financial or social  Systems and APMAS 2006).
goals, SHG federations require better gover-
Other issues challenging the performance of 
nance, staffing, and organizational processes and  SHGs include high default of intragroup loans 
systems (Sinha et al. 2010). 
(the repayment rates on internal loans within 
Thus SHGs receive organizational, opera-
groups are reportedly as low as 35 to 40 percent) 
tional, and financial support from multiple  and the equal distribution of bank loans among 
sources. The facilitating agency (NGO, govern-
members, with those who receive more than they 
ment, or bank) usually employs a field agent to  are able to invest lending the excess to others 
train and monitor the group, the federation offers  (Srinivasan 2010).
Community-Based Providers 
165

However, the Indian SHG model remains  financial service needs of the rural poor. In addi-
unique for its sheer size and outreach to the poor;  tion to providing access to credit, they are the entry 
SHGs are the link between individuals and rural  point for many social activities (see box 6.10). 
regional banks, commercial banks, and coopera-
tives. Although community based, they illustrate  Other Facilitated Groups
how the government, formal banks, and organized  There have been dozens of other models for 
poor clients can work together to respond to the  community-based groups whose purpose is to 
Box 6.10  Self-Help Groups: A Holistic View
Several key factors, rooted in India’s banking 
large-scale employment guarantee scheme 
policies, explain how SHGs have flourished, 
delivers payments through them; social 
engaging more than 70 million people. First, 
campaigns by local leaders use them as 
the Reserve Bank of India mandates that  their organizational base; and politicians of 
banks must have 40 percent of their portfolios 
all parties and ideologies woo them in an 
in a “priority sector,” and SHGs are one of the 
 effort to influence opinion and win elec-
options for meeting these requirements.  tions. From the top levels of government 
Second, a NABARD directive in 1993  allowed 
policy and planning through to the local pan-
informal, unregistered SHGs to be treated as 
chayat (village government), SHGs have 
“legal persons,” enabling banks to open   become one of the most visible platforms 
 accounts and transact business with them.  for women’s development and empower-
Overall, approximately 70 percent of SHGs  ment; they are a household name for public 
are linked to a bank for loans, and more than 
and development programs alike. 
16 percent of all bank lending to priority sec-
 SHGs represent a counterpoint in the 
tors is done through them.
 microfinance world—a model that is owned 
As one of India’s national flagship pro-
and managed by the members themselves, 
grams, SHGs are a key government strategy 
encompassing a large set of small, decentral-
for offering financial services to unbanked 
ized, informal cooperative organizations, 
communities and expanding financial inclu-
 enabled, actively supported, promoted, and 
sion, particularly directed toward women.  resourced by the state, with women as its 
Perhaps more important, they are increas-
central focus. However, the realization of this 
ingly used to deliver many other develop-
vision varies significantly: Some civil society 
ment schemes and programs. As a  organizations and women’s initiatives empha-
 result, they have become much more than 
size “self-help” and empowerment; others 
informal financial groups. Many are engaged 
focus on a more minimalist financial inclusion 
collectively in common livelihoods, market-
numbers game, with greater emphasis on 
ing, and procurement activities. Health and 
 delivering loans. Capacity and performance 
nutrition workers use them to deliver ser-
vary vastly. While the SHG model is relatively 
vices; SHGs often double as the local  simple, its implementation has evolved in 
 water management committee; schemes  complex ways, and the groups have become 
for low-cost housing, pensions, and group 
important institutions for social, political, and 
insurance are delivered through them; a  economic participation.
Source: Anuj Jain, Coady Institute.
166 
The New Microfinance Handbook

facilitate saving and lending for groups who expe-
Membership requires a purchase of shares, which 
rience barriers (for example, distance, cost, trust)  can be sold to other members but not withdrawn. 
to accessing more formal providers. Some are very  FSAs are governed by a general assembly of share-
small, limiting participation to 20–30 members;  holders, which elects a board of directors and an 
others federate small groups in order to serve  audit committee. Their legal form also varies from 
hundreds. Two examples are Financial Service  country to country. In some countries they are not 
Associations (FSAs) and CVECAs (self-managed  registered at all, while in others they are regis-
village savings and credit banks) in Africa.
tered with the relevant government ministry as 
community-based organizations or cooperatives. 
Financial Service Associations
The original goal—to become self-reliant fol-
Introduced in Benin in 1997 with support from the  lowing initial training and oversight—has been 
International Fund for Agricultural Development,  compromised by poor management and weak 
FSAs are member-owned and -operated institu-
governance. Managers often lack the basic 
tions at the village level. With external technical  capacity and experience needed to manage a 
support, they have been replicated in several  financial institution; the absence of a clear sepa-
countries— 
Guinea, Mauritania, Kenya, Uganda,  ration of responsibilities between management 
and Sierra Leone—producing variations to the  and governance has led to problems such as 
model. Some leverage their equity base, built from   disbursing loans to friends, relatives, or influen-
member shares, with loans from commercial banks  tial board members who may not feel obliged to 
(Helms 2006). In Sierra Leone, some offer long-
repay them. To counter these challenges, most 
term credit and group approaches to  marketing  FSAs have management contracts under which 
goods and produce (IFAD 2010). Membership can  an external service company is hired to help to 
include groups and institutions, such as savings  manage the operations (see box 6.11). Others, 
clubs, schools, churches, and health clinics. They  particularly in Uganda, have transformed into 
range in size from 300 to 10,000 members.  financial cooperatives. 
Box 6.11  Financial Service Associations in Kenya
In Kenya, the K-Rep Development Agency  KFS also assists with market research and 
(KDA) promotes FSAs; from 1997 until 2007, 77 
product development, strategic planning, 
associations with a total of 34,000 members  business development, branding, and mar-
were established in 17 districts—including the  keting. The aim is to achieve sustainable 
far north, where agro-ecological conditions are  management and oversight. Marked improve-
very challenging, livelihoods are predominantly  ment in performance has led to increased 
livestock based, and population densities  community confidence in and use of FSAs. In 
are low. With support from the Financial  2012 the KFS network included 44 FSAs,  
Sector Deepening Project, the KDA regis-
totaling approximately 122,000 members. 
tered K-Rep Fedha Services (KFS), a  limited  FSD Kenya estimates that there are an addi-
liability company, to provide both manage-
tional 80,000 members in 40 associations 
ment services and supervision to the associ-
outside of the KFS network.
ations for a fee. In addition to training, the 
Source: FSD Kenya 2007; communication with Felistus Mbole, Financial Sector Deepening Project, June 2012.
Community-Based Providers 
167

CVECAs
 3.  As of May 2012, SGs globally counted more than 
CVECAs are member-based organizations with 
6 million members. http://savingsgroups.com. 
an emphasis on remote rural areas. Originally   4.  Steps for managing this risk include dividing 
promoted by the French-based Centre Interna-
up the group funds among members until the 
share-out date or storing them in a govern-
tional de Développement et de Recher che, they 
ment office.
grew out of an interest in improving the tradi-
 5.  This result is based only on SGs that are 
tional model of cooperatives in West Africa. 
currently trained and monitored by facilitating 
CVECAS are member-based microfinance inter-
agencies. Over time, the level of loan activity 
mediaries facilitated by external technical sup-
varies significantly depending on local market 
port. They are designed to operate in rural areas 
opportunities and access to other financial 
with clients who are primarily subsistence 
service providers. At the same time, in a 
 farmers, with minimal nonfarm income. While 
research sample tracking 332 groups in 
most CVECAs have fewer than 250 members, 
33 projects, loans as a percentage of outstanding 
they achieve flexibility and economies of scale 
assets were significantly higher, at 81 percent.
by networking together into regional federations   6.  This section draws from Ledgerwood and 
(Chao-Béroff n.d.). CVECAs were first devel-
Jethani (2012).
oped in the Dogon region of Mali in the late   7.  The growth of SHGs has been most robust 
1980s and have been replicated in other coun-
in the south; more than 50 percent of such 
tries in Africa (Cameroon, The Gambia), adapt-
groups in the NABARD program are found in 
ing the original model to suit the local 
the state of Andhra Pradesh, where 
environment. In The Gambia, they are known as 
72 percent of households belong to one. 
Here, the State Credit Plan allocated 
village savings and credit associations. Their pri-
24 percent of credit for lending to SHGs, 
mary role is to provide safe and easy access to 
possibly the highest level of support 
savings, offering both current accounts and term 
available to any type of community-based 
deposits, as well as loans. Some of these groups 
group in the country. As much as 65 percent 
also take on external credit, distorting the sav-
of the total loan exposure of some branches 
ings incentives and creating another set of chal-
was to SHGs (Srinivasan 2010).
lenges around repayment, ownership, and   8.  In a study of 214 SHGs in nine districts 
vitality of the groups. Many also suffer from 
in India, the average distance to a bank was 
weak governance, a common issue for many 
3.5 kilometers (EDA Rural Systems and 
financial service providers (Secka 2011).
APMAS 2006). 
 9.  A study of 214 SHGs found that 62 percent 
were engaged by their promotional institution 
Notes
in a “microfinance plus development” model; 
in Andhra Pradesh, the proportion rose  
 1.  Many ROSCAs form expressly to help 
to 90 percent (EDA Rural Systems and  
members to purchase the same item—for 
APMAS 2006).
example, mattresses, cookware, solar lamps,  
or iron roofing sheets.
 2.  At the time of writing, well-known interna-
References and Further Reading
tional NGOs including CARE, Catholic Relief 
Services, Oxfam America, Freedom from 
* Key works for further reading.
Hunger, the Aga Khan Foundation, Plan 
Abhijit, Sharma, and Brett Hudson Matthews. 
International, and World Vision were 
2009. “Village Financial Systems in Northeast 
facilitating SGs.
India.” Focus Note 21, MicroSave India, July.
168 
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Anyango, Ezra, Ezekiel Esipisu, Lydia Opoku, 
Ferrand, David.  2011. “Keynote Paper 1: 
Susan Johnson, Markku Malkamaki, and Chris 
Strengthening Financial Service Markets.” 
Musoke. 2007. “Village Savings and Loan 
PowerPoint presentation at M4P Hub conference 
Associations: Experience from Zanzibar.” Small 
“Developing Market Systems: Seizing the 
Enterprise Development Journal 18 (1): 11–24. 
Opportunity for the Poor,” Brighton, U.K., 
November 7–9. http://www 
*Ashe, Jeffrey, and Candace Nelson. 2012. 
“Introduction.” In Savings Groups at the 
.m4phub.org/userfiles/file/David%20
Frontier, ed. Candace Nelson. Washington, DC: 
Ferrand%20Empress.pdf.
SEEP Network, November. 
FSD (Financial Sector Deepening) Kenya. 2007. 
Ashraf, Nava, Dean Karlan, and Wesley Yin. 2006. 
Annual Report. Nairobi: FSD Kenya. 
“Deposit Collectors.” Advances in Economic 
Gallardo, Joselito. 2001. “A Framework for 
Analysis and Policy 6 (2): Article 5. http://www 
Regulating Microfinance Institutions: The 
.bepress.com/bejeap/advances/vol6/iss2/art5.
Experience in Ghana and the Philippines.” 
Ballem, A., and R. Kumar. 2010. “Savings 
Financial Sector Development Department, 
Mobilisation in SHGs: Opportunities and 
World Bank, Washington, DC, November.
Challenges.” Focus Note 44, MicroSave India. 
Helms, Brigit. 2006. “Access for All: Building 
http://www.microfinancegateway.org/gm/
Inclusive Financial Systems.” CGAP, 
document-1.1.6347/IFN_44_Savings_
Washington, DC. 
Mobilisation_in_SHGs.pdf.
Helms, Brigit, and Douglas Pearce. 2001. 
CARE. 2012. “CARE, Equity Bank, and Orange 
“Financial Service Associations: The Story So 
Launch Partnership to Connect Community 
Far.” CGAP, Washington, DC.
Savings Groups to Banks Using Mobile Phones.”  IFAD (International Fund for Agricultural 
Press release, CARE, Nairobi, March 16.
Development). 2010. “FIDAction in West 
Chao-Béroff, René. n.d. “Cooperatives and 
and Central Africa.” IFAD Newsletter 
Community-Based Financial Systems.” 
18 (October). 
CGAP, Washington, DC. http://www.cgap 
Isern, Jennifer, Rani Deshpande, and Judith Van 
.org/gm/document-1.9.2310/africaday_
Doom. 2005. “Crafting a Money Transfers 
Theme4.pdf.
Strategy: Guidance for Pro-Poor Financial 
*Churchill, Craig, and Cheryl Frankiewicz. 2006. 
Service Providers.” Occasional Paper 10, CGAP, 
Making Microfinance Work: Managing for 
Washington, DC. 
Improved Performance. Geneva: International 
*Isern, Jennifer, L. B. Prakash, Syed Hashemi, 
Labour Organization. 
Robert Christen, and Gautam Ivatury. 2007. 
*Demirgüç-Kunt, Aslı, and Leora Klapper. 
“Sustainability of Self-Help Groups: Two 
2012. “Measuring Financial Inclusion: The 
Analyses.” Occasional Paper 12, CGAP, 
Global Findex Database.” Policy Research 
Washington, DC.
Working Paper 6025, World Bank, 
Washington, DC.
Johnson, S., M. Malkamaki, and K. Wanjau. 2005. 
“Tackling the ‘Frontiers’ of Microfinance in 
Digital Divide Data. 2011. “Results of Study of 
Kenya: The Role for Decentralized Services.” 
Post-Project Replication of Groups in COSALO 
Decentralised Financial Services, Kenya.
I.” FSD Kenya, Nairobi.
*Ledgerwood, Joanna, and Alyssa Jethani. 2012. 
*EDA Rural Systems and APMAS (Anhdra Pradesh 
“Savings Groups and Financial Inclusion.” In 
Mahila Abhivruddhi Society). 2006. “Self-Help 
Savings Groups at the Frontier, ed. Candace 
Groups in India: A Study of the Lights and 
Nelson. Washington, DC: SEEP Network.
Shades.” EDA and APMAS, Gurgaon and 
Hyderabad. http://www.edarural.com/ 
Lee, Nanci. 2010. “Community-Based Financial 
documents/SHG-Study/Executive-Summary.pdf.
Services: African Savings Groups vs. Indian 
Community-Based Providers 
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Self-Help Groups.” Unpublished report, Aga 
World’s 100 Poorest Countries. Appleton, WI: 
Khan Foundation.
MicroInsurance Centre.
Linder, Chris, with contributions from Denny 
*Rutherford, Stuart, with Sukhwinder Arora. 2009. 
George. 2010. “Who Says You Can’t Do 
The Poor and Their Money. Updated version. 
MicroSavings in India? Part 1: Community-
Bourton on Dunsmore, U.K.: Practical Action 
Based/Owned.” Focus Note 45, MicroSave 
Publishing.
India, July.
Ruthven, O. 2002. “Money Mosaics: Financial 
Matthews, Brett H., and Trivikrama Devi. 2010. 
Choice and Strategy in a West Delhi Squatter 
“SHGs Should Balance or Break.” Focus 
Settlement.” Journal of International 
Note 19, MicroSave India.
Development 14: 249–71.
*Rippey, P., and B. Fowler. 2011. “Beyond Financial 
Secka, Ndegene. 2011. “Economic Challenges 
Services: A Synthesis of Studies on the 
Impending Gambian Entrepreneurship.” 
Integration of Savings Groups and Other 
Today—The Gambia’s Quality Newspaper
Development Activities.” Aga Khan 
February 1. http://microfinanceafrica.net/tag/
Foundation. www.akdn.org/publications/2011_
visaca/.
akf_beyond_financial_services.pdf.
*Sinha, Frances, Ajay Tankha, K. Raja Reddy, and 
Rippey, Paul, and Marcia O’Dell. 2010. “The 
Malcolm Harper. 2010. Microfinance Self-Help 
Permanence and Value of Savings Groups in 
Groups in India: Living Up to Their Promise? 
CARE Kenya’s COSAMO Programme.” Savings 
London: Practical Action Publishing.
Groups Learning Initiative, Aga Kahn 
Skully, Michael T. 1994. “The Development of the 
Foundation. 
Pawnshop Industry in East Asia.” http://library 
Robinson, Marguerite. 2001. The Microfinance 
.wur.nl/way/catalogue/documents/FLR21.pdf.
Revolution: Sustainable Finance for the Poor
*Srinivasan, N. 2010. Microfinance India: State of 
Washington, DC: World Bank.
the Sector Report 2010. New Delhi: ACCESS 
*Roth, Jim, Michael McCord, and Dominic Liber. 
Development Services and Sage Publications 
2007. The Landscape of Microinsurance in the 
India. 
170 
The New Microfinance Handbook

CHAPTER 7
Institutional Providers
Joanna Ledgerwood

Chapter 1 provides an overview of the types of  financial services to poor women and men include 
financial service providers within the core of the  nongovernmental organization (NGO) microfi-
financial ecosystem. Chapter 6 focuses on  nance institutions (MFIs), financial cooperatives, 
 community-based providers that operate primar-
formal commercial microfinance banks, special-
ily in the informal sector. This chapter focuses on  ized MFIs and other non-bank financial institu-
institutional providers—those that are more for-
tions (NBFIs) such as insurance and leasing 
mal in nature; that is, they generally have brick  companies, as well as payment service providers. 
and mortar branches (but not always), incur  They can be found on the right side of figure 7.1.
operating expenses, generate revenue, maintain 
These institutions differ in their organiza-
financial accounts (including producing financial  tional structure and governance, the types of 
statements), and are usually registered and often  products and services offered, their legal form, 
regulated. 
and the associated supervision by authorities. 
A financial institution is a collection of  Although they may lack the flexibility and prox-
assets—human, financial, and other—combined  imity of community-based providers, they often 
to perform activities such as granting loans,  can offer a broader variety of products and ser-
underwriting insurance, or mobilizing deposits.  vices. The types of financial products and services 
Projects are not institutions—institutions serve  that a provider offers are influenced by its legal 
a permanent function within the core of a mar-
structure and related regulation (if applicable), 
ket system. Financial institutions that provide  capacity, mandate, and target market. Most, but 
Contributions to this chapter were made by Julie Earne and Peter McConaghy. 
Institutional Providers 
171

Figure 7.1  The Range of Financial Service Providers
Community-based providers
Institutional providers
Community-based groups
Registered institutions
Individuals 
ROSCAs, ASCAs 
Financial cooperatives
Regulated institutions
Moneylenders
Deposit-taking MFIs
Burial societies 
SACCOs
Deposit collectors
Savings and postal banks
Savings groups
 Suppliers, buyers
Pawnbrokers
State banks
Self-help groups
NGO MFIs
Traders
Commercial microfinance banks
Financial service
Mutual insurers
Shop owners
Non-bank financial institutions
associations
Money transfer companies
Friends, family
Commercial insurers
CVECAs
Mobile network operatorsa
Level of formalization
Note: ROSCAs = rotating savings and credit associations; ASCAs = accumulating savings and credit associations; CVECAs = caisses 
villageoises d’épargne et de crédit autogérées;
 SACCOs = savings and credit cooperatives.
a. Mobile network operators are regulated as communication companies; most are not licensed to provide financial services.
not all, financial service providers provide  while microfinance banks tend to take a few years 
credit—either to their members, as with financial  to break even because they need to invest in infra-
cooperatives, or to the public at-large, as with  structure and develop their market. To date, 
banks and NGOs. Most nonregulated institutions  microinsurance providers have found it very diffi-
and even some regulated NBFIs (finance compa-
cult to reach sustainability.
nies, insurance companies) are generally not 
This chapter discusses the types of institutions 
allowed to mobilize and intermediate savings  that provide financial services to poor women 
from the public. However, financial cooperatives  and men. Institutional management issues, such 
can normally intermediate deposits within their  as human resource management, product devel-
membership. Although some banks, MFIs, and  opment, social performance monitoring, and 
cooperatives sell insurance, this product is largely  financial reporting and risk management, are dis-
restricted to insurance companies, as is insurance  cussed in chapters 14 and 15.
underwriting. In some countries, banks, regu-
lated MFIs, and some mobile network operators, 
in addition to institutions licensed as money  Characteristics of Financial 
transfer companies, provide payment services  Institutions 
and other transaction accounts. Institutional pro-
A financial institution’s structure is determined 
viders generally require more sophisticated oper-
by its legal form, its ownership and governance 
ations than informal providers, which often mean  structure, the degree to which it is supervised by 
professional staff and relatively more complex  the state, and the types of clients it serves. These, 
systems. The financial sustainability and inde-
in turn, influence an institution’s product offer-
pendence of different providers vary primarily in  ing, financial management, reporting needs, 
relation to time and, in some cases, objectives.  funding sources, and overall financial sustainabil-
NGO MFIs and transforming MFIs take time to  ity and independence. Table 7.1 summarizes the 
reach sustainability, depending on their target  key characteristics of institutional financial ser-
market, support provided, and overall mission,  vice providers.
172 
The New Microfinance Handbook

Institutional Providers
Table 7.1  Characteristics of Institutional Financial Service Providers 
Regulation 
Management 
Sustainability 
Type of 
and 
and 
and 
provider
Legal form
oversight
Ownership
Governance
Client type
Products
reporting
Funding
independence
Financial 
Registered 
Credit unions  Owned by 
Board of 
A range of 
Basic savings  Professionally  Equity 
Medium to high 
cooperatives with central 
may be 
members
directors or 
clients, 
and credit, 
managed to 
provided 
depending on 
authority
regulated; 
management  depending 
although 
varying 
from member  capacity of 
 
oversight by 
committee 
on members inherently 
degrees; 
contributions;  management 
specialized 
elected by 
savings led
report to 
deposits and  and governing 
body
members
supervisory 
some 
body
authorities
external debt
NGO MFIs 
Registered 
Not 
No owners, 
Board of 
Poor, 
Traditionally 
Professionally  Grants and 
Low to medium 
and 
as an NGO, 
regulated; 
strong 
directors, 
“unbanked”  credit led; 
managed to 
debt from 
(high costs and 
multipurpose  not-for-profit  may be 
ownership 
appointed by  clients; for 
multipurpose  varying 
development  lack of 
NGOs
institution, or  subject to 
characteristics  founders and  multipurpose  NGOs 
degrees; may  institutions, 
separation of 
company 
government  among 
funders
NGOs, 
generally add  need to report  foundations,  activities can 
limited by 
oversight
founders and 
various 
financial 
to registration  socially 
delay or prevent 
guarantee 
board
target clients  services to 
body
responsible 
sustainability of 
and 
other 
investors, or  financial 
beneficiaries activities
aggregators 
activities)
Deposit-
Licensed as 
Regulated 
Mostly private  Board of 
Unserved or  Credit, 
Professionally  Mix of equity  Varied, costs to 
taking MFIs
a bank or 
and 
shareholders;  directors 
underserved  savings, 
managed; 
and debt 
transform can 
other form as  supervised 
some 
appointed by  individuals or  insurance, 
report to 
financing 
be high; 
per 
by central 
development  shareholders
micro or 
payment 
central bank 
from both 
ongoing costs 
regulatory 
bank, 
banks as 
small 
services; 
or supervisory  private and 
of regulatory 
requirements  ministry, or a  initial 
businesses 
terms may be  authority
public 
requirements 
specialized 
shareholders
modified for 
sources, 
can be high
body
client needs
deposits
NBFIs: credit  Licensed as 
Regulated by  Mix of public  Board of 
Clients vary 
Range from 
Professionally  Mix of equity  Medium to high; 
companies, 
an NBFI or 
central bank  and private 
directors 
depending 
credit only, 
managed; 
and debt 
initial support 
insurance 
modified 
or specialized  shareholders;  appointed by  on type of 
leasing, 
report to 
financing 
may be required 
companies, 
financial 
body or by 
sometimes 
shareholders  products (for  insurance; 
supervisory 
from both 
depending on 
leasing 
institution 
one or more  other financial 
example, 
normally not  authority
private and 
target market
companies
(determined  government  institutions or 
credit or 
able to 
public 
by country-
units
other 
insurance) 
intermediate 
sources 
specific legal 
companies
deposits
charter)
(continued next page)
173

174
 
Table 7.1  (continued)
Regulation 
Management 
Sustainability 
Type of 
and 
and 
and 
provider
Legal form
oversight
Ownership
Governance
Client type
Products
reporting
Funding
independence
Suppliers, 
Registered 
Credit 
Varies; can be  Varies
Rural 
Basic credit 
Little formal 
Funding from  High 
wholesale 
as a 
services 
owner 
farmers
embedded in  structure, 
working 
sustainability
buyers, 
company 
generally not  operated or 
purchases
provider 
capital; may 
processors
under 
regulated 
part of larger 
driven
have debt
primary 
company
business
Rural, 
Licensed as 
Regulated by  Shareholders,  Board of 
Broad target  Primarily 
Professionally  Equity and 
Medium to high
savings or 
a bank
central bank  government 
directors 
group: poor 
savings; wide  managed to 
debt 
postal banks
or specialized  and/or private appointed by  and nonpoor;  distribution 
varying 
financing, 
body or by 
shareholders
generally 
network 
degrees; 
generally 
one or more 
rural
leveraged for  report to 
from public 
government 
payment 
regulators
sources and 
units
services
savings
State banks
Licensed 
Normally 
Shareholders,  Board of 
General 
Varied; some  Professionally  Public 
Varied; medium 
with the 
regulated 
generally 
directors 
population; 
offer a full 
managed, but  funding; debt  (benefits from 
central 
and 
government, 
appointed, 
government  variety of 
may be 
largely 
public subsidies 
authorities; 
supervised 
some private
influenced by  sometimes 
financial 
politically 
sourced from  in certain cases 
incorporated  by the 
government 
mandates 
services, 
influenced; 
deposits 
due to often 
as either a 
central bank
poor or rural  others focus  normally 
rural distribution 
parastatal or 
focus
on agriculture  report to 
network) 
shareholding 
lending
regulators
company
Commercial  Licensed as 
Regulated 
Private 
Board of 
Commercial  Credit, 
Professionally  Equity and 
High; with 
microfinance  a commercial  and 
shareholders  directors 
micro, small,  savings, 
managed; 
debt from 
greenfields, 
banks
bank
supervised 
and some 
appointed by  and medium  payments, 
report to 
institutional 
some initial 
The New Microfinance Handbook
by central 
development  shareholders
enterprise 
sometimes 
central bank
investors; 
support 
bank
banks 
clients, 
insurance
deposits
required, then 
urban, fewer 
independent
poor clients
Money 
Licensed as 
Regulated by  Private 
Board of 
Poor and 
Transfers and  Professionally  Private 
Generally high 
transfer 
a money 
local financial  shareholders
directors 
nonpoor; 
payments 
managed 
funders
sustainability 
companies
transfer 
services 
appointed by  rural and 
between 
due to user fee 
provider 
authorities
shareholders
urban
people, 
structure
government, 
businesses
Note: MFI = microfinance institution; NBFI = non-bank financial institution; NGO = nongovernmental organization.

Financial Cooperatives 
weathered the storm relatively well because local 
deposits proved a much more stable source of 
Financial cooperatives are member-owned finan-
funds than external investments (Christen and 
cial service providers, also called savings and  Mas 2009). 
credit cooperatives (SACCOs), savings and loan 
Financial cooperatives are essentially a for-
associations, credit unions, or building societies (a  malized version of a large accumulating savings 
special form of cooperative that mobilizes mem-
and credit association (ASCA) that is legally regis-
ber savings to finance housing). Financial cooper-
tered (see chapter 6). They vary in size from very 
atives are organized and operated according to  small (dozens of members) to very large (thou-
basic cooperative principles: There are no exter-
sands of members). They are subject to the coun-
nal shareholders; the members are the owners;  try’s laws and pay taxes if required. Cooperatives 
each member has the right to one vote. Members  are usually governed by a volunteer board of 
of financial cooperatives are usually affiliated  directors elected by and from the membership. In 
through geography, employment, or religion. To  smaller cooperatives, management may also be 
become a member, each person is required to pur-
voluntary. As with the microfinance sector, gover-
chase a share and is generally restricted in the  nance is one of the greatest challenges facing the 
number of shares he or she can own. The share  cooperative sector. 
purchase value is set by the cooperative and is the 
Cooperatives, particularly smaller ones, may 
same for all members, although it can change  focus on rural markets, facilitating access to both 
over time. In addition to holding shares redeem-
savings and credit services and circulating 
able at par, members may deposit money with the  resources within a community. With both wealthy 
cooperative or borrow from it. Although financial  and poor members depositing funds, excess 
cooperatives traditionally provided simple sav-
liquidity of one household can provide credit for 
ings and credit products, many are introducing a  another. However, cooperatives can be subject to 
greater variety of products, such as contractual  power imbalances, with elected board members 
savings and housing loans; if properly licensed,  or management taking advantage of their position 
they sometimes provide money transfer or pay-
to borrow excessively or extend credit to their 
ment services and insurance (Branch 2005). 
supporters (see box 7.1).
Well-managed cooperatives often provide 
Individual financial cooperatives often choose 
loans at lower interest rates than MFIs. If profit-
to be affiliated with an apex institution, which 
able, they either reinvest excess earnings in the  represents the cooperative at the national level, 
cooperative or return them to members in the  provides training and technical assistance to affil-
form of dividends, usually based on their average  iated cooperatives, acts as a central deposit and 
savings balances or share ownership. These mea-
interlending facility (central financing facility), 
sures sometimes translate to more affordable  and, in some cases, channels resources from 
loans for members or higher returns on savings  external donors to the national cooperative sys-
than are available from other institutional provid-
tem. Being a member of an apex institution can 
ers (WOCCU 2011). 
also mean that individual cooperatives benefit 
Member savings and shares, the primary fund-
from economies of scale for purchasing or other 
ing mechanism for cooperatives, constitute a sta-
services. Affiliation involves purchasing share 
ble and relatively low-cost funding of funds from  capital and paying annual dues to the national 
which loans are made. During the 2008 financial  or regional apex institution. Membership pro-
crisis, for example, local financial cooperatives  vides the right to vote on national leadership and 
Institutional Providers 
175

Box 7.1  Reflections on Member-Owned Financial Service Provision 
Member-owned and -managed financial ser-
system to their own advantage (Johnson 
vice providers offer several features that  2004). This arises from a more general set of 
appeal to poor people. First, their survival  “principal-agent problems” in which the inves-
depends on the degree to which they  tors in the organization or the shareholders 
respond to their members’ need for financial 
(the principals) elect a board or committee (the 
services. Second, a high degree of client  agents) to represent their interests (fiduciary 
ownership and participation is present:  responsibility). But when these organizations 
Users have a direct influence in determining 
become large and monitoring the performance 
the financial services provided, including the 
of the board becomes more difficult, the board 
interest rates charged. (However, flexible  may tend to protect its own interests and 
terms and conditions require more detailed 
those of management rather than those of 
reports to monitor performance and hence 
shareholders and the organization as a whole. 
higher levels of management skill and stron-
This results in the all-too-familiar situation of 
ger governance mechanisms.) People assist 
escalating costs and bad loans to board mem-
one another and offer social support, and  bers, which become particularly problematic 
when a member has a genuine repayment 
when board members are net borrowers 
problem, the member can appeal for more 
whose savings cannot cover the loan losses. 
time to repay (Johnson 2004). This flexibility 
These problems are compounded in poorer 
means that members are not as frightened 
areas where people are less well educated 
of taking loans from these systems as they 
and poorly equipped to understand and moni-
would be from other systems; and unlike  tor management. Where these systems are 
in MFI group-solidarity systems, members  most successful, it is often because board 
are not forced to make repayments on the 
members are skilled, such as retired civil 
defaulter’s behalf. 
servants and professionals, and sufficiently 
However, the very nature of these advan-
concerned about the well-being of the orga-
tages leads to the problems facing user-owned 
nization. Members often trust community 
systems. The element of “negotiability”  leaders more than unfamiliar staff at another 
allows powerful individuals to manipulate the 
institution. 
Source: Johnson, Malkamaki, and Wanjau 2005.
policies and to participate in nationally sponsored  have the requisite skills to supervise financial 
services and programs. 
intermediaries. This general lack of financial 
As institutions that intermediate member sav-
oversight coupled with weak governance can 
ings, larger cooperatives are normally supervised.  compromise the safety and soundness of 
The level and structure of supervision varies sig-
 financial cooperatives, which is especially prob-
nificantly from country to country (see chapter 17).  lematic when poor people’s savings are at risk. 
In many countries, the authorities charged with  Although many still struggle with poor manage-
overseeing cooperatives of all kinds—agricultural,  ment, financial cooperatives are significant 
marketing, transport, and others—also supervise   providers of financial services in many develop-
financial cooperatives. These entities may not  ing countries. 
176 
The New Microfinance Handbook

NGO MFIs 
save and borrow, providing a guarantee for each 
other’s loans; see chapter 9). Although some 
Nongovernmental organizations are nonprofit  NGOs require compulsory savings, they cannot be 
organizations that provide social and economic  legally intermediated (that is, on-lent to another 
services, which may include health or education  client). Many NGOs have broadened their prod-
or microfinance, among other services. They dif-
uct offerings in an effort to enhance access to 
fer from financial cooperatives or community-
financial services, offering credit for uses other 
based groups in that they are not member owned  than productive investment, such as housing or 
and managed. NGOs are a diverse group, includ-
education. 
ing large multipurpose organizations such as 
The funding structure of NGO MFIs varies. 
BRAC in Bangladesh, international NGOs such as  Traditional NGO MFIs are generally funded by a 
ACCION or Opportunity International that have  mix of grants, debt, and accumulated equity, how-
fostered a network of local NGOs, and small inde-
ever, with the professionalization of and demand 
pendent local organizations. 
for sustainability among NGO MFIs, revenue 
The level of formality of NGOs varies signifi-
from daily operations is expected to cover overall 
cantly, depending on the mission, funding, and  costs and provide capital for growth, while grants 
vision of the organization. NGOs are typically reg-
are increasingly spent on technical assistance and 
istered under national laws, which permit a range  product and channel development. The equity of 
of activities and determine the tax treatment of  NGO MFIs includes grants provided by donors 
incoming donor money and revenue generated  for loan capital and retained earnings (excess rev-
from operations. NGO MFIs have no owners.  enue over expenses). NGOs often have fairly 
Rather, they have boards with members appointed  weak leverage (the amount of debt relative to 
by the founders or funders, which are the func-
equity) because their lack of formality can limit 
tional equivalent of shareholders. NGO boards  their ability to borrow commercially, although 
are responsible for overseeing the collective  they are increasingly accessing various kinds of 
activities of the NGO and providing input on stra-
debt. Where traditionally they were required by 
tegic activities. NGO governance structures are  funders to hold cash collateral or pledge their 
generally not suited for bearing fiduciary respon-
loan portfolio as collateral, well-performing 
sibility because board members do not represent  NGOs are able to borrow with guarantees and 
shareholders or member-owners with money at  lower or no physical collateral requirements. 
stake. NGO MFIs may receive oversight from a  Debt for NGOs is largely in the form of term 
government body or international network, but  loans; however, a few NGO MFIs have been able 
they are typically not regulated or supervised by a  to issue bonds supported by partial credit guaran-
country’s central bank or financial system regula-
tees (see chapter 16).
tory authorities. 
NGO MFIs benefit from less onerous report-
As financial service providers, NGO MFIs are  ing requirements and less formalized structures 
limited in the services they can provide (for  than regulated institutions and thus may be able 
instance, only credit); some may also operate as  to operate more informally in response to client 
agents for a bank or insurance company. They tra-
needs; however, management is often weak, par-
ditionally offer a standard microenterprise loan  ticularly as the NGO expands, which may lead to 
for investment in productive activities, either to  difficulty maintaining stability and growth. NGO 
individuals or to groups, often using peer guaran-
MFIs were early, if not the first, providers of 
tees, group solidarity, or village banking methods  microfinance in areas underserved by formal 
(between 5 and 30 neighbors meet regularly to  financial institutions. Over the years, however, 
Institutional Providers 
177

NGOs have become less prominent in microfi-
retained through earnings and deposits, as well as 
nance largely because of their inability to provide  various forms of debt. Deposit-taking MFIs are 
savings services and difficulty covering their costs  often able to borrow from a broad range of lend-
and funding growth. Although thousands of mul-
ers as well as the capital markets. The ability of a 
tipurpose NGOs offer microcredit, they serve a  deposit-taking MFI to borrow is determined by 
relatively small number of clients. Given these  its performance.
limitations, some NGO MFIs become regulated 
Deposit-taking MFIs are a form of NBFI, 
institutions. Larger multipurpose NGOs may spin  which can be an interim step to obtaining a 
off their financial services to a separate entity  bank license or an end in and of itself. As with 
(ideally self-sustaining), while other activities  other shareholding institutions, deposit-taking 
continue to require subsidies. 
MFIs need to balance the need for shareholder 
value and returns with the need to serve poor 
women and men. Furthermore, if transforming 
Deposit-Taking MFIs 
from a nonprofit organization with no owners 
Deposit-taking MFIs have the institutional struc-
into a for-profit company with return-seeking 
ture and regulatory approval required to mobilize  shareholders, a tremendous amount of work 
and intermediate deposits. They may be licensed  and strong leadership is required. The cultural 
and regulated as banks or operate under a special  changes—from frontline staff, to all levels of 
category for deposit-taking MFIs created by the  management, to the board—are very difficult to 
regulatory authorities. For example, the Bank of  manage and require substantial commitment 
Uganda created a special “tier 3” category of  and involvement of the board and senior man-
financial institutions, called micro-deposit-taking  agement. Transformation takes money, strong 
institutions, that intermediate deposits but do not  visionary leadership, institutional ownership, 
qualify as banks. These institutions have lower  and time (see box 7.2).
minimum capital requirements and cannot pro-
vide all the services banks can. The ability of an  Other Non-Bank Financial 
MFI to accept deposits contributes to financial  Institutions 
inclusion by providing clients with a secure place 
to save. By facilitating savings, these institutions  In addition to specialist deposit-taking MFIs, 
better respond to client needs and can expand  which are generally not licensed as banks, other 
services to nonborrowers. 
NBFIs are beginning to increase their depth of 
Deposit-taking MFIs can be set up as green-
outreach to poor women and men. NBFIs include 
field institutions or be transformed from an NGO  insurance companies (discussed in a separate 
MFI into an institution licensed and regulated by  section below), leasing companies, specialist 
the central bank. Accepting deposits provides  credit companies such as finance companies, 
both a much valued service and an important  consumer credit companies, and others. NBFIs 
resource base with which to fund loans. Accepting  are restricted by law in the range of services they 
deposits also enhances the MFI’s sustainability  can offer and the financial infrastructure they 
and places it in a better position to access com-
can access. NBFIs cannot normally intermediate 
mercial sources of funding to fuel growth and  deposits (unless specifically licensed to do so) 
expand outreach. Given their regulated status,  and may not be allowed to participate in pay-
deposit-taking MFIs are usually shareholding  ment and settlement systems (see chapter 18). 
institutions, with a mix of funding sources,  From a legal and regulatory perspective, it is 
including equity raised from shareholders and  often easier to obtain a license to operate as an 
178 
The New Microfinance Handbook

Box 7.2  Transformation from an NGO to a Deposit-Taking Institution 
Many NGOs have taken different routes over 
Numerous institutional incentives are 
the past decade, with some of the larger and 
associated with becoming a deposit-taking 
more professional organizations transforming 
institution. Client satisfaction is improved 
into deposit-taking institutions. The transfor-
when the range of products is broad; and 
mation process is difficult and has proven to 
deposits offer a stable base of local currency 
be extremely time-consuming and expensive. 
funding. In addition, rigorous reporting to a 
Thus it is not for the majority of NGO MFIs. 
regulator facilitates increased transparency 
Assuming that the proper regulatory frame-
and increased access to diversified investors 
work is in place, an NGO MFI must modify its 
and funding sources. There are trade-offs, 
governance structure, develop savings prod-
however. Many institutions target large depos-
ucts, and design new operating processes  its, which are generally less expensive to 
and procedures. These processes include  mobilize but can be less stable than small 
both front-office operations—those that inter-
local deposits and may undermine the original 
face with clients—as well as back-office oper-
purpose of transforming; however, mobilizing 
ations, including accounting, reporting, and  only small deposits generally entails high 
treasury. In addition, upgrading infrastructure 
costs and therefore is not feasible. Some  
such as banking halls and vaults to comply  institutions struggle for years to implement 
with banking regulations, developing manage-
appropriate information systems to facilitate 
ment information services capable of  accepting deposits, and many underestimate 
 reporting to regulators, and capturing data  competition in the formal sector. In addition, 
associated with savings products are all  formal reporting to investors, regulators, and a 
 crucial activities for a successful transforma-
board of directors is substantially greater for 
tion. Furthermore, MFIs must hire and train  deposit-taking institutions. Many MFIs find it 
new staff for savings products, and they often 
difficult to keep up with the volume of report-
hire new senior management with experience 
ing and level of detail required of regulated 
managing a regulated institution.
financial institutions.
Source: Ledgerwood and White 2006.
NBFI than as a bank, because minimum capital  are licensed and regulated by the banking 
requirements are lower and because there is less  authorities and are generally privately owned. 
systemic risk as there is no (for the most part)  Although most leasing companies do not focus 
intermediation of deposits. 
on the poor (there are few microleasing compa-
nies), many types of providers are beginning to 
Leasing Companies 
add leasing products. Because the lease is 
Leasing companies and hire-purchase compa-
granted based on cash flow with the asset itself 
nies finance fixed assets such as equipment or  as security, leasing provides entrepreneurs with 
heavy-duty vehicles and mostly provide credit  financial resources to start a business on a lim-
under financial lease contracts. Under a leasing  ited budget or to increase productivity through 
model, the leasing company retains ownership of  new capital investments. Leasing requires pro-
the leased asset, which is generally used as col-
cesses and systems that accommodate asset 
lateral for the transaction. Leasing companies  ownership and residual value, specific taxation, 
Institutional Providers 
179

and accounting and legal requirements. Leasing  credit is their first experience and first access to 
products are discussed in chapter 9.
the financial system. Customers build up a credit 
history, start saving, and start using the financial 
Finance and Consumer Credit Companies 
system. Consumer finance stimulates the penetra-
Finance companies or financiers are NBFIs that  tion of financial services in society, and a well-
provide small, short-term loans, which are fre-
developed consumer finance delivery system 
quently unsecured and used to purchase con-
leads to a better overall financial structure (banks 
sumer durable goods and services. Finance  and non-banks), better competition, and more 
companies are often associated with consumer  access to credit for all income groups and, last but 
credit and installment contracts. They are nor-
not least, at better credit terms” (FMO 2006). 
mally not allowed to mobilize savings; however, 
Asset finance companies, which were espe-
their activities vary by their charters, and excep-
cially popular in North America in the 1950s, have 
tions are found. For example, some may be able to  been replaced largely by finance divisions of large 
mobilize time deposits, but not demand deposits  retail chains, but they can help the working poor 
(see box 7.3).
to buy household assets such as furniture and 
Organizations that provide consumer credit  appliances. This financing is similar both to leas-
include specialized consumer finance companies,  ing, where the purchaser is able to use the asset 
payday lenders, supplier credit, and retail stores.  during the lease agreement, and to consumer 
For example, some large retail outlets are applying  financing, where the retailer sells on “lay away” 
for licenses to provide financial services, such as  and the purchaser pays a certain amount periodi-
Grupo Elektra in Mexico (see box 7.4). Some pro-
cally until he or she owns the asset. However, 
vide short- to medium-term consumer loans to  financing costs can be quite high. 
employees that are repaid through payroll deduc-
tions. Similar to MFIs, consumer credit compa-
Suppliers and Buyers 
nies often serve low-income households and  Private companies such as input suppliers, 
microentrepreneurs, and they are becoming more   buyers, wholesalers, exporters, and processors 
and more significant in many emerging and devel-
sometimes provide financial services, primarily 
oping markets: “For most customers, consumer  credit, to low-income markets. Supplier credit is 
Box 7.3  NBFIs in India 
Many MFIs in India operate as for-profit NBFIs. 
and cannot issue checks, and (3) deposit insur-
Under Indian law, an NBFI is a company regis-
ance facilities are not available. NBFIs regis-
tered under the Company’s Act of 1956 and 
tered with the central authorities are classified 
engaged in the business of loans and advances 
as an asset finance company, an investment 
and the acquisition of shares, stocks, bonds, 
company, or a loan company. An asset finance 
debentures, and securities issued by the gov-
company, the most common type of NBFI, is 
ernment or a local authority. 
a financial institution whose principal business 
Banks differ from NBFIs: (1) NBFIs cannot 
is the financing of physical assets such as 
accept demand deposits, (2) they are not a  automobiles, tractors, lathe machines, or gen-
part of the payment and settlement system 
erators to support productive activities. 
Source: India Microfinance Editorial Team 2009.
180 
The New Microfinance Handbook

Box 7.4  Grupo Elektra and Banco Azteca in Mexico 
In March 2002 one of Mexico’s largest retail-
which were previously issued by Elektrafin, 
ers for electronics and household goods,  the financing unit of Grupo Elektra’s retail 
Grupo Elektra, received a banking license. In 
stores. These loans averaged US$250. 
October 2002 it launched Banco Azteca, open-
Although tied to merchandise, they could be 
ing 815 branches in all Grupo Elektra stores. 
used for business purposes such as the pur-
From the outset, Banco Azteca targeted  chase of a new sewing machine or a refrigera-
low- and middle-income customers, histori-
tor that could be used to start or sustain a 
cally underserved by the traditional banking  microbusiness. In 2003 Azteca started offer-
industry. Azteca began offering savings  ing US$500 consumer loans not tied to mer-
accounts that could be opened with as little 
chandise. These amounts were comparable in 
as US$5. Within the first month, 157,000  size to loans offered by several microfinance 
accounts were opened, increasing to 250,000 
organizations, which in 2002 amounted to 
accounts by the end of December 2002. At its 
about US$360 on average. Toward the end of 
opening in October 2002, Banco Azteca also 
2003, Azteca also expanded into the mort-
took over the issuance of installment loans, 
gage and insurance business.
Source: Bruhn and Love 2009.
 provided by input suppliers and wholesalers, who  back to the supplier. Value chain finance is dis-
provide in-kind credit or cash in return for either  cussed in detail in chapter 10. 
installment payments over a period of time or a 
Private companies that provide credit are nor-
lump-sum payment at the end of the term. For  mally not regulated or supervised by banking 
example, seed suppliers may provide seeds to  authorities because they generally do not pose 
farmers during the planting season with the  systemic risk (and may not be licensed at all to 
expectation that the seeds will be paid for at the  provide financial services). Although volumes are 
time of harvest. Financing costs are built into  not tracked, private companies often provide a 
the price of seeds. 
substantial amount of credit, particularly in rural 
Credit provided by input suppliers and buyers  areas. 
is often embedded in another transaction and 
In addition to supplier credit, other private 
therefore is not provided without it. Credit is built  companies embed financial services within their 
into existing business relationships through a  normal business operations. For example, 
value chain. A value chain is a path that a product  Patrimonio Hoy provides financial services to 
follows from raw material to consumer, from  increase access to housing (see box 7.5).
input supplier to producers, and through various 
actors who take ownership of the product before  Banks 
it arrives at its final condition and location (Jones 
and Miller 2010). The fact that actors are within  Many types of banks are engaged in microfinance, 
the same value chain provides incentivized lend-
including rural banks, postal and savings banks, 
ing by input suppliers, processors, wholesalers,  state banks, and commercial banks. Banks are 
and others to, for example, guarantee the sale of  normally licensed and regulated by the central 
inputs or commit producers to sell the product  bank or other government agency or ministry, 
Institutional Providers 
181

Box 7.5 Patrimonio Hoy: Housing Microfinance That Addresses Market  
Opportunities 
CEMEX, a Mexican cement manufacturer 
Participants in Patrimonio Hoy pay about 
with a US$15 billion market capitalization,  US$14 a week for 70 weeks and receive 
developed an innovative corporate social  consultations with CEMEX architects and 
responsibility program called Patrimonio Hoy 
scheduled deliveries of materials that coin-
(Patrimony Today). The program aims to  cide with the building phases. Prices on all 
reduce the Mexican housing deficit—which  building materials are kept stable for the life 
has left more than 20 million people with  of the project, which shields consumers 
 
inadequate shelter—while stimulating con-
from sudden price hikes and supply short-
sumer demand for housing materials in the  ages that are common in free markets. 
 
low-income urban slums of Mexico.
And if needed, participants can store their 
For more than a year, CEMEX employees 
materials in a secure CEMEX facility. 
and consultants immersed themselves in the 
Participants found the program enabled 
urban slum of Mesa Colorada in the state of 
them to build homes more cheaply and 
Jalisco, where they conducted a series of learn-
three times faster than they could on their 
ing experiments and in-depth interviews. They 
own. 
discovered that a significant barrier to building 
From 2000 to 2011, Patrimonio Hoy pro-
homes was the inability to save enough money 
vided affordable solutions to more than 1.3 
to purchase the required materials. The families 
million people throughout Latin America and 
explained that committing to long-term projects 
enabled more than 265,000 families—251,000 
was difficult because employment in the area 
in Mexico and 15,000 in other countries—to 
was unstable. Moreover, even when they tried 
build their own homes. Patrimonio Hoy oper-
to purchase construction materials, Patrimonio 
ates through more than 100 centers in 
Hoy participants had nowhere to store them. 
Mexico, Colombia, Costa Rica, Nicaragua, and 
Theft is common in such impoverished neigh-
the Dominican Republic. Of these 100 offices, 
borhoods, and weather conditions often spoil 
85 are in Mexico and 93 are completely 
the products before they can be used.
self-sustaining.
Source: Segal, Chu, and Herrero 2006.
which ensures that the term “bank” is reserved  owned, member owned, or privately owned and 
for certain types of financial institutions. Although  are normally licensed and supervised by the bank-
microfinance banks share features of standard  ing authorities. They are relatively small institu-
commercial or retail banks, lending and outreach  tions, but large enough to support professional 
are targeted to customers not normally reached  management and staff. They are normally 
by traditional formal financial institutions. 
restricted to a certain geographic area and may be 
limited in the products they can offer. They gener-
Rural and Community Banks 
ally provide products similar to commercial banks, 
Rural and community banks operate in rural areas,  including short- and long-term savings products 
providing primarily savings services and agricul-
(sometimes with overdraft facilities) and invest-
tural loans, reflecting the main economic activity  ment and consumption loans, often focused on 
in rural areas. Rural banks can be government  agriculture and trading. Rural banks may also be 
182 
The New Microfinance Handbook

licensed to provide money transfers and pay-
services, some rural banks are also allowed to dis-
ments. Given their small size, rural banks are  tribute microinsurance (BSP 2011).
often part of an association or apex institution 
and may benefit from technical support includ-
Savings Banks 
ing, for example, capacity building, fund mobili-
Savings banks are regulated financial institutions 
zation, and treasury management. In Ghana the  with a retail focus that extends across broad geo-
Association of Rural Banks also performs impor-
graphic areas. In Europe and North America, sav-
tant supervisory functions delegated to it by the  ings banks originated as early as the eighteenth 
Bank of Ghana (see box 7.6).
century, with the objective of providing easily 
Rural and community banks exist predomi-
accessible savings services to a broad range of 
nantly in Indonesia, Ghana, Nigeria, India, China,  populations. 
and the Philippines. In these countries rural banks 
The universe of savings banks is very diverse; 
were often established as part of rural develop-
no “prototype” savings or socially committed 
ment strategies implemented by national govern-
retail bank exists.1 However, most savings banks 
ments. For example, in Indonesia rural banks  were set up to reach clients who are not served by 
were established during the 1960s in an effort to  commercial banks. Typically their objective is not 
foster the growth of financial services. Rural banks  to maximize profit (Christen, Rosenberg, and 
in Indonesia are largely owned by provincial gov-
Jayadeva 2004).
ernments and used to support regional economic 
Savings banks are regulated by the banking 
policies. In India regional rural banks have a man-
authorities and are both publicly and privately 
date to improve access to financial services,  owned. They often have a broad decentralized 
including savings, in underserved, primarily rural,  distribution network, providing local and 
areas and are heavily involved in credit-linked  regional outreach. Research conducted by the 
programs to Self-Help Groups (Linder 2010a,  World Savings Banks Institute in 2006 showed 
2010b). The Philippines has both rural banks,  that savings banks hold three-quarters of the 
which are owned and organized by individuals  1.4 billion accessible accounts provided by 
living in a given community, and cooperative rural  double-bottom-line financial institutions (De 
banks, which are owned and organized by cooper-
Noose 2007).2 Furthermore, data from 2000 to 
atives and other farmer associations. In the  2003 show that non-postal savings banks rep-
Philippines, in addition to savings and credit   resent close to 20 percent of total banking 
Box 7.6  Rural and Community Banks in Ghana 
As a network, rural and community banks are 
and 680,000 borrowers. Although the service 
the largest providers of formal financial ser-
delivery of the network has been strong, its 
vices in Ghana’s rural areas. By the end of  financial performance has been mixed. The 
2008, Ghana had 127 rural and community  profitability and net worth of the network have 
banks, with 584 service outlets, representing 
grown, but the financial performance of some 
about half of the total banking outlets in the 
members has been poor, and a small number 
country, reaching about 2.8 million depositors 
are insolvent.
Source: Nair and Fissha 2010. 
Institutional Providers 
183

assets (Christen, Rosenberg, and Jayadeva  directly by the postal bank, if licensed to interme-
2004). Because of their large branch networks,  diate deposits, or on behalf of a commercial bank 
in many countries, such as Kenya and Chile,  that partners with the post office acting as an 
the geographic proximity of  savings banks  agent. Postal banks are  
primarily wholly or 
enables greater access than some other types   
majority owned by governments directly or 
of providers. As well, savings banks offer prod-
through government-owned and -managed post 
uct terms that make them accessible; their  offices. They are normally supervised by a special-
standard passbook savings account has low  ized unit of the central bank or by a separate gov-
minimum balance requirements and low or no  ernment agency altogether (Christen, Rosenberg, 
fees. Finally, savings banks can also contribute  and Jayadeva 2004). 
to developing financial capabilities because, in 
In 2010 post offices worldwide had an exten-
addition to introducing financial services to  sive retail distribution network with more than 
many unbanked individuals, they often provide  660,000 points of sale, above twice the number of 
financial education programs. For example, in  commercial bank branches; many of these are 
Thailand the Govern ment Savings Bank has a  located in periurban, rural, or remote areas, pre-
school-based savings program in which stu-
senting immense opportunities to offer entry-
dents create a savings bank in their class and  level banking services to the public (WSBI 2010; 
acquire the basic principles of personal finan-
see box 7.8).
cial management (De Noose 2007).
State Banks 
Postal Savings Banks 
State banks include agriculture banks, develop-
A large proportion of savings banks are postal sav-
ment banks, postal banks (discussed above), and, 
ings banks, often established by governments  in some cases, even commercial state banks. The 
originating from the postal network. In addition to  primary institutional feature is that they are 
their core postal activity—collecting and distribut-
owned and controlled primarily by the govern-
ing mail and parcels—postal branch networks can  ment and, as such, are considered public or semi-
provide financial services. Postal financial services  public entities. State banks often have a large 
traditionally include payment and money trans-
number of savers and extensive branch networks. 
fers as well as savings services, generally in small  In line with their ownership structure, they are 
amounts (see box 7.7). In some countries services  funded largely by investment of public funds as 
also include credit or insurance products, either  well as deposits. 
Box 7.7  Post Office Banks in India 
Of the 155,000 post office branches in India  for Rs 3.4 trillion in deposits (more than US$75.6 
reported in March 2008, more than 98 percent 
billion, 42.9 percent of what banks held). Even 
offer some type of savings services. The post 
more encouraging for financial inclusion is that, 
office controlled 174.7 million savings accounts 
unlike banks, 89.8 percent of all post offices are 
(or 40.7 percent of what banks held), accounting 
located in rural areas.
Source: Linder 2010a.
184 
The New Microfinance Handbook

Box 7.8  Increased Financial Inclusion through Postal Savings Banks 
The large branch and agency networks of  payment systems, thus leveraging the postal 
postal banks offer valuable channels for inter-
banks’ networks. The Kenya Post Office 
national and domestic money transfers.  Savings Bank has partnered with Citibank and 
Using a postal bank’s network, the govern-
Stanbic Bank to do this. The network could 
ment and other institutions can pay salaries 
also provide valuable outlets and agencies for 
and pensions and individuals can pay school 
insurance products, as insurance companies 
fees and transfer allowances to pupils in  increasingly examine the low-income mass 
remote areas that are not being served by  market and develop products for it. However, 
commercial banks. For example, in Kenya  the challenges of successful linkages and 
about 55 percent of the allowances for uni-
strategic alliances should not be understated; 
versity students in public universities and 
 
to date, few examples have reached signifi-
50 percent of government pensions are paid 
cant scale.
through the Kenya Post Office Savings Bank 
As postal banks start the process of reengi-
(Robinson and Anyango 2003). Postal banks 
neering themselves and their business, the 
often attract young people and students—
threat of brand confusion with the post office 
either as parents seek to open a low-cost  will grow in importance. The Kenya Post Office 
bank account for their children or as govern-
Savings Bank suffered damage to its reputa-
ments seek to pay student allowances across 
tion as a result of being confused with the post 
the country.
office and its poor service quality. Postal banks 
Significant opportunities exist for postal  often also suffer from serious overstaffing, 
banks to become profitable, modern,  partly as a result of their manual operations 
 client-responsive organizations. Postal banks 
and past politicization of appointments. This 
have large networks of branches, giving them 
phenomenon means that, at some levels, 
a comparative advantage over commercial  postal banks not only have too many staff, but 
banks and creating the potential for offering 
also do not have the appropriate skills to man-
e-banking solutions. The postal bank networks 
age cash balances and the treasury, with the 
also have a comparative advantage over shops 
result that savers must often travel to larger 
or other agent locations. They are permitted to 
centers to withdraw cash. Furthermore, most 
accept deposits and utility bill payments, are 
postal banks are required by their enabling acts 
used to handling remittances and manage  or laws to invest mainly in government instru-
money, and in many cases have greater liquid-
ments. Often state corporations cannot 
ity than shops with limited turnover. Indeed, in 
 
borrow without the approval of the share-
some countries, the central bank authorities 
holder—the government—which guarantees 
do not permit shops or others to offer even a 
the amount borrowed. This can result in bud-
basic withdrawal service. Strategic alliances  getary constraints. Fluctuating interest rates 
with other banks can allow postal banks to  on treasury bills have meant significant vari-
offer withdrawal and deposit services through 
ances in annual profits and in the capacity to 
point-of-sale devices or mobile phone–based 
carry out major projects. 
Source: Wright, Koigi, and Kihwele 2006.
Institutional Providers 
185

Many government-owned banks are estab-
to close or restructure state-owned financial 
lished to serve the agriculture sector. Their pri-
institutions (ADB 2007; see box 7.9).
mary activities include extending credit and 
However, not all state banks suffer from gover-
savings services to promote small-scale farming  nance and management problems and fail to 
production, cottage and village industries, and  become profitable. Bank Rakyat Indonesia pro-
other rural livelihood activities. Individual farm-
vides a good example (see box 7.10).
ers and merchants, cooperatives, or associations 
are the primary target market. In many cases agri-
culture development banks are the only formal  Private Commercial Banks 
financial service provider in rural areas. 
Commercial banks have the most robust product 
State banks have often been established to  offering of all financial service providers, typically 
correct market failures and provide resources to  providing a full menu of payments, credit, and 
underserved or high-priority sectors of the econ-
savings services.3 Although they are beginning to 
omy. As a result, they may be susceptible to the  reach lower-income markets, private commercial 
political priorities of ruling governments and to  banks generally operate in urban areas and serve 
political influences that may not serve the insti-
a wealthier clientele than alternative financial 
tutional objectives. Beyond politics, some aspects  institutions specifically targeting low-income 
of government ownership threaten the long-
populations. 
term sustainability of state banks: An implicit 
Commercial banks tend to be more highly 
government guarantee creates a safety net, limit-
leveraged than other providers given their access 
ing their motivation to operate profitably, and  to different sources of funding enabled by their 
poor collection practices and frequent forgive-
formality, regulated status, and, by definition, 
ness schemes enable a weak credit culture,  commercial orientation. Equity is raised from 
undermining the ability of the private sector to  shareholders either through private placements 
operate in rural markets (Young and Vogel 2005).  or through capital markets. Debt is raised through 
State banks may be reluctant to operate under  commercial sources, including borrowing from 
prudent financial management and accounting  other commercial banks, development finance 
practices. For example, they may not write off  institutions, and microfinance investment vehi-
delinquent loans, frequently understate provi-
cles, and through capital markets.
sions for portfolios at risk, and overstate profits 
In general, commercial banks engage in micro-
and assets. Political ties may compromise full  finance in three ways: (1) by expanding their 
transparency of financial positions. State banks  product offering to microclients—referred to as 
may not be “accountable” to the regulators in the  downscaling—either through the creation of a 
same way that a private bank or financial services  separate internal unit or through a new subsidi-
company should be. Furthermore, board mem-
ary, (2) by creating a new institution—referred to 
bers may be appointed based more on political or  as greenfielding—for the specific purpose of offer-
other criteria than on professional skills or busi-
ing regulated formal financial services to the poor, 
ness rationale, limiting effective governance and  or (3) by establishing an agency relationship with 
perpetuating the challenges of fiduciary respon-
an experienced microfinance organization or 
sibility. Governments have often been willing to  other provider. 
subsidize continuing losses, weakening manage-
ment discipline (Christen, Rosenberg, and  Downscaling 
Jayadeva 2004). Faced with an often massive  When a commercial bank creates a separate inter-
budgetary burden, some governments have had  nal unit or establishes a microfinance subsidiary, 
186 
The New Microfinance Handbook

Box 7.9  Privatization: The Experience of Khan Bank in Mongolia 
Khan Bank was established in 1991 from the 
the loan portfolio grew from US$9 million to 
assets of the former state bank with the spe-
US$149 million. In 2006, 76 percent of the 
cific goal of serving the rural sector. In 1999 the 
loan portfolio was in rural areas, business 
World Bank made reforming Khan Bank a con-
loans accounted for 45 percent, consumer 
dition of its Financial Sector Adjustment Credit 
loans for 28 percent, and agricultural loans for 
Program for Mongolia, and the U.S. Agency for 
26 percent. The portfolio at risk over 30 days 
International Development agreed to fund  was only 2.5 percent. During the initial transi-
external support to manage Khan Bank.  tion period, Khan Bank focused on simple, 
Management’s mission was to (1) restore  standardized products in rural areas. It piloted 
financial soundness to Khan Bank, (2) bring  new products in selected urban branches, 
financial services to the country’s rural popula-
only rolling them out once they proved viable. 
tion, and (3) prepare Khan Bank to operate  Over time Khan Bank increased its range of 
independently as a precursor to privatization. 
products and now offers a wide range of loan, 
After being placed in receivership in 2000, 
deposit, and money transfer services. Loan 
the bank was recapitalized, put under a  products range from express micro loans and 
restructuring plan, and successfully privatized 
small and medium enterprise loans to crop 
in 2003. From December 2001 to June 2006, 
and herder credit.
Source: DAI 2007; ADB 2007.
Box 7.10  Bank Rakyat Indonesia 
In 1983 Bank Rakyat Indonesia (BRI) began  shares of BRI to the public in an initial public 
the transformation from a dispenser of subsi-
offering. Listing on the Indonesian Stock 
dized agricultural credit to a self-financed  Exchange brought a new level of reporting 
microbanking network with ever-growing  and transparency as well as a true double bot-
deposits, loan portfolios, profits, and outreach 
tom line, with public investors expecting a 
to the lower segment of the market. In 1997 
return on their shares, while the government 
and 1998 the Asian financial crisis destroyed 
maintained majority ownership as protection 
much of the commercial sector in Indonesia 
against purely commercial motives.
and almost wiped out the country’s banking 
BRI became the most profitable bank 
 
industry. However, BRI was one of the state-
in Indonesia in 2007 and the largest bank in 
owned banks exempted from closure. It was 
terms of loan portfolio size in April 2008. In 
restructured through a massive recapitaliza-
2010 it purchased Bank Agroniaga in an effort 
tion effort in 2000, and in 2003 the govern-
to expand its footprint in the agribusiness 
ment of Indonesia offered 40 percent of the 
sector. 
Source: Seibel and Ozaki 2009.
Institutional Providers 
187

it needs to change its organizational structure,  brand. The culture and brand of the commercial 
lending methodologies, staffing, processes, and  bank will not necessarily carry through appropri-
procedures to facilitate smaller transactions  ately to the microfinance arm. 
appropriate for microclients. For example, loan 
If a subsidiary is created, it must be licensed 
officers, who traditionally meet prospective cli-
and regulated separately, with its own manage-
ents at the bank branch, must usually visit clients  ment team and staff. The parent bank is a partial 
in their home, marketplace, or village. Loan prod-
owner (usually majority) in the new microfinance 
ucts must be modified to reflect the reality that  subsidiary. Other investors (equity shareholders) 
most microclients do not have collateral, official  bring microfinance experience, and specialized 
accounts, or financial statements; instead, loan  consulting firms often take a role in setting up and 
officers must focus on business and household  managing the new subsidiary (see box 7.11). 
cash flows. Savings services need to be modified 
to have lower or no minimum balances. Pricing  Greenfielding 
may need to be adapted to reflect higher operat-
While transforming NGO MFIs and downscaling 
ing costs and lower balances. Similarly, auditing  existing commercial banks can be effective for 
and accounting procedures need to be modified  increasing financial inclusion, greenfielding—the 
to analyze a portfolio with numerous small trans-
start-up and creation of new microfinance 
actions. Cultural and operational changes of this  banks—is another approach whereby a formal 
magnitude require a distinct management struc-
bank is created with financial services dedicated 
ture to ensure, first and foremost, that the new  entirely to the micro, small, and medium-size 
microfinance unit or subsidiary offers a value  enterprise markets. The banks are licensed and 
proposition for clients under its own image and  formally regulated institutions with professional 
Box 7.11  Subsidiary Model in Practice: ACCION-Ecobank Partnership 
Ecobank is a full-service regional banking insti-
Company (EASL) in Ghana—an institution 
tution employing more than 11,000 staff in  jointly owned by Ecobank (70 percent shares) 
746 branches and offices in 29 West, Central, 
and ACCION (30 percent shares) through its 
and Southern African countries. In an effort to 
investment company, ACCION Investments. 
move down-market and provide banking ser-
The new entity received its license from the 
vices to lower-income clients, it partnered  Bank of Ghana in March 2008. Since its launch, 
with ACCION to form subsidiaries in Ghana 
EASL has experienced significant growth, 
and Cameroon. As part of the agreement,   
serving clients through a network of six 
ACCION brings its technical expertise and  branches and two satellite kiosks based in mar-
leadership in the microfinance sector, and  kets throughout Accra. EASL provides the 
Ecobank offers the opportunity to leverage its 
working poor with access to credit and savings 
infrastructure and extensive network of banks 
products, along with debit cards for use across 
to help to standardize and deliver high-quality 
the country. In particular, EASL has successfully 
financial services to low-income clients. 
launched six savings products addressing a vari-
At the end of 2006, Ecobank and ACCION 
ety of client needs. In May 2010 EASL opened 
launched Ecobank-ACCION Savings and Loans 
its first two branches in Douala, Cameroon.
Source: Ecobank-ACCION website (http://www.accion.org/page.aspx?pid=2067).
188 
The New Microfinance Handbook

management teams and unique methodologies 
Holding companies provide standardized ser-
for deploying small-scale savings accounts, credit,  vices to their affiliated subsidiaries such as sup-
and other financial services. 
port for fundraising, help negotiating loan and 
Greenfielding of new microfinance banks has  shareholder agreements, and backup support for 
grown rapidly since 2006 with the creation of  information systems, product development, audit-
numerous commercial microfinance networks.  ing, and training programs for middle and senior 
These networks are structured as holding com-
management. The commercial microfinance net-
panies in which the sponsor or primary share-
work model is founded on the principles of social 
holder provides the technical expertise while  responsibility, transparency, efficiency, and sus-
other like-minded investors, including develop-
tainable profitability. Banks owned by the same 
ment finance institutions and bilateral donor  holding company are integrated into a worldwide 
institutions, provide various forms of funding. In  network in which ideas and experience are 
addition to investing equity, shareholders nor-
exchanged and synergies are exploited. All net-
mally provide grant funding to the technical  work institutions are co-branded and adhere to a 
partner, often a foreign network, to develop the  common set of ethical, environmental, and pro-
capacity of the institution as well as related  fessional standards (see box 7.12). 
products and channels, support a critical analy-
Creating a new institution entails three stages: 
sis of the financial needs of target beneficiaries, 
and hire and train local staff. Over time, local  • Foundation stage. A greenfield MFI is estab-
employees are trained to take over virtually all 
lished, the license is obtained, initial capacities 
functions of the new banks.
are developed, and operations are launched. At 
Box 7.12  Microfinance Networks and Commercial MFIs 
ProCredit, the first commercial microfinance  microfinance banks through a combination of 
network, started operations in Central and  equity and management services rendered by 
Eastern Europe. In 2011 the ProCredit group 
its technical partner LFS Financial Systems 
consisted of 21 banks operating in transition  GmbH, concentrates on start-up and early- 
economies and developing countries in Eastern 
stage greenfield banks. Together with other 
Europe, Latin America, and Africa. Building on 
partners, it establishes new and transforms 
the success of the network model, numerous 
existing non-bank microlending institutions into 
other commercial microfinance networks were 
full-service microfinance banks. Over time, 
created between 2005 and 2007, including  AcessHolding will transform from a holding 
AccessHolding, MicroCred, and Advans. These 
company of associated MFIs into a controlling 
networks have focused largely on filling market 
parent company of a global network of microfi-
gaps in some of the most underbanked coun-
nance banks with a common brand identity. As 
tries. Among all the networks, more than 
 
of December 2011, AccessHolding had assets 
20 microfinance banks were greenfielded in  of  €479.8 million and had invested in seven 
Africa between 2006 and 2010, largely sup-
microfinance banks in Azerbaijan, Liberia, 
ported by the International Finance Corporation 
Madagascar, Nigeria, Tajikistan, Tanzania, and 
and Kreditanstalt für Widenraufbau.
Zambia. All investments are regulated entities 
AccessHolding, a commercial microfinance 
operating under full commercial bank or special 
holding company dedicated to investing in  microfinance licenses.
Source: Access Holdings (http://www.accessholding.com); ProCredit (http://www.procredit-holding.com).
Institutional Providers 
189

this stage management consists largely of staff 
Microfinance organizations acting as agents 
seconded from the technical partner or share-
for banks can offer the physical presence, expe-
holder. The new bank receives continuous  rience, and agility to reach low-income popu-
training and capacity building from the techni-
lations and assess them efficiently, whereas 
cal partner. Ideally a local partnership is also  banks offer longer-term, lower-cost sources of 
established at this stage.
funds. For MFIs, agency relationships can sup-
port increased income, while expanding finan-
• Institutional development stage. The branch  cial services to their clients (Miller 2011). Some 
network is gradually expanded, and opera-
agency relationships originate with the micro-
tional breakeven is expected by the third or  finance organization rather than the commer-
fourth year of operations. Funding for techni-
cial bank, while others are hybrid, with only 
cal assistance is maintained but reduced as  some services being managed by the agent 
local management and staff personnel have  institution. 
been trained and adequate systems have been 
Agency relationships can also include differ-
rolled out.
ent financial service providers (most often banks 
• Sustainability and further advancement. A sec-
or money transfer companies), to allow clients to 
ond injection of capital is foreseen during the  process transactions when they cannot access 
fifth or sixth year of operations to sustain the  their primary provider; this is referred to as 
bank’s growth. Local staff now assume most  “correspondent banking,” where a bank per-
managerial positions, and the bank absorbs the  forms services for another bank located in a dif-
costs of senior expatriate staff, if applicable.
ferent city or country. A correspondent bank 
usually conducts business transactions, accepts 
deposits, and gathers documents on behalf of 
Agency Relationships and Partnerships 
another bank or other financial institution. 
The third method for engaging in microfinance is  Other correspondent banking services may 
to provide services through an agency (rather  include treasury management, credit services, or 
than directly). Agency relationships occur when a  foreign exchange. 
commercial bank partners with a microfinance 
Correspondent banking services can help a 
organization or other financial service provider to  financial institution to extend its geographic cov-
provide services to microfinance clients on behalf  erage, while lowering transaction costs for clients 
of the bank. 
using the existing infrastructure of partner insti-
In this model the microfinance clients do not  tutions. Correspondent banking can be used to 
engage directly with the bank, but rather with the  offer services to clients without having to invest 
partner organization acting as its agent. The agent  in physical infrastructure, which may prove too 
undertakes marketing, sales, and service (most  costly for a smaller provider. For example, money 
direct client contact), while loans and savings are  transfer companies such as Western Union or 
booked on the balance sheet of the bank. Often  MoneyGram often arrange to have a kiosk or win-
operating on a fee-for-service basis, the agent is  dow located within the branch of a bank (or MFI). 
paid by the bank for each new loan; incentives are  Normally each of the partners continues to run its 
in place to ensure loan quality. When an agency  businesses separately but benefits from the ability 
relationship is used, the primary changes in the  to share branch costs and to access a greater num-
bank occur at the senior management level to  ber and type of customer. Another example is 
integrate microfinance assets into the bank’s  where many smaller providers such as MFIs or 
overall strategy and cost structure. 
SACCOs partner with a larger bank or group of 
190 
The New Microfinance Handbook

banks to negotiate access to the larger provider’s  part because funding for health insurance is pop-
network of automated teller machines (ATMs)  ular among donors.
(see box 7.13).
Mutual Insurers 
Mutual insurers are nonprofit organizations that 
Insurance Companies 
are often owned by credit unions or cooperatives 
Microinsurance is a relatively new area within  and are nonprofit, member-based organizations. 
microfinance and is still very much in the learn-
They are distinct from other community-based 
ing stage. Chapter 11 provides a thorough discus-
groups such as burial societies (see chapter 6) 
sion of microinsurance products and services and  because they have professional management and 
addresses some of the issues and challenges fac-
are typically supervised under regulations other 
ing the delivery of microinsurance. This section  than the insurance act. They have the advantage 
describes the main types of insurance providers  of operating in low-income areas and are experi-
active in microinsurance.4 
enced in financial activities, disbursements, and 
confirmation of events. After commercial insur-
NGO Insurance Providers 
ers and NGOs, mutual insurers are the third larg-
NGO insurance providers include development  est provider of microinsurance (Roth, McCord, 
organizations, trade unions, federations, and  and Liber 2007).
MFIs that provide microinsurance (Roth, 
Takaful  insurers are insurance organizations 
McCord, and Liber 2007). They interact directly  that operate according to Islamic financial princi-
with poor communities and are therefore close to  ples; a takaful insurer can invest only in non- 
the market. Most operate without the benefit of  interest-bearing assets and, as such, operates 
an insurance license and are outside the regula-
essentially as a nonprofit mutual. However, very 
tions to which commercial insurers must adhere.  few takaful insurers provide microinsurance. 
They are not driven by profits, which gives them 
more flexibility and propensity to experiment in  Commercial Insurance Providers 
providing new microinsurance products. NGO  Commercial insurers are for-profit insurers regu-
insurance providers have traditionally been the  lated under various country-specific insurance 
largest provider of health microinsurance, for  acts. They are professionally managed and 
example, in part because demand exists and in  required to maintain reserves in accordance with 
Box 7.13  Linking Different Types of Institutions 
SACCO Link is a partnership in Kenya that has 
access their cash through Co-Operative Bank of 
increased linkages within the formal financial  Kenya’s ATMs as well as any Visa-branded ATM. 
sector. The SACCO Link service has helped  It links many rural cooperative members with 
SACCOs to enhance the sophistication of finan-
the larger financial sector. The SACCOs pay for 
cial services they offer to members. The SACCO 
connectivity, software upgrades, and a bridge 
Link debit card enables SACCO members to  to connect to the bank’s system (integrator). 
Source: Co-Operative Bank of Kenya 2008.
Institutional Providers 
191

regulations. Commercial insurers provide a vari-
manages the customer relationship, handling 
ety of insurance products through established  sales, premium collection, policy administration, 
sales and delivery structures and have the poten-
claims assessment, and settlement, while the 
tial to distribute microinsurance on a very large  microinsurance provider is responsible for the 
scale. However, in addition to modifying products  design and development of the products (Roth, 
to make them both appropriate for low-income  McCord, and Liber 2007). In some cases a third-
clients and cost-efficient, a specific challenge for  party service provider (such as a health care  
delivering insurance is establishing trust between  provider) is also involved. 
the insurer and the client. Commercial insurers, 
MFIs with strong processes and systems can 
especially, may not be accustomed to the extra  administer policies for insurers. However, weak-
effort required to ensure that clients understand  nesses in these areas can be exacerbated by the 
the service and see the value of microinsurance.  responsibility for administering microinsurance 
Microinsurance providers need to understand  policies (Roth, McCord, and Liber 2007). These 
the risk profiles of clients as well as the tolerance  relationships require much expenditure of time 
and mitigation measures of poor people, which  on building trust and capacity and providing 
make the provision of microinsurance signifi-
support. 
cantly more challenging than traditional 
Commercial insurers also have access to rein-
insurance.
surance. Reinsurance is a risk management tool 
Unlike general credit and savings products,  whereby one insurance company purchases 
insurance products typically involve more than  insurance from another insurance company. 
one organization—the insurer and the delivery  Reinsurers provide insurance to insurers for cata-
channel. The insurer carries the risk, finalizes the  strophic risk or excessive losses and are becoming 
premium and product design, and ultimately pays  increasingly common with microinsurance, 
claims. The delivery channel sells the product  although to date, they do not play a very large role 
and provides after-sales service (Roth, McCord,  because the size of claims is so small (Roth, 
and Liber 2007). 
McCord, and Liber 2007). 
Selling insurance, collecting premiums, and 
supporting policyholders to settle claims may be  Payment Service Providers
performed by the insurer’s direct sales division or 
by others serving as the delivery channel, includ-
Payment services refer to the electronic transfer 
ing MFIs, financial cooperatives, independent  of funds, sometimes called money transfers, 
agents, churches, post offices, governments,  transfer services, transactions, mobile money 
funeral parlors, and retailers. Depending on the  (when using a mobile phone), or simply pay-
country, regulation may affect different delivery  ments. Although nonelectronic payment services 
channels differently. 
exist (for example, paying a fee to a human cou-
For example, although an MFI may not have  rier to transport cash to another person, as dis-
the capacity or regulatory approval to offer insur-
cussed in chapter 6), for institutional providers 
ance, it can act as an agent for a large insurance  these terms refer to the electronic transfer of 
company, offering direct access to customers (see  funds between two parties. 
box 7.14). Responsibilities are separated in such 
Electronic money or e-money products (elec-
partnerships, with the insurer specializing in  tronic or mobile payment services) are offered by 
product design and risk management and the  numerous types of providers, including money 
MFI leveraging its geographic footprint and cli-
transfer companies, post offices, banks, or other 
ent relationships. In these cases, the MFI 
  formal financial institutions as well as, more 
192 
The New Microfinance Handbook

Box 7.14  Allianz in West Africa 
To reach out to the low-income market, Allianz, 
may not have identity cards, do not know their 
a commercial insurance company, looked for 
rights, and could not enforce them even if 
partners with established networks in rural ar-
they did. In a “cascade of trust,” Allianz relies 
eas. It teamed up with PlaNet Guarantee, an 
on PlaNet Guarantee’s knowledge of local 
international organization that promotes micro-
MFIs and ability to manage microinsurance; 
insurance across Africa. PlaNet Guarantee 
 
PlaNet Guarantee trusts the reliability of 
has brokered nine partnerships for Alli anz in  Allianz; CAURIE trusts the advice of PlaNet 
different African countries. Part ners are MFIs 
Guarantee; the loan officers trust CAURIE; 
that secure their cre dits with standard credit 
and the women in the village banks trust their 
life insurance. CAURIE, Allianz’s partner in  loan officers. Information about insurance and 
Senegal, provides credit to 21,000 women in 
Allianz products in particular is handed down 
275 village banks. Within each village bank, the 
this cascade. 
women split up into solidarity groups of be-
To provide even better service in the 
tween 3 and 10 women. To avoid the burden 
future, PlaNet Guarantee and Allianz initiated 
that the death of a member can put on the  dialogues with 300 micro credit clients through 
whole group, the MFI added compulsory  local NGOs. Cus tomers help loan officers to 
credit life insurance to its product.
under stand their needs beyond individual life 
With this new service, CAURIE’s loan offi-
insurance—such as coverage for the death of 
cers had to learn how to explain microinsur-
a family member and the associated funeral 
ance. They found that the benefit of insurance 
costs or health expenses. This information 
is much harder to convey than the benefit of 
helps Allianz to develop new products that will 
credit, because customers pay up-front for a 
create additional va lue for these customers. In 
specific future event that may or may not  Senegal Allianz added a livelihood component 
 
happen—for example, the death of the  to its life insurance pro duct. The insurance 
insured. If that event does not happen, there 
pays out a fixed sum for each day a borrower 
is no payout. Moreover, customers have to  is unable to work to cover lost income. 
trust that the insurer will keep its promise.  Although not yet a full-blown health insur-
Formal contracts are worth little in villages  ance, the daily allowance is large enough to 
where people often do not have addresses, 
cover smaller medical expenses.
Source: Allianz 2010.
recently, through Internet networks or mobile  internationally for people who are unbanked or 
network operators (MNOs) and other third-party  for people who prefer not to use either the formal 
providers. These payment services typically  banking system or informal systems. They trans-
require the use of a cash-in, cash-out location  fer funds through electronic funds transfer (EFT) 
whereby the customer making the transfer brings  networks. The sender visits the company’s retail 
cash to the office of the provider or the location of  or affiliated agent’s location, submits the transfer 
an affiliated agent. 
amount, and pays the fee, at which point the funds 
Money transfer companies are commercial  are transferred and the recipient is informed by 
networks that transfer funds domestically and  telephone or text message. The recipient is then 
Institutional Providers 
193

able to collect the transfer amount by showing 
Post offices offer electronic cross-border pay-
appropriate identification at any retail or agent  ments referred to as giro transfers. To make the 
location representing the money transfer com-
transfer, clients must do so from a post office loca-
pany. Each major money transfer company oper-
tion; the receiver can receive the transfer into a 
ates in a similar manner, with a central database  postal account, a bank account, or in cash. Giro 
linking all staff or company agents who are dis-
transfers take advantage of the cash float in the 
bursed widely in various locations, including  postal system, and although transfer times may be 
branch offices (generally their own) and exten-
relatively long (two to four days), the fees are gen-
sive networks of partner banks, postal agencies,  erally lower than with banks (Frankiewicz and 
MFIs, travel agents, change bureaus, grocery  Churchill 2011).
stores, convenience stores, and other retailers. 
Banks most often conduct transfers and pay-
The provision of money transfer services was a  ments through current accounts (see chapter 12). 
highly profitable industry long before the advent  Current account transactions may be carried out 
of the Internet and mobile phone networks (see  using negotiable instruments such as checks or 
box 7.15). Although the profit margins for these  money orders and, like other financial products, 
services have shrunk as innovations in telecom-
can be accessed through various delivery chan-
munications have created other options for cus-
nels such as debit cards, ATMs, or mobile phones. 
tomers, transfer service companies remain an  Commercial banks also facilitate electronic fund 
important financial service provider. The service  transfers to another bank account; this is gener-
points are widely accessible, and the service is  ally expensive and not available to persons with-
efficient and convenient without much paper-
out a bank account. 
work. Although expensive, money transfer ser-
Although traditional providers of electronic 
vices are often the only option for an unbanked  transaction services are regulated financial insti-
customer who cannot or does not wish to rely on  tutions, credit unions, post offices, or commercial 
informal systems or is not comfortable with  money transfer companies, over the past decade 
transferring money using a mobile phone. 
more than 100 mobile money deployments (that 
Box 7.15  Western Union and MoneyGram 
Two of the largest players in the money transfer 
Both Western Union and MoneyGram 
industry are Western Union and MoneyGram. 
have increasingly offered retail and agent loca-
In 2012, Western Union had approximately  tions in developing countries, while at the 
510,000 agent locations in 200 countries and 
same time targeting members of diaspora 
territories, allowing consumers to send money 
communities who frequently send money 
worldwide through retail or agent locations,  back to their home countries. Migrant workers 
including convenience stores, kiosks, and the 
seeking economic opportunity in urban areas 
postal service. Similarly, in 2012 MoneyGram 
away from home also provide a natural target 
had more than 275,000 locations in 194 coun-
market because many migrant laborers do not 
tries. Each company earned significant profits. 
use banks.
Source: Isern, Deshpande, and Van Doom 2005; Wikipedia.org/wiki/moneygram; corporate.westernunion.com/
news_media_corporate.html.
194 
The New Microfinance Handbook

is, money transfers using mobile phones) have  References and Further Reading 
launched in developing countries, which suggests  * Key works for further reading.
there is significant commercial interest among  ADB (Asian Development Bank). 2007. “Proposed 
MNOs in offering payment services using mobile 
Loan. Mongolia: Khan Bank. Report and 
phones.5 Mobile network operators are becoming 
Recommendation of the President to the Board 
important players within the financial ecosystem, 
of Directors.” Project 41911, ADB.  
as a channel both for delivering financial prod-
Allianz. 2010. “Learning to Insure the Poor.” 
ucts and services through mobile phones as well 
Microinsurance Report. Allianz, Munich. 
as for providing money transfer services in their  Branch, Brian. 2005. “Working with Savings and 
own right. As experience is gained and the sector 
Credit Cooperatives.” Donor Brief 25, CGAP, 
evolves, they are poised to become increasingly 
Washington, DC, August. 
more relevant. 
Bruhn, Miriam, and Inessa Love. 2009. “The 
Although the regulations in Kenya permit an 
Economic Impact of Banking the Unbanked: 
MNO to offer payment services to clients without 
Evidence from Mexico.” Policy Research Paper 
a bank account, the central banks in other coun-
4981, World Bank, Washington, DC.
tries (India, Pakistan, and Bangladesh, for exam-
BSP (Bangko Sentral ng Pilipinas). 2011. “BSDP 
ple) require the deployment of all mobile payments 
Grants Microinsurance License to Two Rural 
to be led by banks; in other words, the users of 
Banks.” Press release, BSP, December 22. 
mobile money are customers of the bank, and the  *Christen, Robert Peck, and Ignacio Mas. 2009. 
mobile device is the delivery channel for transact-
“It’s Time to Address the Microsavings 
ing through accounts held at the bank (see chapter 
Challenge, Scalably.” Enterprise Development 
and Microfinance 20 (4): 274–85. 
12). Related to this are third-party providers that 
are neither financial institutions nor MNOs that  *Christen, Robert Peck, Richard Rosenberg, and 
Veena Jayadeva. 2004. “Financial Institutions 
are also emerging as payment service providers, 
with a ‘Double Bottom Line’: Implications for 
for example, bKash in Bangladesh and Sub-K in 
the Future of Microfinance.” Occasional Paper 
India. While they do provide direct interface with 
8, CGAP, Washington, DC, July. 
clients, they are discussed in chapter 12 because it  Co-Operative Bank of Kenya. 2008. “Africa 
is hard to differentiate them as providers or as 
Technical Workshop.” PowerPoint  
delivery platforms; by definition they need to part-
presentation, November 26. 
ner with other providers to deliver services. 
DAI. 2007. “Khan Bank: Bank Management 
Support.” http://dai.com/our-work/projects/ 
Notes 
mongolia%E2%80%94khan-bank-bank- 
management-support. 
 1. www.wsbi.org.
*De Noose, Chris. 2007. “Bringing the Hidden 
 2.  Double-bottom-line financial institutions 
Giants to the Footlight: The Role of Savings and 
target the mass market, such as MFIs, credit 
Retail Banks in Increasing the Level of Access 
unions, cooperatives, agricultural and 
to Financial Services.” Microbanking Bulletin 15 
development banks, and savings and postal 
(Autumn). 
savings banks (De Noose 2007).
FMO (Entrepreneurial Development Bank of the 
 3.  This section was contributed by Julie Earne.
Netherlands). 2006. “Guidelines for Consumer 
 4.  This section is summarized from Roth, 
Finance.” Memo, FMO, July 6. 
McCord, and Liber (2007).
*Frankiewicz, Cheryl, and Craig Churchill. 2006. 
 5.  GSMA Mobile Deployment Tracker (http://
Making Microfinance Work: Managing for 
www.wirelessintelligence.com/mobile-money).
Improved Performance. Geneva: ILO. 
Institutional Providers 
195

———. 2011. Making Microfinance Work: Managing 
Nair, Ajar, and Azeb Fissha. 2010. “Rural Banking: 
Product Diversification. Geneva: ILO. 
The Case of Rural and Community Banks in 
Ghana.” In Innovations in Rural and Agriculture 
*Helms, Brigit. 2006. “Access for All: Building 
Finance, ed. Renate Kloeppinger-Todd and 
Inclusive Financial Systems.” World Bank and 
Manohar Sharma. Focus 18, Brief 5. Washington 
CGAP, Washington, DC. 
DC: International Food Policy Research Institute 
India Microfinance Editorial Team. 2009. 
and World Bank. 
“NBFC—Frequently Asked Questions—RBI.” 
Ritchie, A. n.d. “Typology of Microfinance Service 
India Microfinance Business News (Delhi), 
Providers.” Version 1.3. World Bank, 
Financial Inclusion, Social Entrepreneurship, 
Washington, DC. 
and Mobile Money Blog, April 7.
Robinson, Marguerite, and Ezra Anyango. 2003. 
Isern, Jennifer, Rani Deshpande, and Judith Van 
“Report on Kenya Post Office Savings Bank: 
Doom. 2005. “Crafting a Money Transfers 
MicroSave Africa Mid-Term Review.” 
Strategy: Guidance for Pro-Poor Financial 
Background paper, MicroSave, Nairobi. 
Service Providers.” Occasional Paper 10, CGAP, 
Washington, DC.
*Roth, Jim, Michael McCord, and Dominic Liber. 
2007. The Landscape of Microinsurance in the 
Johnson, S. 2004. “‘Milking the Elephant’: 
World’s 100 Poorest Countries. Appleton, WI: 
Financial Markets as Real Markets in Kenya.” 
MicroInsurance Centre.
Development and Change 35 (2): 249–75.
Segal, Arthur I., Michael Chu, and Gustavo A. 
Johnson, Susan, Markku Malkamaki, and Kuria 
Herrero. 2006. “Patrimonio Hoy: A Financial 
Wanjau. 2005. “Tackling the ‘Frontiers’ of 
Perspective.” Case study, Harvard Business 
Microfinance in Kenya: The Role of 
School, Cambridge, MA.
Decentralized Services.” Decentralized Financial  Seibel, H. D., and M. Ozaki. 2009. “Restructuring 
Services, Nairobi. 
State-Owned Financial Institutions: Lessons 
Jones, Linda, and Calvin Miller. 2010. Agricultural 
from Bank Rakyat Indonesia.” Asian 
Value Chain Finance: Tools and Lessons. Rome: 
Development Bank, Mandaluyong City, 
Food and Agriculture Organization.
Philippines.
Ledgerwood, Joanna, and Victoria White. 2006. 
*WOCCU (World Council of Credit Unions). 2011. 
Transforming Microfinance Institutions: 
“What Is a Credit Union?” http://www.woccu 
Providing Full Financial Services to the Poor. 
.org/about/creditunion/.
Washington, DC: World Bank.
Wright, Graham A. N., Nyambura Koigi, and 
Linder, Chris with contributions from Denny 
Alphonse Kihwele. 2006. “Teaching Elephants 
George. 2010a. “Who Says You Can’t Do 
to Tango: Working with Post Banks to Realise 
MicroSavings in India? Part 1: Community-
Their Full Potential.” MicroSave, Nairobi, 
Based/Owned.” Briefing Note 45, MicroSave 
Kenya. 
India. 
*WSBI (World Savings Banks Institute). 2010. “A 
———. 2010b. “Who Says You Can’t Do 
WSBI Roadmap for Postal Financial Services 
MicroSavings in India? Part 2: Conventional 
Reform and Development.” Position paper, 
Finance.” Briefing Note 46, MicroSave India. 
WSBI, Brussels, June. 
Miller, Calvin. 2011. “Microfinance and Crop 
*Young, Robin, and Robert Vogel. 2005. 
Agriculture: New Approaches, Technologies, 
“State-Owned Retail Banks (SORBs) in 
and Other Innovations to Address Food 
Rural and Microfinance Markets: A 
Insecurity among the Poor.” Workshop paper 
Framework for Considering the Constraints 
commissioned for the 2011 Global Microcredit 
and Potential.” Development Alternatives, 
Summit, Valladolid, Spain, November 14–17.
Inc., Maryland.
196 
The New Microfinance Handbook

PART III
FINANCIAL SERVICES 
 
AND DELIVERY  
CHANNELS


CHAPTER 8
Savings Services
Joanna Ledgerwood

  Voluntary savings mobilization from the pub-
and operations that improve productivity and 
lic is not a matter of adding a few products to  contribute to higher incomes. Savings also help to 
a microcredit organization. If successful, it  manage shocks through providing resources dur-
inevitably and irreversibly changes the insti-
ing times of crisis (figure 8.1). In recent years the 
tution, though not its mission. Those that are  volume of demand and consumer preference for 
not prepared for such changes should not  safe and convenient savings services has been 
undertake to collect savings from the public.  increasingly acknowledged, outdating a previous, 
However, those that are willing and able to  widely held view that the poor do not save.
make the changes needed to overcome the 
“The poor need savings services that allow 
risks can profitably attain wide outreach as  them to (1) deposit small, variable amounts fre-
financial intermediaries and can serve as  quently and (2) access larger sums in the short, 
models of the industry for other institutions.
medium, or long term (Rutherford 2009). Like 
—Robinson (2006)
everyone else, they demand a portfolio of savings 
products that offer differing terms of access and 
Demand for savings services is diverse and robust.  generate differing returns” (CGAP 2005, p. 3). In 
A small amount of savings in a secure place can  some cases, poor people need highly liquid ser-
provide resources to manage consumption needs,  vices, for example, to cope with emergencies or to 
smooth irregular income, cover expenditures for  take advantage of an investment opportunity. For 
health and education, or provide the capital nec-
other purposes, they prefer illiquid options to pro-
essary to invest in household assets or new tools  tect their savings and instill discipline, particularly 
Contributions to this chapter were made by Cheryl Frankiewicz. 
Savings Services 
199

Figure 8.1  How Savings Can Improve the Lives of the Poor 
(a) Enhance productivity
(b) Smooth consumption
(c) Protect against shocks
Income
Income
Income
Time
Time
Time
Source: Christen and Mas 2009. 
Note: Dotted line denotes cash flows when people have access to savings services.
if they are saving to purchase an asset or pay an  save in small amounts, making the transaction 
upcoming expense such as school fees. Savings  costs proportionately even higher. Products may 
services also help to keep savings secure, espe-
have complicated procedures and requirements 
cially when receiving lump sums such as at har-
that are difficult for poor people to meet, such as 
vest time or through a remittance (CGAP 2005).
 
minimum balances or formal identification; 
This chapter provides an overview of savings  intimidating banking facilities and procedures 
services, primarily from an institutional perspec-
can potentially make poor savers feel disre-
tive focusing on the institutional capacity  spected (Frankiewicz and Churchill 2011). 
required, the range of clients served, the added  Although informal saving mechanisms have 
complexity to operations when mobilizing depos-
drawbacks, because of the difficulties in access-
its, and a brief discussion of savings products. It  ing formal providers, many poor women and 
will be of interest to practitioners, donors, and  men continue to save informally (see box 8.1; see 
regulators, particularly those interested in adding  also chapter 2).
savings services for the poor. 
Saving in cash at home or with neighbors or 
friends is the most liquid and accessible form of 
Savings Services in the 
savings but also the most vulnerable to pressure 
Community
for unintended or unnecessary expenditures and 
at the most risk of theft. To avoid such risk, many 
Poor people often rank convenience, access, and  choose to save in kind—storing value in grain, ani-
security over interest earnings, with proximity  mals, or jewelry—or through savings clubs or 
being key. For these reasons, poor savers have  deposit collectors found in the local community. 
persistently chosen to save in the informal sec-
Often women will save a store of food (such as 
tor. Banks typically have limited rural infrastruc-
rice) with a neighbor for use at a time when food 
ture, and many find it difficult to serve small,  is scarce. These arrangements are generally recip-
often isolated savers profitably. Furthermore, for  rocal between households and build on the trust 
clients, accessing savings services from formal  and social capital within communities. Saving in 
institutions often requires time and high trans-
livestock is common as well and can provide 
action costs such as transportation, identifica-
short-term income from the sale of products such 
tion, registration, and opportunity costs. As well,  as milk, eggs, or wool. In addition, selling animals 
given low and irregular incomes, poor people  can support the need for medium-term lump 
200 
The New Microfinance Handbook

Box 8.1  Savings Patterns in India
A study by MicroSave and the International  transaction time/money listed as hindrances), 
Finance Corporation of savings patterns in  and lengthy procedures to open accounts. As 
India showed that challenges to saving can  such, the vast majority of excess liquidity 
include cash flow volatility, unplanned expen-
remains in the informal sector.
ditures, and unanticipated events such as ill-
When respondents were asked why they 
ness and natural disasters. Examining the  do not save, volatility in cash flows was the 
supply and demand of savings options for  reason cited most often. Unplanned expendi-
poor people in India, the study highlighted reg-
tures, unanticipated events such as illness or 
ulatory and operational challenges and oppor-
natural calamity, and the lack of a proper place 
tunities for financial institutions and mobile  to save were all also frequently cited. 
banking platforms serving the low-income  Opportunities for individuals to save on a 
market. It found that nearly 75 percent of  structured, regular basis were highly valued. 
opportunities to save are unplanned and  The researchers concluded with seven key 
remain in the informal sector because of ease 
attributes that influenced the performance of 
and access. Although bank branch density in 
service providers who mobilize deposits: 
India is reasonable, usage is low because of 
security, interest, proximity, liquidity/ability to 
bad personal experiences with banks, mis-
withdraw, acceptance of small savings, 
trust of the banking system, inaccessibility  deposit term, and the opportunity to save in 
(specifically with affordability of travel and  small amounts on a regular basis.
Source: Sadana et al. 2011. 
sums. Yet saving in kind is not always safe and  also be inflexible (for example, ROSCAs) and 
often not very liquid as market demand and val-
result in a negative return (for example, deposit 
ues fluctuate. There are also costs associated with  collectors),1 and money may not be accessible 
saving in livestock because animals require food,  when needed (for example, ASCAs). 
water, grazing land, and shelter—costs that add to 
household financial pressures. Saving in jewelry 
is popular in many cultures because it is transfer-
Institutional Savings Services
able into cash and can be used to maintain value  Formal providers are beginning to make impor-
during a period of inflation. However, jewelry can  tant progress in reaching lower-income markets 
also fluctuate in value and poses a high risk of  with savings services. When savings services are 
theft and fraud (Robinson 2004). 
offered by institutional providers, they are gener-
Saving clubs such as rotating savings and credit  ally referred to as deposits. Savings is a more gen-
associations (ROSCAs), accumulating savings and  eral term used when discussing a broad set of 
credit associations (ASCAs), deposit collectors,  activities related to holding assets stored by oth-
and others in the community are used frequently  ers; deposits are the portion of savings held in 
(see chapter 6). These offer more security than  financial institutions (CGAP 2005). Mobilizing 
keeping cash or other assets at home and instill  deposits is very different from providing credit 
discipline with mandatory regular deposits (daily,  and much more difficult. Whereas lenders must 
weekly, biweekly, or monthly). However, they can  select borrowers whom they trust to repay the 
Savings Services 
201

loans, the situation is reversed with savings: It is  chapter 17).2 They also require careful oversight 
the customers who must trust the service pro-
by a competent, committed governance structure 
vider (Robinson 2006). 
knowledgeable about financial intermediation, 
Savings services from formal providers can  and strong institutional capacity including skilled 
improve upon informal services and, in some  management and appropriate systems and 
cases, support increased incomes (see box 8.2). 
 processes to manage the complexity of both 
 lending and mobilizing savings, and to facilitate 
Institutional Capacity
a relationship of mutual trust (see chapter 15). 
For financial institutions to offer deposit services  Infrastructure is required that provides easy access 
to the public, they must be licensed to do so (see  for clients (see chapter 18) as well as the capacity to 
Box 8.2  Savings Constraints and Microenterprise Development: Evidence 
from Kenya
“Does limited access to formal savings ser-
take-up and usage of the account was high 
vices impede business growth in poor coun-
among market vendors, especially women—
tries?” In search of an answer, Pascaline  40 percent of female market vendors took up 
Dupas and Jonathan Robinson conducted a  the savings account. The fact that these 
field experiment in which a randomly selected 
women voluntarily saved in accounts earning 
sample of small informal business owners in a 
negative returns suggests that access to a for-
village in rural western Kenya received access 
mal savings account was highly valued. 
to an interest-free savings account. By directly 
The research found that having an account 
expanding access to bank accounts, they  had a substantial positive impact on levels of 
tested the impact of these accounts on overall 
productive investments among market ven-
savings mobilization, business investment,  dors and within six months led to higher 
income (measured using expenditures), and  income levels, determined through a proxy 
health expenditures, among other variables.  of expenditures. The authors found sugges-
The sample was composed primarily of mar-
tive evidence that the account made market 
ket vendors. Dupas and Robinson relied on a 
women less vulnerable to health shocks. The 
data set collected from 279 daily logbooks  logbook data indicated that over the period of 
kept by individuals in both the treatment  the study, market women in the control 
(those with access to the account) and control 
group were forced to draw down their work-
(those without access) groups. The logbook 
ing capital in response to health shocks, 
data were supplemented by bank account  whereas women in the treatment group did 
activity information, making it possible to  not have to reduce their business investment 
examine the impact of the accounts along a 
levels and were better able to smooth their 
variety of dimensions that typically are not  labor supply over illness. It seems that Dupas 
easily measured.
and Robinson’s initial hypothesis was cor-
The bank charged substantial withdrawal 
rect: Limited access to formal savings ser-
fees, and as such, the de facto interest rate on 
vices can impede business growth in poor 
the account was negative. Despite this,  countries.
Source: Dupas and Robinson 2011.
202 
The New Microfinance Handbook

 
manage liquidity throughout a network of 
intermediary. The institution should have a 
branches, outlets, or agents (see chapter 14). 
demonstrated track record of high-level per-
Additional (and sometimes substantial) reporting 
formance and transparency. It should have 
requirements and compliance issues (for example, 
effective and efficient operations, maintain a 
strong rooms and safes, teller windows) to satisfy 
high rate of loan recovery, and regularly earn 
the regulatory body imply increased personnel 
good returns. It should be financially self- 
costs and the need for expanded information sys-
sufficient, with considerable outreach. 
tems and infrastructure. According to Robinson  e.  Preparation for far-reaching changes. Before 
(2006), five main conditions need to be met for a 
becoming regulated and undertaking deposit 
financial institution to mobilize public deposits: 
mobilization, the institution’s owners, govern-
a.  The political economy. Mobilizing voluntary 
ing board, managers, and staff, as well as the 
public deposits requires at least a moderately 
licensing authorities, need to understand that 
enabling macroeconomy and some degree of 
substantial changes in the institution’s organi-
political stability. 
zation, leadership, infrastructure, information, 
and operations will be required—many of 
b.  The policy and regulatory environment. A rea-
them in a relatively short period.
sonably adequate policy and regulatory envi-
ronment is needed—or if not immediately 
In order to be financially self-sufficient, insti-
possible, at least consistent nonenforcement  tutions that mobilize deposits from the poor must 
of inappropriate policies and regulations.  also attract large deposits; transaction costs are 
Institutions licensed to take savings from the  too high to collect savings in very large numbers 
public and to intermediate these funds need to  of small accounts. Providing large numbers of 
operate in an environment characterized by  small savers with deposit services is labor inten-
liberalized interest rates and regulations  sive and therefore costly—even if no interest is 
appropriate for commercial microfinance.
paid below a minimum balance. By attracting 
larger deposits, the overall costs are lowered and 
c.  Public supervision. For the protection of their  liquidity risk is reduced, especially when low- 
customers, especially savers, institutions that  income clients need to withdraw their savings at 
mobilize deposits must be publicly supervised.  the same time, such as when school fees are due 
This generally means that their governments  or in preharvest months. If large numbers of cli-
must be willing to modify their standard bank-
ents withdraw savings at the same time, the insti-
ing supervision practices so that the rules are  tution can easily run into liquidity problems. 
suitable for their activities. Appropriate super-
When savings are collected from a range of clients 
vision does not mean relaxing standards; It  of different income levels, including organiza-
means applying high standards in ways that  tions and institutions, this is unlikely to occur 
are relevant for financial service providers  except in special circumstances such as hyperin-
serving the poor. It also means ensuring that  flation, regional shock, or loss of trust in the pro-
the supervisory body has the capacity to mon-
vider (Robinson 2006). 
itor effectively the performance of such 
licensed providers. 
Management Skills
d.  A strong institutional performance record. An  Managing a financial intermediary, that is, an 
institution mobilizing deposits must have  institution that takes savings and lends those sav-
high-quality governance and management  ings to others, is far more complex than managing 
capacity that is appropriate for a financial  credit services only. Financial intermediation 
Savings Services 
203

requires significant management skills, in partic-
Managing Operations
ular, strong financial capabilities, as well as  Most providers that mobilize deposits have orga-
knowledge of the opportunities and risks of pro-
nizational structures that are both extensive and 
viding financial services to the poor. This can be  decentralized. Locations close to deposit custom-
difficult to achieve. Well-qualified managers are  ers reduce transaction costs for both the provider 
hard to find and generally command high salaries  and its clients and are an important part of estab-
(Robinson 2006).
lishing a permanent relationship built on mutual 
When mobilizing deposits, managers and staff  trust, which is key to successful savings mobiliza-
need to understand how local markets operate,  tion. “People will deposit their savings with an 
how to locate potential savers, and how to design  institution only if they perceive it to be reliable, 
instruments and services for that market. They  trustworthy and professional” (Frankiewicz and 
also need to understand basic finance and the  Churchill 2011, p. 89; see box 8.3). 
importance of an adequate spread between lend-
Because of this extensive and decentralized 
ing and deposit services. They need to be trained  structure, savings operations can be more vul-
in developing savings products and services  nerable to fraud and errors than credit opera-
appropriate for all types of savers, and adapting  tions. Institutions must manage the liquidity 
products when necessary. Both classroom and  risks  associated with larger amounts of cash and 
on-the-job training are needed in market  the unpredictability of the size and timing of 
research, including monitoring and evaluation,   deposits. Effective asset liability management 
product costing and pricing, and operational  (see chapter 14) and internal controls (see 
 procedures (Robinson 2006). 
 chapter 15), for example, as well as adequate 
premises are crucial. Accounting, reporting, and 
Box 8.3  Inspiring Trust
To ensure depositors develop a trust relationship with the institution, providers must do the 
following:
• Deliveronpromises,eveniftheyseeminsignificantorhavenodirectconnectiontoasavings
product; failure to deliver will create the impression the provider is unreliable.
• Servecustomersinanefficient,friendly,andresponsivemanner.
• Providewell-definedandtransparentservices.
• Createasecure,attractive,andprofessionalappearance.
• Hireandpromotemanagerswhodemonstrateprofessionalismandareperceivedbyclients
to be strong, risk-conscious, and trustworthy.
• Makewithdrawalssimpleandeasytoaccess.
• Developmarketingcampaignsandpromotionalmaterialsthatcommunicatesafety,reliability,
transparency, and a long-term commitment to the community.
• Makepublicrelationsanimportantcomponentoftheinstitution’smarketingstrategy.
• Providefinancialcounselingorfinancialeducationtoincreaseclients’understandingof
the benefits of saving and the measures the provider is taking to ensure the safety of their 
funds.
Source: Frankiewicz and Churchill 2011.
204 
The New Microfinance Handbook

audit  systems must normally be approved by the  term and the larger the amount, generally the 
 regulator as well as internal controls, and often  higher the interest rate paid. Fees are often levied 
physical premises. Deposit mobilizing institu-
for withdrawals and transfers that exceed the 
tions must ensure that the product terms do not  number of allowable free transactions per month, 
increase interest rate and liquidity risk and that  and for balances that fall below a predetermined 
the deposits mobilized are invested in assets that  minimum. With deposit collectors or money 
match their term and pricing structure. There  guards, fees are charged for collecting savings, 
must be sufficient reserves, capital, and operat-
resulting in negative returns. 
ing funds to cover any operating losses or losses 
The interest rate paid on deposits is generally 
due to catastrophic events without using client  based on the prevailing deposit rates of similar 
deposits. Internal controls must be sufficient to  products in similar institutions, the rate of infla-
protect savings from fraud and mismanagement  tion, and market supply and demand. Risk factors 
and to ensure the physical security of funds. The  such as liquidity risk and interest rate risk must 
physical premises must provide adequate pro-
also be considered based on the time period of 
tection, accommodate clients, and inspire their  deposits. Because highly liquid accounts are 
trust. Additional security measures are likely  costly to administer, they pay lower interest. Most 
needed as well as reporting and information sys-
savers who select a liquid account are more inter-
tems. Systems must be able to handle an  ested in greater access to their savings than to 
increased number and type of transactions asso-
higher interest earnings. Fixed-term deposits pay 
ciated with mobilizing deposits and provide  a higher rate of interest because the funds are 
information that is sufficient, accurate, timely,  locked in and provide a more stable source of 
and transparent. Finally deposit-taking institu-
funding than more liquid savings products.
tions need a profitable place to invest mobilized 
In addition to interest paid on deposits, provid-
deposits beyond those that are used for lending  ers incur numerous other costs, including staff 
(CGAP 2005; McKee 2005).
and branch costs to mobilize and administer 
Altogether, financial institutions that mobilize  deposit accounts. Deposits do not generate reve-
deposits generally have significantly more savings  nue for providers; rather, they provide capital, 
accounts than loan accounts. It is necessary that  which is used to fund loans or other investments 
institutions know how to design and deliver prod-
for a return. As discussed in chapter 9, credit prod-
ucts, including loans, for a wide variety of clients  ucts are priced to cover all operating costs, loan 
and that they have realistic business plans that  loss provisioning costs, and the cost of capital. The 
demonstrate ongoing profitability. Revenues and  cost of capital includes the costs of deposits and 
costs need to be detailed, and plans must also con-
other debt and equity. A provider needs to earn a 
sider the cost of capital in addition to the admin-
spread between what it pays for savings and what 
istrative and financial costs of deposits. 
it earns from lending services. This spread is then 
used to cover other costs, namely, operating costs, 
Pricing Savings Products
provisioning costs, and other capital costs. Credit 
Some savings services pay interest (or a share of  and savings products should therefore be designed 
earnings if savings are on lent) to the saver; others  and priced together to enable both appropriate 
do not and, in fact, may result in negative earnings  coverage and institutional profitability (Robinson 
(the value of savings declines) because of fees  2006). Determining the rate of interest to pay on 
charged. The interest rate paid on savings prod-
deposits is complicated and must be considered as 
ucts is often tied to the balance and length of time  part of the overall cost structure of providing 
the savings are held on deposit; the longer the  financial services (see chapter 15).
Savings Services 
205

Some providers organize their branches or  funding within the system, it will then access 
field offices as profit centers and employ a method  external funding and on-lend it to its branches for 
of  transfer pricing, ensuring full-cost coverage  a set price.
throughout the branch network (if applicable). 
The transfer price charged to branches (or 
Transfer pricing refers to the pricing of services  paid to branches for excess deposits) is set either 
provided by the head office to the branches on a  close to the interbank lending rate or at a rate 
cost-recovery basis. For example, costs incurred  somewhat higher than the average costs of funds 
in the head office to manage the overall organiza-
of the provider. This provides incentives for 
tion are prorated to the branches based on a per-
branches to mobilize savings locally rather than 
centage of assets (loans) or liabilities (deposits)  relying on the excess liquidity of other branches 
held at the branch. Funding costs are apportioned  within the network. It can also result in addi-
as well. A branch that disburses a larger volume of  tional revenue at the head office level to cover 
loans than the deposits it collects needs to receive  overhead. Transfer pricing ensures transparency 
funding from the head office (or another branch)  and instills accountability and responsibility in 
to fund those loans. The head office (or a regional  the branches.
office) acts as a central funding facility to ensure 
that any excess deposits in one branch are “sold”  Savings Products
to another branch to fund their loans. The branch 
that has excess deposits receives payment (inter-
In general, an institution providing deposit ser-
est revenue) for those funds, while the branch  vices does not need a large number of products 
receiving them pays a fee (interest expense). If  (see box 8.4). A savings account permitting 
the head office determines that there is no excess  unlimited transactions, a time deposit account 
Box 8.4  Savings Services—Not Only about Products
“For many years, product design was  clients; information systems, space use, 
neglected in microfinance. Now the pendu-
asset-liability management, liquidity, and 
lum has swung, and product design is too  cash management; efficiency of operations 
often overemphasized by managers who  (for example, short waiting periods for savers 
sometimes appear to think that the race is 
who want to deposit or withdraw); quality of 
won by the provider with the largest number 
administration; quality of the loan portfolio; 
of products. Well-designed savings products 
trustworthiness of the institution; and many 
are essential, but they are only one element 
other factors are crucial to capturing and 
in a much larger set of requirements for suc-
maintaining public savings. Getting the struc-
cessful mobilization of savings from the  ture and operations of these interlinkages 
 public—many of which tend to be overlooked 
right—which requires experienced, skilled 
as increasing emphasis has been placed on 
management at all levels—is far more impor-
designing multiple products. Product deliv-
tant than a wide range of products. The race 
ery is far more difficult than product design. 
is generally won by the institution that dem-
Convenience of branch location and opening 
onstrates the best delivery of a few well- 
hours; attitudes of managers and staff toward 
chosen products.”
Source: Robinson 2006.
206 
The New Microfinance Handbook

(which includes options for relatively short  transactions are restricted). For example, for sav-
maturities), potentially a contractual savings  ings accounts with no minimum balance require-
account to support education, retirement, 
  ment, to compensate for the small balances 
housing, or upcoming ceremonies, and, if neces-
generally held in these accounts, providers may 
sary, one or two other deposit products are suffi-
restrict the number of monthly transactions and/
cient. They must be carefully designed through a  or limit withdrawals to lower-cost access points 
balance of product features, security, conve-
such as automated teller machines or mobile 
nience, and price to allow them to be used in dif-
phones. Passbook savings generally offer clients 
ferent combinations for different purposes by all  interest on the funds deposited, although many 
types of savers—poor and nonpoor, individuals  providers also charge transaction and other fees 
and institutions (Robinson 2006). 
associated with services. 
Deposit products available from regulated pro-
The main advantages with passbook accounts 
viders include current accounts, savings accounts,  are liquidity and higher interest rates compared to 
contractual savings accounts, time deposits, and  current or transaction-based accounts. Generally 
long-term savings or micropensions.3
passbook savings accounts are used for short-term 
savings for cash flow management or for emer-
Current Accounts
gencies or unexpected opportunities. Interest paid 
Current accounts are generally considered to be  is normally lower than that paid on time deposits. 
more of a transaction account than a savings 
account (see chapter 12). They provide the  Contractual Savings Accounts
account holder with the ability to manage daily  Contractual savings accounts (also called com-
cash flows and transfer funds and make pay-
mitment savings or target savings) require clients 
ments. Also called checking accounts or demand  to commit to regularly deposit a fixed amount for 
or site deposits, current accounts are fully liquid  a specified period to reach a predetermined date 
accounts in which the depositor may deposit and  or amount. Clients are prohibited from or penal-
withdraw any amount at any time with no  ized for withdrawals before the maturity date. 
advance commitment or notice. Current accounts  After the maturity date, the client can withdraw 
may be set up with automatic transfers, for exam-
the entire amount plus the interest earned.
ple, to pay bills each month or to transfer to 
Contractual savings accounts help clients 
another account. 
accumulate funds to meet specific expected 
Customers often must deposit a minimum  needs, such as school fees or to pay for an upcom-
amount to open a current account and maintain a  ing celebration such as a marriage (see box 8.5). 
minimum balance to keep it active. Generally cur-
Generally the interest paid on contractual savings 
rent accounts do not pay any interest but charge  is similar to other savings accounts, the primary 
clients fees either on a monthly or a transaction  benefit being the discipline they provide.
basis or both. If clients overdraw from their cur-
Contractual savings products can be used as a 
rent accounts, they may be charged a penalty or  first entry point for youth in microfinance. Often 
the payment may be rejected outright. 
only small modifications are needed to tailor a 
regular product for youth, including, for example, 
Passbook Savings Accounts
low or no minimum balances or a link to a finan-
A basic savings account or passbook savings is an  cial education program. 
account that is fully liquid (that is, money can be 
An innovative savings product similar to con-
freely deposited and withdrawn by the account  tractual savings is borrowing for the purpose of 
holder) or semiliquid (that is, the number of  saving (see box 8.6).
Savings Services 
207

Box 8.5  Saving for Education
Opportunity Bank Malawi offers a savings  agreement between the parents and the 
account designed for parents and guardians 
bank to use the savings to pay for their chil-
with school-age children called Tsogolo 
dren’s education. Parents can open the 
Langa. The account allows parents to more 
account and voluntarily deposit money into 
easily pay school fees and other related  it if the beneficiary child is a student at any 
expenditures and to keep their money safe 
of the bank’s approved schools. The account 
until the fees are due, ideally allowing chil-
offers no service charges and makes fee 
dren to go to school continuously. The  payments directly to the school on behalf of 
account features include a minimum bal-
the depositor. Interest is paid on a monthly 
ance of MK 300 (US$1.85) and a contractual 
basis.
Source: Opportunity Bank Malawi, http://www.oibm.mw/index.php/deposit-products/62-tsogolo-langa-account. 
Box 8.6  Borrowing to Save
P9 is a savings-and-loan service offered to 
Jipange Kusave (JKS) builds off of the 
low-income households by SafeSave in  same concept, offering a savings-and-loan 
Bangladesh that builds on Stuart Rutherford’s 
service through Kenya’s hugely popular 
pioneering work on understanding how the  mobile money service M-PESA. The first loan 
poor manage their financial lives. P9 “lends to 
is usually small, about US$20. Half of it is 
save” by advancing only a portion of the loan 
deposited into the client’s M-PESA account to 
amount and holding the remainder (40–50  use as they please, and the other half goes 
percent) in escrow as “savings.” Over time, 
into a savings account in a regulated bank. 
the client pays the entire loan amount and  JKS encourages clients to set “savings goals” 
retains the savings. For example, if a client  and commit to a number of smaller 
wants to save US$5, she borrows US$10 and 
 commitments—a goal of US$50 for example, 
immediately has use of US$5 to do with what-
could involve five rounds of US$20 each.  JKS 
ever she wishes. The remaining US$5 is  charges an origination fee of 2–5 percent, an 
locked away as savings. She cannot touch it 
early savings withdrawal fee of 5 percent, and 
until she repays the US$10 in full, at which 
a charge from M-PESA of K Sh 10 (approxi-
point, she has accumulated US$5 in savings. 
mately US12 cents) per transaction. Repay-
The client is able to borrow increasing  ments for both P9 and JKS can be made as 
amounts in subsequent tranches, building up 
often as desired and in any amount.
significant savings within a short amount of 
However, the products are not without 
time. P9 has an initial registration fee of 200 
their challenges. The variable costs to clients 
takas (approximately US$3), a disbursement 
can be quite high, and securing appropriate 
fee of 3 percent, no interest, and allows  banking licenses and satisfying regulatory 
top-ups. 
requirements will be key to their growth.
Source: Ashriul Amin. 
208 
The New Microfinance Handbook

Time Deposits
micropensions, and savings combined with 
Time deposits—also called fixed deposits, term  insurance products. 
deposits, or certificates of deposit—are savings 
prod ucts in which a client makes a one-time  Pensions
deposit that cannot be withdrawn for a specified  Although not highly prevalent among poor com-
period or term without penalty. At the end of the  munities, pensions are a type of savings product 
term, the client can withdraw the entire amount  that provides a regular flow of payments from 
with interest or roll over the deposit for another  retirement to death. Sometimes these payments 
term. Financial institutions offer a range of possi-
transfer to a surviving spouse. Pensions are pri-
ble terms and usually pay a higher interest rate on  marily provided by employers. Benefits accumu-
time deposits than on passbook or contractual  late based on earning level and years of service; 
savings accounts because these accounts offer the  the more years of service and the higher the 
institution larger amounts of money for longer  employee’s earnings, the greater the amount of 
periods of time at lower costs (see box 8.7).
payments. Pension funds can be internally man-
aged by the company or outsourced to an invest-
Long-Term Savings and Micropensions
ment manager and can be fully funded by the 
Poor people are vulnerable because low and  employer (defined benefit pension) or a defined 
irregular incomes combined with insufficient  contribution pension funded by both the 
financial tools often leave them with little to no  employer and employee, with the employer 
savings as they age. In many developing coun-
matching the employee’s contributions using a 
tries, particularly in poor communities, children  formula such as 2:1 or 0.5:1. 
and grandchildren will take financial responsi-
Even less prevalent—and, in fact, so far there is 
bility for older family members and provide  very little long-term experience to draw from—
them shelter and financial resources. In addi-
micropensions provide a form of income security, 
tion to family support, there are financial ser-
enabling voluntary savings for old age and aimed 
vices that facilitate savings for long-term goals  at lower income populations (Sterk 2011). They 
and/or retirement, including long-term savings,  require fixed contributions over time, which are 
Box 8.7  Nicaragua—Promoting Agriculture Savings
The Central de Cooperativas de Ahorro y  farmers receive. Credit unions work with 
Crèdito Financieras de Nicaragua (CCACN) 
farmer members to open a savings account 
is a second-tier network of Nicaraguan  and deposit the proceeds from each harvest 
credit unions. CCACN developed a time  and then work with each farmer to identify 
deposit product called “Agriculture Salary” 
his or her individual expenses and deter-
with a twist. Rather than receive all the pro-
mine an appropriate “salary”—a portion of 
ceeds of an annual or semiannual harvest 
harvest proceeds on deposit combined with 
as a lump sum all at once, the goal of the 
interest—to be withdrawn from the credit 
product is to smooth the flow of income  union each month.
Source: WOCCU 2003.
Savings Services 
209

invested in term savings accounts, group term  small regular deposits over time and then with-
savings accounts, or physical assets such as prop-
draw either the lump-sum amount or, like 
erty, land, and livestock, to create a consistent  micropensions described above, with an annu-
flow of income when the micropension holder  ity allowing a regular stream of payments over 
can no longer generate income. Micropensions  time after a certain age (see box 8.8). Although 
offer an option to invest in a financial asset over  clients appreciate the illiquid nature of LTCS 
time that produces a flow of income—either as a  products as well as the benefits of discipline 
lump sum, on a periodic basis, or through the pur-
(like other contractual savings products), they 
chase of an annuity—beginning at a predeter-
necessarily compare the options of investing 
mined age (Sterk 2011). Micropensions can also  elsewhere and the associated risks. In particu-
be informal whereby money is invested in the  lar, if available, clients need to consider the 
businesses or education of family members in   benefits of saving long term versus buying 
exchange for future income or subsistence sup-
insurance. The risk of LTCS products is that the 
port (Rutherford 2008).
person may die before the savings goal is 
reached. This risk is addressed with retirement 
Long-Term Contractual Savings
and life products offered by insurance compa-
Similar to micropensions, long-term contrac-
nies (Frankiewicz and Churchill 2011). 
tual savings  (LTCS)  products can be used to 
Finally, retirement planning can also involve the 
prepare for retirement and to build resources  combination of savings and insurance products, 
for life-cycle events anticipated in the future.  specifically, savings completion insurance, endow-
LTCS products work much like other contrac-
ment plans, or annuities. This is discussed under 
tual  savings products whereby clients make  insurance products in chapter 11. 
Box 8.8  Grameen’s Deposit Pension Scheme (GPS)
In 2001 Grameen Bank began to offer long-
Deposits are made during the weekly 
term savings products for the poor. Terms are 
meetings that all Grameen members are 
5 or 10 years, and equal monthly deposits are 
obliged to attend. Grameen thus uses its own 
made in sums as little as US$1. Interest on the 
“agents,” because the agents are also credit 
10-year term is paid at 12 percent per annum. 
officers. After five years, in 2005 GPS had 
This is about 8 percent in real terms and gener-
attracted more than 3 million accounts holding 
ous compared with rates offered by commer-
approximately US$83 million. By the end of 
cial banks for similar products. (This has led to 
October 2011 the balance was Tk 38.87 billion 
increased demand from nonpoor households 
(US$513 million). 
to obtain Grameen membership and brings 
Understanding precisely why the product 
into question the profitability of the product.) 
is so popular is complicated by the fact that all 
The depositor gets almost twice the amount 
borrowers with a loan of more than US$125 
of money she saved at the end of the period. 
are required to hold a minimum-value GPS 
The matured sum may be taken in cash or as 
account. Nevertheless, many savers hold 
monthly income. Savers may also transfer the 
more than one account, suggesting that the 
sum into one of Grameen’s fixed deposits. 
product is valued for its own sake.
Source: Frankiewicz and Churchill 2011, adapted from Roth, McCord, and Liber 2007; http://www.grameen-info 
.org/index.php?option=com_content&task=view&id=26&Itemid=0.
210 
The New Microfinance Handbook

Notes
Innovations for Poverty Action, New York and 
New Haven, CT.
 1.  The willingness of poor women and men to 
pay for deposit collection demonstrates the 
*McKee, K. 2005. “Prerequisites for 
value of saving services and the overall need 
Intermediating Savings.” In Savings Services for 
for both the ability and discipline to save small 
the Poor, ed. Madeline Hirschland, 27–42. 
amounts frequently.
Bloomsfield, CT: Kumarian.
 2.  This section is summarized from Robinson 
Robinson, Marguerite. 2004. “Mobilizing Savings 
(2006).
from the Public: Basic Principles and 
Practices.” USAID, SPEED Network, and 
 3.  This description of products draws substantially 
Women’s World Banking, Kampala, Uganda. 
from Gilsovic, El-Zoghbi, and Foster (2010).
*———. 2006. “Mobilizing Savings from the Public.” 
In Transforming Microfinance Institutions: 
References and Further Reading
Providing Full Financial Services to the Poor, ed. 
Joanna Ledgerwood and Victoria White. 
* Key works for further reading.
Washington, DC: World Bank.
Ashraf, Nava, Dean Karlan, and Wesley Yin. 2006. 
Roe, Alan, Robert Stone, Stephen Peachey, and 
“Tying Odysseus to the Mast: Evidence from a 
Abigail Carpio. 2008. “Increasing the Number of 
Commitment Savings Product in the Philippines.” 
Deposit Accounts: A White Paper for 
Quarterly Journal of Economics 121: 635–72.
Discussion.” Oxford Policy Management, Oxford.
*CGAP (Consultative Group to Assist the Poor). 
Rosenberg, Rich. 1996. “Microcredit Interest 
2005. “Microfinance Consensus Guidelines 
Rates.” CGAP Occasional Paper 1. CGAP, 
Developing Deposit Services for the Poor.” 
Washington, DC. 
CGAP, Washington, DC.
Roth, Jim, Michael McCord, and Dominic Liber. 
*Christen, Robert Peck, and Ignacio Mas. 2009. 
2007. The Landscape of Microinsurance in the 
“It’s Time to Address the Microsavings 
World’s 100 Poorest Countries. Appleton, WI: 
Challenge, Scalably.” Enterprise Development 
MicroInsurance Centre.
and Microfinance 20 (4): 274–85. 
Rutherford, Stuart. 2008. “Micropensions: Old Age 
Dupas, Pascaline, and Jonathan Robinson. 2011. 
Security for the Poor?” In New Partnerships for 
“Savings Constraints and Microenterprise 
Innovation in Microfinance, ed. Ingrid 
Development: Evidence from a Field 
Matthäus-Maier and J. D. von Pischke, 241–64. 
Experiment in Kenya.” NBER Working Paper 
Berlin: Springer.
14693. NBER, Cambridge, MA, October 27.
*———. 2009. The Poor and Their Money: An Essay 
*Frankiewicz, Cheryl, and Craig Churchill. 2006. 
about Financial Services for Poor People. New 
Making Microfinance Work: Managing for 
Delhi: Oxford University Press. 
Improved Performance. Geneva: International 
Sadana, Mukesh, et al. 2011. “Deposit Assessment 
Labour Organization.
in India.” IFC, MicroSave, and Ministry of 
*———. 2011. Making Microfinance Work; Managing 
Foreign Affairs, March. http://www.microsave 
Product Diversification. Geneva: International 
.org/sites/default/files/research_papers/
Labour Organization.
Microsave_IFC.pdf.
*Gilsovic, Jasmina, Mayada El-Zoghbi, and Sarah 
*Sterk, Boudewwijn. 2011. “Micro Pensions: 
Foster. 2010. “Advancing Saving Services: 
Helping the Poor to Save for the Future.” Aegon 
Resource Guide for Funders.” CGAP, 
Global Pensions, The Hague, May 31.
Washington, DC.
WOCCU (World Council of Credit Unions). 2003. 
*Karlan, Dean, and Jonathan Morduch. 2009. “The 
“A Technical Guide to Rural Finance: Exploring 
Economics of Saving. Access to Finance: Ideas 
Products.” Technical Guide 3. WOCCU, 
and Evidence.” Financial Access Initiative and 
Madison, WI, December.
Savings Services 
211


CHAPTER 9 
Credit
Joanna Ledgerwood and Julie Earne

Credit products offer clients the ability to bor-
requirements (to ensure repayment). The core 
row money in exchange for an agreement to  components of a loan are size, term, repayment 
repay the funds with interest and/or fees at some  terms, lending methodology, collateral or secu-
future point(s) in time. Credit products range  rity, and pricing.
from working capital loans, emergency and con-
Loan sizes vary depending on need and can be 
sumption loans, to leasing products and housing  as low as US$5 from a community-based pro-
loans. They are found at the core of the financial  vider to upwards of US$20,000 or more for an 
market system.
individual business loan or housing loan. Loan 
This chapter provides a brief overview of  sizes can increase over time based on client 
lending products including product characteris-
needs, debt capacity, and credit history; loans 
tics, pricing, methodologies for determining the  should not increase simply as a function of con-
effective cost of borrowing, and the most preva-
tinued borrowing. 
lent credit products accessed by poor people 
Loan  term (or tenor) refers to the length of 
today. It will be of interest to practitioners,  time the loan is intended to be outstanding. Most 
donors, and others wanting to support outreach  microfinance loan terms range from three months 
of credit to the poor. 
to one year, although terms can be up to three 
years or longer. Group loans tend to have short 
Characteristics of Credit Products
maturities given they are normally small and 
Loans are structured based on client demand,  sometimes provided to clients without a credit 
capabilities of the provider, and risk management  history. Agriculture loans may have longer terms 
Contributions to this chapter were made by Liz Case. 
Credit 
213

to match the planting and harvest period, while  individuals and, in some cases, whether they 
housing loans may be even longer due to their  must adhere to Islamic banking principles. The 
larger size and purpose. Given the higher risk  lending methodology chosen greatly influences 
associated with a longer term, loan terms can  product design, client selection, the application 
increase as clients establish a track record. 
and approval process, loan repayment, and mon-
Repayment terms affect the credit risk, trans- itoring and portfolio management. Lending 
action costs, and accessibility of loan products.  methodology also impacts the institutional 
Loans are usually designed to be repaid in peri-
structure and staff requirements, including 
odic (often equal) installments over the loan term  training and compensation. 
or at the end as a lump sum, ideally matched to 
the borrowers’ cash flows. Loan payments (usu-
Group Lending
ally comprising principal plus interest but can be  Group-based approaches lend either to the group 
interest only if the principal is paid all at the end)  itself as one loan, to individuals who are members 
can be made in weekly, biweekly, or monthly  of a group, or to groups who then on-lend individ-
installments depending on the loan structure, or  ually to the members. Group lending reduces 
can be a lump-sum payment at the end of the  transaction costs and risks to providers and often 
term. The frequency of loan payments depends  facilitates greater access to financial services for 
on the needs of the client and the ability of the  those who are difficult and expensive to reach, 
provider to ensure repayment and manage liquid-
including remote, rural populations, those with 
ity. A grace period (period of time between the  low debt capacity, and those who have no collateral 
disbursement and first repayment) may also be  or credit history. The group mechanism effectively 
provided, especially with agriculture loans to  shifts the bulk of the responsibility for screening, 
allow for planting. 
monitoring, and enforcement from the provider to 
More frequent repayments serve to reduce  the borrowers, and thus some of the costs.
credit risk but in turn can increase the transaction 
Some of the most well-known group lending 
costs and may make loans less accessible for bor-
methodologies include the following:
rowers in remote areas or those with infrequent 
cash flows. Depending on how, when, and where  • Grameen—five-personsubgroups,sixofwhich
payments are made, the risk of default may 
make up a center of 30 individual borrowers; 
increase if the borrower is not able to manage 
the subgroups guarantee each other’s loans, 
larger installments or a final lump sum. 
and the center provides a secondary guarantee. 
Loan products must be well structured to meet 
client needs and provided in a safe, transparent  • Solidarity groups—three to 10 people per
manner. For example, it is imperative that provid-
group, each guaranteeing each other’s individ-
ers effectively assess debt capacity to ensure that 
ual loans. 
clients borrow amounts they can afford to repay  • Villagebanks—15to50peoplewhoforma“vil-
on time. When clients are unable to repay, provid-
lage bank” that makes individual loans to the 
ers should have policies that support delinquent 
members of the village bank. In some cases 
borrowers and limit further harm while still 
pooled member savings may be loaned to 
ensuring a strong repayment discipline. 
members within the group; such loans are 
referredtoas“internalaccount”loans.
Lending Methodology
Lending methodologies differ with respect 
 
Disadvantages of the group approach include 
to whether loans are made to groups or to   higher transaction costs for clients due to time 
214 
The New Microfinance Handbook

spent in group meetings (and away from produc-
officers’ cash flow analysis. These worksheets 
tive activities or household responsibilities), a rel-
enable a loan officer to create a basic balance 
atively limited product offering, a lack of privacy,  sheet and income statement based on revenues, 
and of course the risk a fellow group member will  expenses, turnover, and value of stock and sup-
default. Covariance risk—the tendency of group plies in the household or enterprise.
members to be affected by the same risk at the 
A cash flow analysis can be supplemented 
same time as a result of similar production activi-
with other tools such as credit ratings, credit 
tiesorevent—canalsoexist,resultinginhigher scoring, and psychometric evaluations, depend-
risk for both the provider and borrowers. Group  ing on their availability in a given market. A 
training costs can be high because of the impor-
credit rating is obtained from a credit bureau 
tance of quality group formation and related con-
and provides information on a borrower’s his-
sumer education. Furthermore, group members  tory of repayments and delinquencies from all 
sometimes feel pressure to borrow even if they do  providers participating in the credit bureau (see 
not need a loan or are unsure of their ability to  chapter18).
repay. This may also happen in Savings Groups or 
For clients without a credit history and with-
Self-Help Groups even though loans are made by  out formal employment, providers use other data 
the group to individuals.
to better assess risk and help currently unbanked 
clients develop a formal credit history. Such data 
Individual Lending
can include the following:
Individual lending requires greater up-front anal-
ysis of clients and their cash flows, sometimes  • Billpayments(electricity,gas,orwater)
physical collateral, and frequent and close contact  • Phone bills (mobile and fixed, post- and
with clients during the term of the loan. Loan 
prepaid)
approvals and amounts are based on an appli-
cant’s eligibility and debt capacity, which in turn  • Rentalpayments
are dependent upon a number of factors, includ-
• Transaction data (remittances, withdrawals,
ing personal and business characteristics, for 
deposits, or transfers).1
example, age, gender, or reputation, sources and 
amount of income, age of business (if applicable), 
These data are sometimes put into a credit 
cash flow, and available collateral. Historically  scoring that uses historic payment data to math-
many providers also considered the purpose of  ematically predict the probability of a client 
the loan as part of the loan approval decision, but  defaulting. Instead of conducting extensive 
this is less and less common as providers begin to  analysis of financial statements, credit scoring 
understand client cash flows, their needs, and the  uses simple predictive variables, such as length 
fact that money is fungible within households and  of time in business, bill payments, and length of 
microenterprises. 
time with the financial institution, to generate a 
Cash flow analysis is used primarily for indi-
score that represents the probability of future 
vidual loans and focuses on the overall cost struc-
repayment (Frankiewicz and Churchill 2011).
ture of the household or microenterprise,  The increasing use of electronic channels by 
including all revenues flowing in and expenses  lending institutions (for example, mobile bank-
flowing out, anticipated cash flows during the  ing, ATMs, or banking agents) increases the abil-
term of the loan, and the absorptive debt capacity  ity to track and utilize clients’ payment and 
of the borrower. Many individual providers have  transaction histories to predict payment capac-
designed streamlined worksheets that guide loan  ity and creditworthiness.
Credit 
215

Psychometrictestingisanewerformofclient creditors. Other Islamic banking principles state 
evaluation and is in the early stages of develop-
that(1)allfinancialtransactionsmustbelinked
ment.Psychometricevaluationsinvolveaskinga toa“real”economicactivityinvolvingtangible
series of questions that evaluate the potential bor-
assets and (2) funds may not be invested in activ-
rower’s attitude and outlook, ability, and charac-
ities inconsistent with Sharia (alcohol, pork, or 
ter in an effort to predict creditworthiness.2 These  gambling). Furthermore, contracts must reflect 
tests are processed by specialized companies and  mutual agreement; all parties must have precise 
attempt to measure credit risk without depending  knowledge of the product or service being 
on formal financial accounts, business plans, or  boughtorsold(Karimetal.2008).
collateral. 
There are various types of Islamic microfi-
nance lending contracts. Murabaha sale is a 
Islamic Lending
 cost-plus-markup sale contract that requires the 
Islamic banking requires special lending method-
financial service provider to purchase the asset, 
ologies.3 Islamic (or Sharia-compliant) financial  as requested by the client, and sell it to them at a 
principles strictly prohibit giving or receiving any  predetermined markup to pay for the service 
fixed, predetermined rate of return on financial  provided (see box 9.1). Contracts can also be
transactions(Karimetal.2008).BecauseIslamic developed as profit and loss sharing schemes: 
law forbids gains on lending money, Islamic  Musharaka refers to equity participation in a 
loans are often treated more like equity than debt  business with parties sharing the profits or losses 
with lenders considered investors rather than  according to a predetermined ratio. Musharaka 
Box 9.1  Islamic Finance in Practice
Akhuwat was established in 2001 in Pakistan 
Islamic microfinance services in Pakistan 
with the aim of providing interest-free micro-
using murabaha-based financing principles to 
credit to the poor. Akhuwat dispenses small 
individuals, based on a combination of per-
interest-free charitable loans (qard al-hasan)  sonal guarantors, group savings accounts, 
with an administration fee of 5 percent.  cosigners, and community recommenda-
Administrative procedures and activities are  tions to ensure repayment. In 2009 Islamic 
coordinated through mosques and the com-
Relief partnered with HSBC Amanah, the 
munity. There are no independent officers;  Islamic finance arm of the commercial bank 
rather, loans are disbursed and recovered in 
HSBC, to provide financing to its microfi-
the mosque. The Islamic provider relies on  nance projects in Rawalpindi. HSBC Amanah 
 collateral-free and individual financing based  also assists in developing the Sharia structure 
on mutual guarantees. Anecdotal evidence  for financing models and contracts and pro-
suggests that disbursing loans in a mosque 
viding Islamic finance training to Islamic 
attaches a religious sanctity to borrowers’  Relief staff. In turn, Islamic Relief staff man-
oaths to repay them on time. 
age the microfinance projects, including set-
Islamic Relief, a Muslim international relief 
ting out eligibility criteria, screening potential 
and development organization, provides  beneficiaries, and reporting to HSBC Amanah. 
Source: Allen and Overy LLP 2009. 
216 
The New Microfinance Handbook

can be used to fund assets and/or for working  means that the entire group no longer has access 
capital.  Mudaraba is trustee financing in which  to credit.
one party provides funding while the other party 
Character-based lending: Some providers lend 
provides the managerial expertise in managing  to people based on a good reputation. Before
the business, and they share in the profit or loss.  making a loan, the credit officer visits various 
Profit-and-losssharingschemesrequirevigilant establishments in the community and asks about 
reporting and a high level of transparency for  the potential client’s character and behavior.
profits and losses to be distributed fairly (Karim 
Frequent client visits:Providedthebranchor
etal.2008).
credit officers are within a reasonable geographi-
cal distance from their clients, frequent visits help 
Loan Collateral
to ensure that the client is able and willing to 
Low-income clients often have minimal assets to  repay the loan. Frequent visits also allow the 
pledge for loans; property, land, machinery, and  credit officer to understand his or her clients’ 
other capital assets are often not available.  cash flows and the appropriateness of the loan 
Becauseofthis,collateralsubstitutesandalterna-
(amount, term, frequency of payments, and so 
tive collateral are used to reduce the risk to the  forth).Visitsalsocontributetodevelopingmutual
lender. 
respect between the client and the credit officer 
as they learn to appreciate and understand each 
Collateral Substitutes
other’s commitment to their work, which can 
One of the most common collateral substitutes is  lead to stronger relationships that benefit both 
peer pressure, either on its own or jointly with  the clients and providers. However, more fre-
group guarantees. 
quent client visits entail additional costs that 
Group guarantees:  Many providers facilitate  need to be considered.
the formation of groups whose members jointly 
guarantee each other’s loans. Guarantees are  Alternative Forms of Collateral
either implicit guarantees, with other group  Commonly used alternative forms of collateral 
members unable to access a loan if all members  include compulsory savings and personal 
are not current in their loan payments, or actual  guarantees.
guarantees, with group members liable if other 
Compulsory savings: Many providers require 
group members default on their loans.
clients to hold a balance (stated as a percentage of 
Some providers require group members to  the loan) in savings (or as contributions to group 
contribute to a group guarantee fund, which is  funds) for first or subsequent loans (or both). 
used if one or more borrowers fail to repay. Use of  Compulsory savings differ from voluntary savings 
the group guarantee fund is sometimes at the dis-
in that they are not generally available for with-
cretion of the group itself and sometimes decided  drawal while a loan is outstanding. In this way 
by the provider. If it is used at the group’s discre-
compulsory savings act as a form of collateral.
tion, the group will often lend money from the 
Bybeingrequiredtosetasidefundsassavings,
guarantee fund to the group member who is  borrowers are restricted from utilizing those 
unabletopay.Thememberwho“borrows”from funds. Usually the deposit interest rate paid (if 
the group fund is then responsible for paying the  any) on the savings is lower than the return earned 
fund back. If use of the group guarantee fund is  by the borrowers if the savings were put into their 
managed by the provider, the fund is seized to the  business or other investments. This results in an 
extent of the defaulted loan, with other group  opportunity cost equal to the difference between 
members making up any shortfall. Failure to do so  what the client earns on compulsory savings and 
Credit 
217

the return that could be earned otherwise. This  be fixed for the term of the loan. The effective 
needs to be considered in calculating the cost of  price is increased when a fee is charged in addi-
the loan for the borrower. Compulsory savings,  tion to interest. Fees are generally charged on the 
however, also provide a means of building assets  initial amount of the loan disbursed and may be 
for clients; not all providers view compulsory sav-
expressed as a percentage of the loan amount or 
ings as strictly an alternative form of collateral.
an absolute amount to cover the cost of making 
A variation of compulsory savings is for bor-
the loan. Other costs to the client such as trans-
rowers to pay additional interest each month and,  port costs to visit the provider, costs to obtain 
provided they have made full, on-time payments  documentation such as identification or property 
each month, the additional amount is returned to  rights, child care, and time away from business all 
them.Forexample,attheBankRakyatIndonesia, contribute to the total cost of credit for the bor-
thisisreferredtoasa“promptpaymentincentive” rower but are generally not expressed in the price 
and results in the borrower receiving a lump sum  of the loan and do not generate revenue for the 
at the end of the loan term. This benefits the bor-
lender. 
rower and provides a concrete incentive to repay 
the loan on time, thus benefiting the bank as well.
Calculating Interest Rates
Personal guarantees: If borrowers do not have  Interest rates can be stated using a declining bal-
the ability to guarantee their loans, they are some-
ance method or a flat-rate method. The declining 
times able to enlist friends or family members to  balance calculates interest as a percentage of the 
provide personal guarantees (sometimes referred  amount outstanding during the loan term. As the 
to as cosigners). This means that in the event of  amount of principal declines with each periodic 
the inability of the borrower to repay, the person  payment, the interest is calculated only on the 
who has provided a personal guarantee is respon-
remaining amount owed. The flat-rate method 
sible for repaying the loan.
calculates interest based on the original disbursed 
amount (sometimes net of fees). The flat-rate 
Loan Pricing
method is sometimes preferred by providers for 
Revenueonloansis,forthemostpart,generated the sake of simplicity in calculation; because the 
from interest and fees, including in some cases  interest payment is the same amount each repay-
penalties for late payments. Revenue needs to ment period, some providers argue that using the 
cover various expenses, including operating costs,  flat-rate method is easier for staff and clients to 
loan loss provisions, and the cost of capital, ideally  understand (see box 9.2). 
leavingasurplus(profit).Pricingrequiresabal-
Although many providers use the flat-rate 
ance between the need to cover costs through  method because it is simple to calculate, it results 
revenue with the need for simplicity, transpar-
in higher effective rates of interest (and thus 
ency, and affordability for clients. For community-  higher costs for the borrower) for the same 
based lenders who have minimal if any costs, the  stated rate compared to interest calculated on a 
price for loans is usually set based on demand and  declining balance. For example, by month 6 of a 
supply. If the price is set too high, there will be  12-monthloanfor1,000,theborrowerwillowe
little demand and therefore minimal returns; if it  only 500 (approximately) if he or she has paid in 
is set too low, demand will exceed supply.
regular weekly installments. At that point, if the 
The price of loans is normally stated as a nom-
loan price were to be calculated using the declin-
inal interest rate—a percentage of the loan ing balance method, interest would be charged 
amount. Interest rates can be flexible and change  ononly500ratherthan1,000.(Notethatwith
depending on market conditions, or, more often,  interest paid on the declining balance, a greater 
218 
The New Microfinance Handbook

Box 9.2  The Flat-Rate Method
The flat-rate method calculates interest as a percentage of the initial loan amount rather than the 
amount outstanding (declining) during the loan term. Using the flat-rate method means that 
interest is always calculated on the total amount of the loan initially disbursed, even though 
periodic payments cause the outstanding principal to decline. 
To calculate interest using the flat-rate method the interest rate is simply multiplied by the 
initial amount of the loan. For example, if a provider charges 20 percent interest using the flat-
rate method on a 1,000 loan, the interest payable is 200.
For example, loan amount: 1,000; 12-month loan term; monthly loan payments: 100; interest 
rate: 20 percent.
Outstanding  
Month
Payments
Principal
Interest
balance
0


— 
1,000.00
1
100
83.33
16.67
916.67
2
100
83.33
16.67
833.34
3
100
83.33
16.67
750.01
4
100
83.33
16.67
666.68
5
100
83.33
16.67
583.35
6
100
83.33
16.67
500.02
7
100
83.33
16.67
416.69
8
100
83.33
16.67
333.36
9
100
83.33
16.67
250.03
10
100
83.33
16.67
166.70
11
100
83.33
16.67
83.37
12
100
83.33
16.67
0.00
Total
1,200
1,000.00
200.00

Source: Ledgerwood 1998.
portion of the monthly payment is paid in inter-
However, providers should realize that regard-
est during the early months of the loan and a  less of the nominal rate quoted, it is important 
greater portion of principal is paid toward the  that all interest calculations are transparent. 
end of the loan. This results in a slightly larger 
The examples in boxes 9.2 and 9.3 illustrate 
amount than half of the principal remaining out-
that with all other variables the same, the amount 
standing at the midpoint of the loan. In the  of interest paid on a loan with interest calculated 
example in box 9.3, in month 6, 524.79 is still out-
on a declining balance is much lower than that on 
standing, not 500.) 
a loan with interest calculated on a flat-rate basis, 
The declining balance method is a fairer way  for the same stated rate. To compare rates of 
to price loans but more difficult to calculate   interest calculated by different methods it is nec-
and may be confusing to borrowers (box 9.3).  essary to determine what interest rate would be 
Credit 
219

Box 9.3  Declining Balance Method
To calculate interest on the declining balance, a financial calculator is required. On most financial 
calculators, present value and payment must be entered with opposite signs; that is, if present value 
is positive, payment must be negative, or vice versa. This is because one is a cash inflow and one is 
a cash outflow. Financial calculators allow the user to enter different loan variables as follows:
PV =  Present value, or the net amount of cash disbursed to the borrower  
at the beginning of the loan
i = Interest rate, which must be expressed in same time units as n below
n = Loan term, which must equal the number of payments to be made
PMT = Payment made each period.
In the example above, a one-year loan of 1,000 with monthly payments and 20 percent interest 
calculated on the declining balance is computed by entering the following:
PV = –1,000 (enter as negative amount, as it is a cash outflow)
= 20 percent a year; 1.67 percent a month
n = 12 months 
Solve for PMT:
PMT = 92.63.
Total payments equal 1,111.56 (12 months at 92.63). 
Total interest is 111.56.
Loan amount: 1,000; 12-month loan term; monthly loan payments: 92.63; interest rate: 20 percent.
Month
Payments
Principal
Interest
Outstanding Balance
0


— 
1,000.00
1
92.63
75.96
16.67
924.04
2
92.63
77.23
15.40
846.79
3
92.63
78.52
14.21
768.29
4
92.63
79.83
12.81
688.46
5
92.63
81.16
11.48
607.30
6
92.63
82.51
10.12
524.79
7
92.63
83.88
8.75
440.91
8
92.63
85.28
7.35
355.63
9
92.63
86.70
5.93
268.93
10
92.63
88.15
4.49
180.78
11
92.63
89.62
3.02
91.16
12
92.63
91.16
1.53
0.00
Total
1,111.56a
1,000.00
111.76a

Source: Ledgerwood 1998. 
a. Difference of 0.2 is due to rounding.
220 
The New Microfinance Handbook

required when interest is calculated on the  Calculating Effective Rates
declining balance to earn the same nominal  The total cost of a loan is often expressed as the 
amount of interest earned on a loan with a flat-
“effective interest rate.” The effective rate of
rate basis calculation (see box 9.4). 
interest refers to the inclusion of all direct finan-
cial costs of a loan in one rate. Effective interest 
Fees and Other Service Charges
rates differ from nominal rates by incorporating 
In addition to charging interest, many providers  interest, fees, the interest calculation method, and 
also charge a fee or service charge when disburs-
other loan requirements into the financial cost of 
ing loans. Fees or service charges increase the  the loan. The effective rate also includes the cost 
financial costs of the loan for the borrower and  of compulsory savings or group fund contribu-
revenue to the provider. Fees are often charged as  tions because these are financial costs to the bor-
a means to cover initiation costs or to increase the  rower. Other transaction costs, both financial and 
yield to the provider instead of charging higher  nonfinancial, incurred by the borrower to access 
nominal interest rates.
the loan, such as opening a bank account, trans-
Fees are generally charged as a percentage of  portation, child-care costs, or opportunity costs, 
the initial loan amount and are collected up-
are not included when calculating the effective 
front rather than over the term of the loan.  rate because these can vary significantly by bor-
Becausefeesarenotcalculatedonthedeclining rower. The effective rate of interest is useful for 
balance, the effect of an increase in fees is greater  determining whether the conditions of a loan 
than a similar increase in the nominal interest  make it more or less expensive for the borrower 
rate (if interest is calculated on the declining  than another loan and the effect of changes in 
balance). 
pricing policies.
Box 9.4  Equating Declining Balance and Flat-Rate Methods
A 1,000 loan with 20 percent interest calculated on a declining balance for one year with 
monthly payments results in interest of 112 (rounded from 111.56). The same loan with interest 
calculated on a flat-rate basis results in interest of 200. To earn interest of 200 on a loan of 
1,000 with interest calculated on the declining balance, the interest rate would have to 
increase by 15 percentage points to 35 percent (additional interest revenue of 88 based on 
interest on a 1,000 loan at 35 percent declining balance results in a total interest cost of 200, 
rounded from 199.52).
Interest 35% 
Interest 20%
Interest 
Interest  
declining 
declining balance
20% flat
Difference
20% flat
balance
Actual costs
112
200
88
200
200
Source: Ledgerwood 1998.
Credit 
221

When interest is calculated on the declining 
Given all the possible variables when structur-
balance and there are no additional financial costs  ing loans, numerous examples could be provided 
to a loan, the effective interest rate is the same as  andthepermutationsaremany.Varioussources
the nominal interest rate. Many providers, how-
are available that explain in more detail how to 
ever, calculate the interest on a flat-rate basis,  calculate effective rates, including Rosenberg
charge fees as well as interest, or require borrow-
(1996),Ledgerwood(1998),andmftransparency.
ers to maintain savings or contribute to group  org. In particular, mftransparency.org provides a 
funds (guarantee or insurance funds). 
downloadable Excel spreadsheet called the 
Variables of microloans that influence the “CalculatingTransparentPricingTool.”4
effective rate include the following:
In reality, it is possible for all providers, even 
without sophisticated systems, to calculate the 
• Nominalinterestrate
declining balance interest rate and communicate 
• Methodofinterestcalculation:decliningbal-
the effective interest rate to clients. Using several 
ance or flat-rate 
widely available tools, a provider can amortize 
the loan repayment so that each installment is the 
• Payment of interest at the beginning of the same, thus maintaining simplicity for clients who 
loan (as a deduction of the amount of principal  want to pay the same installment each period. It is 
disbursed to the borrower) or over the term of  used by most, if not all, formal financial institu-
the loan
tions. Also, if all providers used the declining bal-
• Servicefeeseitherupfrontoroverthetermof ance method, it would enable price competition 
the loan
based on transparency.5 
• Contributiontoguarantee,insurance,orgroup
fund
Loan Products
• Compulsorysavingsorcompensatingbalances As we now know, poor women and men have a 
and the corresponding interest paid to the bor-
multitude of financial service needs. In addition, 
rower either by the provider or another insti-
more and more providers acknowledge that 
tution (bank or credit union)
money is fungible; that is, loans intended for a 
specific purpose may be used for something else 
• Paymentfrequency
within the household or business. In response 
• Loanterm
providers have expanded their credit product 
offerings to include more than the standard 
• Loanamount.
microenterprise loan for working capital or 
When all variables are expressed as a per-
fixed assets. Loans are beginning to be made 
centage of the loan amount, a change in the  available for different purposes, including the 
absolute amount of the loan will not change the  following: 
effective rate. 
Calculation of the effective rate demonstrates  • Cashflowmanagement(workingcapitaland
how different loan product variables affect the 
consumption loans)
overall costs and revenues of the loan. Box 9.5 • Risk management (emergency and top-up
illustrates the effect that a change in the loan fee 
loans)
and a change in the loan term have on the effec-
tive rate (the examples are calculated on both a  • Asset building and productive investment
flat-rate and a declining balance basis). 
(fixed asset loans, leasing, housing loans).
222 
The New Microfinance Handbook

Box 9.5  The Effect of a Change in Loan Fees and Loan Terms
With all other variables the same, the effective rate for a loan with interest calculated on a flat-
rate basis will be higher than the effective rate for a loan with interest calculated on a declining 
balance basis. Fees also increase the effective rate, and if fees are charged, the effective rate is 
further increased when the loan term is shortened. This is because fees are calculated on the 
initial loan amount regardless of the length of the loan term. If the loan term is shortened, the 
same amount of money needs to be paid in a shorter amount of time, thus increasing the effec-
tive rate. (This difference is greatest when a fee is charged on a loan with interest calculated on 
the declining balance. The shorter loan term increases the relative percentage of the fee to total 
costs.) Similarly, a fee that is based in currency (such as US$25 per loan application) will change 
the effective rate if the loan amount is changed; that is, smaller loan amounts with the same fee 
(in currency) result in a higher effective rate.
Calculation 
Effective 
20% annual 
Service  
Loan term 
cost per 
Fee/Term
rate
fee (%)
(months)
month (%) Change (%)
3% fee; 12-month 
Flat-rate
3
12 
3.5
term
Raise fee to 8%
Flat-rate
8
12 
4.3
↑ 0.8
Lower term to  
Flat-rate
3

4.0
↑ 0.5
3 months
3% fee; 12-month 
Declining 
3
12 
2.1
term
balance
Raise fee to 8%
Declining 
8
12 
2.9
↑ 0.8
balance
Lower term to  
Declining 
3

3.2
↑ 1.1
3 months
balance
Note that the effect of an increase in the fee by 5 percent (to 8 percent) has the same effect 
(an increase of 0.8 percent per month in effective rate) whether the loan is calculated on a declin-
ing balance or flat-rate method. This is because the fee is calculated on the initial loan amount. 
Source: Ledgerwood 1998.
Cash Flow Management
repay both principle and interest at predeter-
Working capital loans for microenterprises were  mined intervals. Working capital loans are, for the 
among the first microcredit products to be devel-
most part, used for cash flow management to sup-
oped during the industry’s initial growth phase in  port productive investment. 
the 1970s. Working capital loans (often termed
Lines of credit are often used for working capi-
microenterprise loans) are provided to either  tal and/or household cash flow management. 
start or expand enterprises with the assumption  Ratherthanreceivingasetamountofaloanthat
that additional business revenue will be used to  is then repaid, lines of credit allow the borrower 
Credit 
223

to access credit as needed up to a certain amount.  regular income and assets, and in some cases, 
Repaymentisoftenveryflexibleaswell.Interest payment may be delayed until schooling ends. 
and fees (if applicable) are paid on the amount  Education loans are increasingly linked with 
borrowed(or“drawndown”)foraslongasitis financial education for youth with the view to 
outstanding. Lines of credit, however, require  develop financial capable consumers.
management systems that accurately track with-
As more stakeholders begin to acknowledge 
drawals and payments of the line of credit as well  the need for education funding, innovative prod-
as the ability to ensure adequate liquidity at all  ucts are being developed (see box 9.6)
times; they are typically available only from com-
mercial providers. 
Risk Management
Consumption loans: Many households face  Emergency loans provide funds on short notice 
cash management challenges related to both daily  for unanticipated events. They are generally 
consumption and larger expenditures for life-
offered by community-based providers but are 
cycle events such as marriages and funerals, or to  becoming more prevalent with institutional pro-
address emergencies or education needs. These  viders.Bankssometimesmakeemergencyloans
needs are often best addressed through savings,  to clients with whom they have long-term rela-
but if not available or if cash flows are insufficient,  tionships, often by adding to existing loans As 
consumption loans with appropriate loan  with any loans, the debt capacity of the borrower 
amounts and repayment terms can be useful. The  must be ensured. 
primary purpose of these loans is to help house-
Top-up loans: Many providers, both formal and 
holds to smooth cash flows so that daily con-
informal, offer “top-up” loans where the out-
sumption becomes less dependent on income,  standing loan amount can be increased if the 
particularly when income is erratic (Frankiewicz  amount requested is relatively small. Top-up 
andChurchill2011).Consumptionloansmaynot loans were introduced to provide flexibility to tra-
be available if providers are used to assessing  ditional working capital loans and are generally 
microenterprise cash flows to determine debt  processed very quickly with decisions largely 
capacity. Frequently when consumption loans are  based on a borrower’s repayment history. 
not readily available, borrowers will take a work-
ing capital loan and use it for consumption.
Asset Building and Productive Investment
Salary loans are made to clients with a regular  Fixed asset loans are used to finance a specific 
source of income through salaried employment.  asset such as a sewing machine or motorcycle; 
The borrower’s salary provides collateral for the  generally the assumption is the asset will con-
loan, and repayments are usually debited directly  tribute to an income-generating activity or 
through the employer at the time of payroll. Salary  enterprise, increasing the borrower’s cash flow 
loans may or may not be required to be used for  and, thus, capacity for debt. However, as men-
specific investments or purchases and are often  tioned above, stated and actual use may vary 
used for consumption. Salary loans, however, are  fundamentally. It is impor tant thus to assess 
relatively rare for low- and very low-income pop-
cash flows and debt capacity without the asset in 
ulations because most do not have salaried  case the loan proceeds are not used to purchase 
employment.
the asset. Acknowledging that this sometimes 
Education loans are used to finance primary or  happens and that altogether the poor may want 
secondary education. These loans can have more  to purchase assets that are not productive, some 
flexible repayment schedules and collateral  providers are beginning to make loans to pur-
requirements to accommodate students’ lack of  chase household assets as well.
224 
The New Microfinance Handbook

Box 9.6  Financing Education through Human Capital Contracts
Education finance has long been an area of 
affordable payments upon graduation regard-
interest for financial service providers. One  less of their level of income. Graduates are not 
new tool—the Human Capital Contract  required to make payments when unem-
(HCC)—provides an innovative approach to  ployed, and they make smaller payments dur-
some of the key challenges associated with 
ing periods of underemployment, reducing 
lending for higher education. 
the risk of unmanageable debt servicing asso-
More like equity then debt, the HCC is not 
ciated with traditional student loans. 
technically a credit product. Participants apply 
Although the HCC lowers risk for students, 
for and receive a given amount of funding to 
lenders must cope with variable repayment 
help cover costs associated with higher educa-
streams, income verification, and legal barri-
tion. In exchange, each student commits a  ers to implementation. One Latin American 
fixed percentage of their income for a fixed  firm, Lumni, is successfully overcoming these 
period of time after graduation. There is no set 
and other challenges. Lumni smoothes the 
principal associated with the transaction—the 
risk inherent in such variable repayment 
student’s obligation ends after the designated 
schemes by pooling student contracts and 
number of payments (generally defined as a 
bringing actuarial and labor market expertise 
percentage of their income over a set number 
to bear in its fund design and contract pricing 
of years paid monthly) have been made  work. To ensure success for both parties, 
regardless of the total sum paid. The percent-
students have access to career development 
age of income commitments never exceeds 
services and networking activities. 
15 percent and is set for each individual based 
By 2012, Lumni had financed over 3,000 
on the expected earnings for his or her degree. 
students with operations in Chile, Colombia, 
As a result, some students will ultimately  Mexico, and the United States and is currently 
repay more than others, but all students face 
planning expansion into Peru. 
Source: Noga Leviner, education finance specialist and former CEO, Lumni USA.
Leasing
agreements, financial and operating, with some 
Leasing is a form of financing that allows  variations. 
 businesses or individuals to make use of equip-
Financial leases are leases in which the risks 
ment and other assets without having to own  and rewards associated with ownership of the 
them or purchase them outright at the begin-
leased equipment are substantially transferred 
ning. The user (the lessee) pays specific  from the lessor to the lessee. A financial lease has 
 regular amounts to the owner (the lessor).  the following common aspects:
Commonly leased assets include machinery  • Amortization of the asset price—includes a
(such as plows or shovels), vehicles, farming 
purchase option for an agreed amount of pay-
equipment, and livestock. Separating the use 
ments or at the end of the lease period
and ownership of an asset eliminates the need 
for a business or household to commit scarce  • Maintenance—lesseeisresponsibleformain-
capital to purchase assets (Wakelin et al. 2003). 
tenance and all risks usually associated with 
Broadly there are two different types of lease
ownership without actually owning the asset
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225

• Noncancellation—the agreement is generally A variation on financial leases are sale and lease-
fixed at the time of the contract (Kloeppinger-
back leases; the asset is sold initially to the lessor, 
ToddandSharma2010).
with the agreement that the lessee will purchase 
back the asset over the life of the lease agreement 
For farmers or enterprises constrained by a  (Deelen et al. 2003).
lack of assets for collateral, financial leases over-
Operating leases are structured so the respon-
come this constraint, and in some cases, the lessee  sibility associated with ownership of the leased 
owns the asset outright at the end of the lease  asset rests with the lessor who owns the asset. 
period (see box 9.7). 
Generally operating leases are for terms substan-
Financial leases are often beneficial to provid-
tially less than the economic life of the asset, and 
ers who may not have specific knowledge about  the lessee pays to use it for a finite period of time. 
the equipment being leased. Under a financial  An example of an operating lease includes the use 
lease, the lessor takes the financial risk of the  of livestock or a vehicle for a few days in exchange 
leased product without having to assume the  for payment. With operating leases, the lessor 
technical risk associated with product perfor-
takes responsibility for the upkeep and ongoing 
mance. Financial leases are sometimes called  operations of the asset. 
capital leases, lease to purchase, or hire-purchase 
Leasing can also be provided under Islamic 
leases (with a hire-purchase lease, part of the  banking. Ijarah is a leasing contract typically used 
ownership of the asset is transferred with each  to finance small equipment. The term of the lease 
payment, and upon payment of the last install-
and the payment schedule must be determined in 
ment the lessee becomes the full owner). 
  advance to avoid speculation and comply with 
Box 9.7  Cow Leasing
K-Rep Development Agency in cooperation 
the microleasing company and the farmer’s 
with Swisscontact developed a cow-leasing 
family are covered. In the event of death of 
product. Under the lease, a farmer is loaned 
either the farmer or the cow, the leasing 
a pregnant cow and a chaff cutter used for 
company is paid the outstanding amount of 
producing milk. Various alternative forms of 
the loan.
collateral and risk mitigation mechanisms 
Under the microleasing contract, the 
are used to protect the provider and the  farmer has the benefit of a grace period of up 
farmer. First, as a lease, the asset itself is 
to three months. After this period, the farmer 
collateral, because the provider may take the 
has to begin repaying the cost of the cow plus 
cow back if the farmer does not make the 
interest. The farmer can also choose to repay 
agreed payments. Second, the farmer must 
in 9, 12, or 18 months. The farmer uses income 
belong to a group with other farmers who 
from milk sales to repay the loan. When the 
cross-guarantee each other. Third, the farmer 
farmer completes payment for the cow and 
has to take insurance coverage for the cow 
the chaff cutter, he owns both outright and 
and for himself. The attached credit life prod-
reaps double benefit; because the cow is 
uct, the cost of which is built into the amount 
already pregnant, the farmer owns the cow 
of the lease, ensures that all the risks to both 
and its calf.
Source: Baumgartner and Kamau 2010. 
226 
The New Microfinance Handbook

Sharia principles. For the transaction to be con-
collateral. Interest rates are often lower than for 
sidered Islamic (and not a sale camouflaged with  microenterprise loans. Like other microcredit 
interest), the ijarah contract must specify that the  products, housing loans make use of group guar-
ownership of the asset, and responsibility for its  antees, localized collection efforts, and minimal 
maintenance, remain with the funder. An ijarah  collateral, often other than the house or land 
contract may be followed by a sales contract,  itself; providers generally do not require a land 
whereby the ownership of the asset is transferred  title to guarantee the loan, making products more 
tothelessee(Karimetal.2008).
accessible to low-income borrowers. Even where 
To date, however, leasing services have not  specific housing finance products are not avail-
been readily available given the difficulties of  able, there is evidence that up to 20 percent of all 
offering leasing products and the need for special  microfinance loans intended for working capital 
licenses and expertise.
is used for housing and upgrading purposes 
(Ferguson2008).
Housing Loans
Housing support services, such as expertise 
Housing loans have become more popular in the  from architects, engineers, and construction 
last decade as providers acknowledge the need  supervisors, are sometimes offered with housing 
for adequate shelter and the value of building  loans.Forexample,ProdelinNicaraguaandthe
assets.6 Housing loans differ from traditional  Patrimonio Hoy program of Cemex  in Mexico 
mortgages in that mortgage finance refers to long-
offer specific technical assistance to both ensure 
term loans to purchase real estate where the  high-quality results and confirm that loan funds 
property acts as collateral. Mortgages are gener-
are used for housing improvements or construc-
ally offered by commercial banks and mortgage  tion. Although many argue they help ensure qual-
companies at market interest rates; however, up  ity housing (Ferguson 2010; Vance 2010), these
to 80 percent of the global population cannot services can be costly and complicated to deliver 
access conventional mortgage finance because of  (seebox9.8).
affordability issues, informal incomes, lack of 
The vast majority of housing loans have so far 
clear land ownership, insufficiently deep financial  focused mainly on progressive building improve-
markets, and/or weak housing finance institu-
ments, where individual households take a series 
tions (Daphnis and Ferguson 2004). The World  of loans to improve their homes incrementally 
Bankestimatesthatonly3percentofthepopula-
given the costs involved and low incomes. 
tion of Africa can afford a mortgage (Centre for  Furthermore, the poor do not show much appe-
AffordableHousingFinanceinAfrica2011).
tite for larger loans with terms beyond five 
CGAP(2004)defineshousing microfinance as  years;7 they are well aware they will have other 
“loans to low-income people for renovation or needs—for education, weddings, funerals—that
expansion of an existing home, construction of a  will require their resources. Lastly, few provid-
new home, land acquisition and basic infrastruc-
ers show significant appetite for providing 
ture.” Some institutional providers have begun,  finance for new house construction for the poor, 
mostnotablyoverthepast5to10years,todevelop or slum-upgrading financing overall, because of 
housing loans for low-income populations. These  increases in risk and costs that this kind of larger 
products combine elements of both conventional  project entails. Incremental lending, and the 
mortgage finance and microcredit. Housing  housing improvements that go with it, are an eas-
microfinance provides relatively larger loans  ier“fit”intotheexistingdeliverymodelsofmost
(up to US$5,000) and longer terms (one to eight  providers seeking financial viability (Ferguson 
years) and may require compulsory savings as  2010;McLeodandMullard2006).
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227

Box 9.8 Affordable Housing in Ghana 
In 2007 UN-Habitat, supported by the govern-
on the ground floor that delivered cross- 
ments of Sweden, Norway, and the United  subsidy. Financing and funding arrangements 
Kingdom, established a local finance facility  included a commercial loan that was guaran-
institution in Tema-Ashaiman, near Accra,  teed by TAMSUF, community down pay-
which was designed to provide credit  ments, subsidy from partner nongovernmental 
enhancement (in this case, cash-collateral  organizations, subsidy from government, and 
guarantees) and technical support to develop 
the commercial cross-subsidy being gener-
“bankable” low-income housing or slum  ated by the shops and the toilets and show-
upgrading projects, that is, projects that are 
ers. Thus far, the community, all of whom are 
able to secure and repay commercial housing 
informally employed, have been paying the 
loans. The TAMSUF institution has now deliv-
commercial loan with a 100 percent repay-
ered on a challenging but thus far successful 
ment rate. 
project that resulted in the construction of a 
Although a complex project, which required 
mixed-use low-income housing project in the 
significant structuring and negotiation, the 
heart of the informal settlement of Amui Djor. 
Amui Djor building has served as a positive 
The three-story building, constructed on land 
example that communities can repay com-
provided by the Tema Traditional Council, has 
mercial loans and can ensure and manage 
32 residential units on the upper floors, which 
group repayment. TAMSUF is working on fur-
were sold to low-income residents at a  ther phases of this project, which received an 
reduced rate. This was made possible through 
award of excellence in December 2011 for 
the construction and operation of 15 shops  innovation in social housing from ConsultASH 
and a commercial toilet and shower operation 
and the UK Charted Institute of Housing.
Source: Liz Case, UN-Habitat.
Notes
References and Further Reading
 1. CGAPTechnology—AlternativeDatato
* Key works for further reading.
Develop a Credit Score, http://www.cgap 
*AllenandOveryLLP.2009.“Islamic
.org/p/site/c/template.rc/1.26.2144/.
MicrofinanceReport.”Reportforthe
 2.  The Entrepreneurial Finance Lab, http://www 
International Development Law Organisation, 
.efinlab.com.
February. http://loganswarning.com/wp- 
 3. AdaptedfromKarimetal.(2008).
content/uploads/2010/12/Islamic-
Microfinance-Report.txt.
 4.  See http://www.mftransparency.org/resources/
calculating-transparent-pricing-tool/.
Baumgartner,P.,andP.Kamau,eds.2010.“How
Can a Farmer Get a High Yielding Cow?” 
 5.  Contributed by mftransparency.org, October 
Organic Farmerno.56,January,Nairobi,Kenya.
2011.
Centre for Affordable Housing Finance in Africa, 
 6.  This section was contributed by Liz Case.
FinMarkTrust.2011.“2011Yearbook.”FinMark
 7. PierreGiguere,privatecommunicationwith
Trust,Parkview,SouthAfrica.http://www 
Liz Case, Manager, Housing Finance, 
.housingfinanceafrica.org/wp-content/
Développement International Desjardins, 
uploads/2011/09/2011-Housing-Finance-Year-
Canada,June2010.
book.pdf.
228 
The New Microfinance Handbook

CGAP(ConsultativeGrouptoAssistthePoor).
EmergingMarketNiche.”FocusNote49,CGAP,
2004.“HelpingtoImproveDonorEffectiveness
Washington, DC. http://www.cgap.org/gm/
in Microfinance: Housing Microfinance.” 
document-1.9.5029/FN49.pdf.
DonorBrief20,CGAP,Washington,DC.
Kloeppinger-Todd,R.,andM.Sharma.2010.
Daphnis,Franck,andBruceFerguson,eds.2004.
“InnovationsinRuralandAgricultural
Housing Microfinance: A Guide to Practice. 
Finance.”FocusNote18,WorldBank,
Bloomfield,CT:KumarianFoundation.
Washington, DC.
*Deelen, Linda, Mauricio Dupleich, Louis Othieno,  Ledgerwood,Joanna.1998.Microfinance 
OlivierWakelin,andRobertBerold,eds.2003.
Handbook: An Institutional and Financial 
Leasing for Small and Micro Enterprises: A 
Perspective.Washington,DC:WorldBank.
Guide for Designing and Managing Leasing 
McLeod,Ruth,andKimMullard,eds.2006.
Schemes in Developing Countries. Geneva: 
Bridging the Finance Gap in Housing and 
International Labour Organization.
Infrastructure. Urban Management Series. 
Ferguson,Bruce.2008.“AValueChainFramework
Rugby,Warwickshire:PracticalAction
for Affordable Housing in Emerging Countries.” 
Publishing.
Global Urban Development Magazine 4 (2), 
Vance,Irene.2010.“HousingSupportServicesin
November.http://www.globalurban.org/
Central America: Status and Challenges.” 
GUDMag08Vol4Iss2/FergusonValueChain 
PresentationattheconferenceSustainable
.htm.
Housing Microfinance in Sub-Saharan Africa: 
———.2010.“FinancingSlumUpgradingandSlum
TurningLoansintoHomes,April12–15,Nairobi.
PreventionforthePoor.”Presentationatthe
Wakelin, Oliver, Louis Otheno, and Kirugumi 
conference Sustainable Housing Microfinance 
Kinuya.2003.“LeasingEquipmentfor
in Sub-Saharan Africa: Turning Loans into 
Business:AHandbookforKenya.”Report,
Homes,”April12–15,Nairobi.
Enterprise Development Innovation Fund, 
*Frankiewicz,Cheryl,andCraigChurchill.2011.
September. http://practicalaction.org/microle-
Making Microfinance Work: Managing Product 
asing/leasing.htm.
Diversification. Geneva: International Labour 
*Wright,GrahamA.N.2010.“DesigningSavings
Organization.
andLoanProducts.”Report,MicroSave,
*Karim,Nimrah,MichaelTarazi,andXavier
Nairobi.http://www.microsave.org/research_
Reille.2008.“IslamicMicrofinance:An
paper/designing-savings-and-loan-products-0.
Credit 
229


CHAPTER 10
Agricultural Finance
Calvin Miller

Rural finance refers to financial services provided  specific to agriculture. This chapter focuses pri-
in rural areas for agricultural as well as nonagri-
marily on credit products for agriculture and will 
cultural purposes. Agricultural finance, primarily  be of interest to practitioners, policy makers, and 
a subset of rural finance, is dedicated to financing  regulators who want to understand the financial 
agriculture-related activities such as inputs, pro-
service needs of individuals and businesses work-
duction, storage, processing, and marketing of  ing in the agriculture sector and to develop appro-
goods. In addition to funding for working capital,  priate products for addressing those needs.
agricultural finance also funds investment and 
infrastructure, such as irrigation systems, storage 
facilities, and machinery. It includes a variety of  The Context of Agricultural 
products including credit, savings, insurance, and  Finance
transfer payments. Agricultural finance is pro-
Governments have tended to promote agricul-
vided in various forms (cash and in-kind) to  tural finance, providing credit to low-income 
agroenterprises and farmers operating small,  farmers through government-owned agricultural 
medium, and large farms. It also includes finan-
banks and special agricultural loan programs. 
cial services such as warehouse receipts systems,  After relatively dismal results of agricultural 
savings or other capitalization mechanisms, as  credit programs due to systemic or covariant risks 
well as insurance and forward contracts that are  (risks that affect many at the same time, such as 
The author thanks Linda Jones and Emilio Hernandez for their contributions. The views expressed here are those 
of the author(s) and do not necessarily reflect the views of the Food and Agriculture Organization of the United 
Nations, for which the content of this chapter was written.
Agricultural Finance 
231

droughts), high costs of operations, and unsus-
time, higher food prices improve the profitabil-
tainable subsidies, the focus of financing changed  ity of agriculture and the returns to investment 
from agricultural credit to financial services ser-
in the sector, thus creating demand for agricul-
ving other rural activities in addition to agricul-
tural financial services. 
ture. Financial services were more efficient by 
In addition to the rise in prices and long-term 
serving the entire rural population, while reduc-
growth prospects in agriculture, an even more 
ing risk by moving beyond a sole focus on agricul-
fundamental change has been occurring in how 
ture. However, without incentives, many private  agriculture is organized and operates. Agriculture 
and even public financial institutions have grown  has become more commercial, catalyzing more 
increasingly hesitant to fund agriculture due to  integration between buyers and sellers to meet 
the difficulties involved in managing an agricul-
higher consumer demand. The relationships 
tural portfolio. Given the shift of government  between buyers, sellers, and other participants in 
financing away from agriculture, significant gaps  agricultural value chains have changed in an 
now exist in the availability of both rural and agri-
effort to improve efficiency, meet tighter stan-
cultural financial services. 
dards of agroindustries, and satisfy market 
Since many microfinance institutions (MFIs)  demand for consistent quality, timely delivery, 
were founded to serve the poor and agriculture is  and differentiated products. These changes have 
a critical source of rural employment, income,  had a major impact on how the agriculture sector 
and food security, addressing the financial needs  is or could be financed.
of poor agricultural households fits within their 
New technologies in information and commu-
mission. However, due to the typical nature and  nication have opened new opportunities for 
cost of their services, MFIs have tended to pro-
improved financial and value chain services. All 
vide rural financial services that are most appro-
types of financial institutions, including most 
priate for nonagricultural purposes. While  MFIs, now have management and information 
product innovation has allowed MFIs to reach  systems that can handle multiple, customized 
impoverished rural households with savings and  credit, savings, and payment products, including 
loan products and, in many cases, with training  point-of-sale transactions and direct transfers. 
and other services, financial services for agricul-
They also have improved communication with 
tural finance have generally remained a small  agricultural clients. Furthermore, improved 
portion of their portfolios. 
access to information facilitates pricing, direct 
Today, development concerns and market  sales, and deliveries as well as forward buying and 
potential are driving renewed interest in both  selling of contracts and lowers the transaction 
agriculture and agricultural financial services.  costs of doing business, making agricultural 
Recognizing that the majority of poor people in  enterprises good clients.
developing countries reside in rural areas and 
One aspect of agricultural finance that has not 
depend on agriculture for their livelihoods,  changed is the effect of political intervention, 
many governments and development agencies  which in some countries can be significant. 
have specifically included increased access to  Governments often intervene in agricultural prices, 
agricultural finance in their national develop-
either through price controls or through import 
ment strategies. Furthermore, a drop in global  and export restrictions or regulations that affect 
food reserves has raised concern for food secu-
market prices for agriculture and hence repayment 
rity; short-term increases in food prices are  capacity of agricultural borrowers. In addition, 
causing unrest, while growing demand increases  governments and even donors are often tempted to 
vulnerability over the long term. At the same  control interest rates for lending to agriculture, 
232 
The New Microfinance Handbook

especially to smallholder farmers, which can be  risks, making it hard for financial service provid-
disruptive for those lending to the sector. Policy  ers to hedge them. Consequently, providers find 
makers in some countries may also directly inter-
it difficult to finance agricultural activities.
vene in agricultural finance with policies to pro-
The nature of the flow of capital is a further 
vide subsidized credit through a variety of channels  challenge to both borrowers and lenders. 
or loan write-offs at election time or after poor har-
Because agricultural production (crops and live-
vests. Such programs often create more problems  stock) in general has a slower turnover than 
than they solve and make private financial institu-
other microenterprise ventures traditionally 
tions wary of lending to the sector. The provision of  funded by MFIs, agricultural credit generally 
subsidized funding to farmers or cooperatives  requires longer loan terms and is vulnerable to 
often creates disincentives for private providers to  unpredictable and potentially lower returns on 
get involved (van Empel 2010). For example in  capital. Consequently, it entails higher risk and 
India, the government provided an agriculture  is much more sensitive to interest rates than tra-
debt waiver scheme for smallholder farmers in  ditional microfinance (Miller 2011). 
1990 and again in 2008, adding to the banks’ reluc-
Agricultural credit requires adjustments that 
tance to lend to these farmers (Das 2012).
differentiate it from a typical microenterprise 
One reason for political and development  loan. Because cash outflows for inputs, capital, 
intervention in smallholder agriculture financing  and some labor occur at the beginning of the sea-
is that it is often perceived as agriculture rather  son and cash inflows occur primarily at harvest 
than agribusiness or agroenterprise. However, for  time, agricultural loans often require the loan 
financing, especially lending, agriculture must be  principal to be paid at maturity rather than 
treated as a business. “Credit is not appropriate,  throughout the loan period. Interest may also be 
nor viable, for subsistence farming, although  paid at maturity, at the beginning of the loan, or 
some financial services such as savings for income  periodically (either at fixed or flexible intervals) 
‘smoothing’ and insurance can be useful. Despite  throughout the loan period. 
both the important development role of aiding 
In agriculture, land is often used as collateral. 
smallholders as they transition from subsistence  However, there are frequent problems with land 
farming into the market economy and the social  title and property rights for smallholder families, 
emphasis of many microfinance organizations, it  especially women-headed households that often 
is not the role of a financial services provider to  do not have title to land (in some cultures women 
lend where there is not a market-linked business  are not allowed, either formally or informally, to 
case to do so” (Miller 2011, 4). 
own land). Furthermore, small loans rarely justify 
the legal costs to process a land claim. Movable 
The Challenge of Agricultural 
assets such as livestock and equipment are also 
Credit
fairly high risk, as farmers often have no proof of 
ownership or insurance coverage for them. 
Farmers often live in areas that are hard to reach  Personal and group guarantees have weaknesses, 
with traditional financial services. In addition,  since group members often are also farmers and 
they face climatic and price risks, seasonal  likely to face the same risks. Therefore, such guar-
demand for products, and fluctuating labor and  antees work best when the group or its members 
capital. Many of these risks and challenges such  do not depend on similar sources of income such 
as droughts, floods, pests, or diseases are beyond  as crop agriculture. Poor financial literacy rates of 
the control of farmers; within a region, they are  farmers also contribute to inefficient agricultural 
often subject to the same weather and climate  finance markets.
Agricultural Finance 
233

The following factors apply primarily to rural  their respective contexts. These extend well 
and agricultural markets and constrain both the  beyond loans, savings, and other financial ser-
supply of and demand for financial services  vices to include insurance, hedging, embedded 
(Christen and Pearce 2005): 
finance from nonfinancial entities, and invest-
ment finance. There are also guiding principles of 
• Generally lower population density, dis-
agricultural finance that can be considered uni-
persed demand, low literacy rates, and inad-
versal better practices. 
equate transportation and communication 
Agricultural risk assessment includes both the 
infrastructure
risks of the particular client or group of clients 
• Limited economic opportunities for local themselves and their relationships with the per-
populations
sons or groups with whom they buy and sell. Thus 
the assessment goes well beyond what is common 
• High risks faced by potential borrowers and in microfinance. The emphasis of microfinance is 
depositors due to the variability of incomes,  placed on knowing the clients, their character, and 
exogenous economic shocks, and limited tools  their capacity, demonstrated, in part, by their 
for managing risk
repayment history. Assessment is quick but gener-
• Seasonality of crops and production sched-
ally only provides a cursory overview of the 
ules, leading to spikes in loan demand and  household or enterprise activity. In traditional 
shortages in both funding and labor in certain  banking, collateral is the most important and often 
periods 
determining factor for lending. As long as the loan 
is secured, often with a collateral value much 
• Heavy concentration on agriculture and higher than the loan amount, there is little interest 
 agriculture-related activities, exposing clients  in fully understanding the business or household. 
and providers to multiple risks, both idiosyn-
Collateral requirements are often prohibitive for 
cratic (one household) and covariant (entire  agricultural borrowers, who generally do not have 
region or country)
the type of mortgage collateral most banks request. 
When financing agriculture, fully under-
• Womenfarmers,whoareconstrainedbylack standing the needs and risks of the client, busi-
of land, loss of land when the husband dies, or  ness activity, and sector is crucial. Lending 
inability to borrow without the husband’s  solely on the basis of the client’s character or 
permission 
the group’s track record is inadequate, as is the 
• Lackofreliableinformationaboutborrowers
traditional collateral-based banking approach. 
Each of the 5 Cs of loan analysis—namely, char-
• Lackofmarketinformationandmarketaccess
acter, capacity, collateral or capital, conditions, 
• Weak institutional capacity, including poor and cash flow—must be well understood for 
governance and operating systems and insuffi-
each borrower as well as for their agricultural 
cient skills among staff and management of  activity. It is important to assess the capacity 
service providers 
of the borrower and, if relevant, the strengths 
and weaknesses of his or her agribusiness 
• “Crowdingout”effectofsubsidiesanddirected partners with regard to their financial, mana-
credit.
gerial, and technical capacity. There must also 
While there is no one simple solution to suc-
be a level of confidence in both the character 
cessful agricultural finance, an array of proven  of the borrower and his or her relationship 
processes, approaches, and tools work within  with the various participants in the value 
234 
The New Microfinance Handbook

chain. And while character and collateral  Agricultural Value Chain Finance
remain important, agricultural credit places  Agricultural lending requires risk assessment 
much greater weight on cash flows and condi-
well beyond the agricultural borrower to include 
tions (Miller and Jones 2010).
an analysis of market dynamics that determine 
Cash flow analysis is the most important C for  the fluctuations of prices and production in the 
determining the amount and timing of loans,  agriculture sector. This is because the ability of 
repayment schedules, and repayment capacity.  farmers to produce, sell their products, and profit 
The diversity of agricultural activities on even a  from their farming activities is influenced by the 
small farm makes it seem complicated, but the  economic performance of individuals or busi-
cash flow of a household or agribusiness must be  nesses from whom they buy and sell. Farmers’ 
assessed. The lender can assess cash flow either  cash flow is linked to the competitiveness and 
directly or indirectly using information from the  reliability of their suppliers, buyers, and service 
farmer’s buyers or sellers. Some of the farm’s cash  providers. These farmers, businesses, and indi-
flow will be regular, while some will be irregular;  viduals are interdependent actors participating in 
for agricultural producers, most production-  the transformation of agricultural products, each 
related cash flow is irregular—that is, seasonal in  one of them adding value through their efforts to 
nature (Heney 2011).
produce products that the end consumer will 
Conditions are a second critical factor.  purchase. The total set of interactions between all 
Conditions are not simply the conditions of the  of these actors to produce a specific agricultural 
loan, which must work well for the borrower, but  product is often referred to as a value chain
the short- and long-term conditions of the entire 
A value chain is the path that a product follows 
value chain and sector. Collateral remains impor-
from raw material to consumer, from input sup-
tant, but the emphasis shifts from reliance on  plier to producer, and on through the various 
mortgage collateral and toward collateral based  actors (private or public) that take ownership of 
on products, contracts, and processes.
the product before it arrives at its final condition 
These characteristics of agricultural lending  and location. The path may be very short—from 
require a deeper assessment and understanding  farmer to household—or may follow a complex 
for planning and monitoring loans and thus are  path of value addition and geographic movement 
prohibitively costly for small loans, which is a  from farmer to aggregator or cooperative, to raw 
major reason why MFIs and banks are typically  materials processor, to value added production, to 
not interested in them. However, the changing  retailer (Miller and Jones 2010). In the expanded 
nature of agriculture is providing ways to use the  definition of the term, a value chain and its analy-
agricultural value chain to accomplish much of  sis also embody support service providers, socio-
this risk assessment and monitoring. For this, a  cultural constraints, enabling environment, and 
new approach—agricultural value chain finance
relationships among stakeholders. 
has emerged to address finance in agriculture. It 
Value chain finance refers to the flow of funds to 
is not new in its elements or new to those who  and through, or among, the various actors in a value 
have taken a comprehensive approach to agri-
chain. It uses an understanding of production, 
cultural lending, but it is quite new to many. It is  value added, and marketing processes to deter-
an approach that seeks to reduce costs and lower  mine financial needs and provide financing to 
the risks of lending by understanding risks and  those involved. The strength of value chain finance 
structuring financing (that is, fitting the condi-
lies in understanding the risks of the business by 
tions) to fill the needs of participants within a  understanding the risks and competitiveness in 
value chain. 
Agricultural Finance 
235

the value chain, using that information for invest-
chain finance. However, if the same provider 
ment decisions, and then providing financial ser-
lends to coffee producers so they can purchase 
vices tailored to current and potential clients  inputs—because they are known to be part of a 
within the value chain. Competitive agriculture is  viable coffee value chain with a reliable buyer and 
connected  agriculture—linking participants in a  market—this is value chain finance. These rela-
sector or within a value chain in which everyone  tionships often give external financiers the confi-
involved has a vested interest (Miller 2011).
dence to extend credit to those who would not be 
Lenders need to understand the nature of  able to obtain credit on their own. Additionally, 
relationships and the capacities and limitations  medium or large firms may be able to obtain 
of the persons and companies participating in a  financing for their partners farther down the 
particular value chain in order to assess the  chain. For example, a bank may not be geared to 
level of risk that may affect the ability of a spe-
serving small-scale producers and agroenter-
cific client to repay a loan. With this awareness,  prises, but might provide a loan to a large buyer 
lenders also need to consider the cash flow and  with the understanding that the large buyer will 
interests of the other participants within the  on-lend to those in their value chain. Such 
value chain or chains of the borrower (Miller  on-lending could enable these smaller producers 
and da Silva 2007). In addition, providers need  and agroenterprises to purchase inputs so that 
to improve their data management to capture  they can produce or manufacture goods and sell 
and use production and marketing data for the  them to the large buyer. Knowledge of a value 
most important agriculture sectors of their cli-
chain and how it operates can improve repay-
ents and region. 
ment and reduce risk.
Value chain finance can be either internal or 
The interplay between a value chain and the 
external  to a value chain. For example, when a  financial market strengthens both the value 
dealer supplies inputs on credit to a producer, or a  chain and the financial market system. Access to 
wholesaler makes an advance payment to a trader  credit helps participants in the value chain to 
for the purchase of raw materials, these consti-
overcome bottlenecks and supports the smooth 
tute internal value chain finance. Internal financ-
functioning of the value chain. The existence of a 
ing between value chain actors is often  viable value chain reduces risk and instills confi-
“embedded” with other services. Common forms  dence in lenders, thereby deepening outreach. 
of embedded finance are trader credit, input sup-
However, agricultural value chains often are 
plier credit, marketing company credit, and lead  poorly organized, lack transparent pricing, and 
firm financing. The flow of funds from an outside  are fragmented—all of which results in higher 
provider to a business or a category of businesses  transaction costs. In many cases, the market is 
(producers, traders, input suppliers) in the value  distorted by stakeholders, including donors, gov-
chain is defined as external value chain finance.  ernments, and development banks, that regard 
For example, when a bank lends money to a buyer  agriculture as a social problem rather than as an 
for production purchases, or when a provider  economic activity. 
extends credit to a farmer using a warehouse 
Value chain financing not only analyzes the 
receipt as collateral, these are examples of exter-
flow of funds between participants in the value 
nal value chain finance. 
chain and financial institutions, but also is cog-
If a provider, for example, offers general loans  nizant of the support services1 that are pro-
to rural and agricultural borrowers, and some of  vided and those that are needed in order to 
them use the funds to generate income related to  strengthen the weakest links in the chain, as 
specific crops or value chains, this is not value  shown in figure 10.1. 
236 
The New Microfinance Handbook

Figure 10.1  Using the Value Chain for Agricultural Financing
Financial service
Support
institutions
Value chain actors
services
Exporters / wholesalers
Bank
Technical training
Processors
Non-bank
financial institutions
Business training
Local traders & processors
Private investors
& funds
Producer groups
Specialized
Cooperatives /
services
associations
Farmers
Local MFIs /
Governmental
community
certification / grades
organizations
Input suppliers
Product flows
Financial flows
Source: Miller and Jones 2010. 
Value Chain Business Models
often envision this model as the most desirable 
because it gives producers the greatest power. 
The nature of the product, cash flow dynamics,  But this model generally brings greater exposure 
type of relationships, and risks associated with a  to risk, requires greater productive and manage-
value chain are influenced by various business  rial capacity of farmers, and entails the need to 
models defined by who is the “driver” of the value  access more sophisticated financial services. 
chain. There are several types of models:
Many, and in some countries a majority, of small 
producer organizations do not have the capacity 
• Producer-driven
and market knowledge for sustainable success 
• Buyer-driven
and growth without some support. One disad-
• Facilitated
vantage is that market demand is driven by con-
• Integrated.
sumers, who are the farthest from the producers 
In  producer-driven models, the producer  in the value chain. However, for producer orga-
organization is the driver and the principal deci-
nizations with good capacity and value chain 
sion maker. Producers and even governments  partners, the model can be successful. 
Agricultural Finance 
237

In buyer-driven models—for example, contract  since this model depends on subsidies from non-
farming—buyers contract producers to supply the  governmental and governmental development 
product and offer them direct or indirect credit to  agencies, it must be conceived as a catalytic short- 
enable them to meet delivery requirements.  to medium-term model. The facilitator does not 
Financing conditions are set to fit the producer’s  become directly engaged in product flows or 
cash flow schedule. For smallholders and their  transactions in the value chain (see box 10.1).
producer organizations, contract farming or the 
In integrated models, the lead agribusiness has 
less formal arrangements called outgrower  full control over and responsibility for coordina-
schemes are becoming the most common form of  tion. This is common with larger conglomerate 
buyer-driven model today for linking finance to  agribusiness firms and can allow them to lower 
the value chain and securing inputs, technical  their financing and business risks. This model is 
assistance, and market access. 
much less inclusive of small producers and agroen-
Facilitated value chain models use outside  trepreneurs, making it harder to reach the poor.
support agencies (generally development agen-
In summary, understanding business models 
cies acting as facilitators) to build capacity and  and how they are organized helps lenders to know 
broker partner relationships, thereby reducing  how best to provide credit to value chain partici-
the costs and risks for those involved. However,  pants, with the financing often coming through or 
Box 10.1  The DrumNet Project
The DrumNet Project in Kenya establishes re-
transfer. DrumNet serves as the intermediary 
lationships with key actors along a supply  in the flow of payment to ensure that credit is 
chain—a buyer, a bank, and several retailers of  repaid before earnings reach the farmers’ ac-
farm inputs—and links them to smallholder  counts. A master contract governs the entire 
farmers through a dedicated transaction plat-
process, and DrumNet’s information technol-
form and a fully integrated finance,  production,  ogy system monitors compliance.
delivery, and payment process. The  targeted 
The process creates an enabling environ-
use of information and communication tech-
ment for agricultural finance in several ways. 
nologies across the platform makes the pro-
First, banks are assured at the time of  lending 
cess efficient, cost-effective, and practical in  that farmers have a market for their produce 
the African context.
and the means to serve that market—two 
The process begins when farmers (orga-
building blocks of a healthy revenue stream. 
nized into farmer groups) sign a fixed-price  Second, banks minimize the problem of loan 
purchase contract with an agricultural buyer.  diversion by offering in-kind credit to 
 
The contract allows farmers to approach a  farmers for inputs and directly paying certi-
partner bank, obtain credit, and receive farm-
fied (and monitored) retailers after the 
ing inputs from a local, certified retailer. At har-
inputs are distributed. Finally, cashless pay-
vest, the contracted produce is collected,  ment through bank transfers reduces strate-
graded, and sold to the buyer at designated  gic default, since farmers cannot obtain 
collection points. A successful transaction  revenue until their outstanding loans are 
 triggers a cashless payment through a bank  fully repaid.
Source: Campaigne and Rausch 2010 
238 
The New Microfinance Handbook

in coordination with the value chain driver, who  advance (with interest as agreed) from the pur-
can then pass on funding through to its partners.  chase price. A supplier may offer a producer 
However, many agribusiness firms that buy or sell  inputs on credit, with the understanding that the 
products prefer not to manage credit and look to  producer will pay the supplier once the crop is 
outsource credit management, thus creating an  sold. In some cases, these arrangements can 
opportunity for financial service providers. By  involve a third party such as when a buyer pays 
working in partnership with input suppliers and  the supplier for inputs and deducts the cost from 
buyers, they can provide financial services with  the price paid to the producer. 
lower market risk and greater efficiency, as loans 
Marketing companies and lead firms that 
can often be repaid at the point of sale through  aggregate products from producers often advance 
coordination with warehouse managers and  payment for goods prior to production, which is a 
 processors. Working with specialized financial  form of trade credit embedded in the value chain. 
institutions (rather than suppliers and buyers  Similarly, contract farming exists when a whole-
doing it themselves) often improves the delivery  saler provides credit to producers based on a con-
and lowers the cost of financial services to the  tract specifying that the farmer must provide a 
value chain partners. Agribusinesses finance their  specific volume and quality of produce to the 
suppliers or buyers as a way to secure products or  wholesaler at a specific time. While there may not 
markets, but they are often less equipped to man-
be an explicit interest rate, a discount on the sell-
age financing and find it more efficient to concen-
ing price is usually built into the contract. With 
trate on their core business and let financial  contract farming arrangements, the wholesaler 
institutions manage loans. At the same time, these  may also offer technical assistance to ensure qual-
participants in the value chain often have more  ity products.  
knowledge about agricultural inputs, markets, 
Traders are most often members of the rural 
and the persons and organizations they work  community or from within the region. They not 
with than external financial institutions. This  only have capital and have or can arrange trans-
gives them a comparative advantage. 
portation, but, which is most important, often 
also have specialized knowledge of markets and 
Trade Finance
contacts that enable them to operate effectively in 
Trade and product-related finance refers to credit  their region. Traders are therefore able to advance 
provided by traders, input suppliers, and agribus-
funds with the guarantee that the crop to be har-
iness processors and buyers. Trade finance has  vested will be available to them for resale accord-
traditionally been the most prevalent form of  ing to a price that is fixed at the time of financing. 
agricultural financing, especially for small pro-
In regions where there is little competition, prices 
ducers. It is common in both well-structured  offered by traders are often low to compensate for 
agricultural value chains and in informal and  risk, costs of embedded interest, and profit; trad-
fragmented ones. These farmer-trader or  ers may be opportunistic and take advantage of 
 buyer-trader relationships play a critical role in  smallholder farmers who need cash.
connecting farmers to markets. They provide 
For financial institutions, especially MFIs and 
farmers with funds for inputs, harvest, or other  government banks, it is often assumed that 
needs such as family consumption and emer-
financing must be provided directly to the micro 
gencies. In more organized value chains, a trader  and small agricultural producers and households. 
or buyer may give an advance to a producer so the  This may or may not be the most feasible way to 
 producer can purchase inputs and cover costs  finance agricultural activities due to the costs and 
until harvest. The trader then deducts the  risks involved. Hence, financing institutions also 
Agricultural Finance 
239

need to consider alternative ways to finance sup-
accounts receivables (that is, invoices) at a dis-
pliers, traders, and agribusiness buyers who can  count. Both are forms of credit, which allows a 
advance the supplies or funds needed by those  business to obtain immediate cash without wait-
producers. For example, when sufficient compe-
ing for invoices to be paid. This cash advance 
tition among traders or buyers helps to keep their  credit is especially important for small enterprises 
prices realistic in relation to market prices, then  that need operating capital for purchasing goods 
indirect financing of smallholder farmers through  or advancing cash or inputs to their clients. 
such traders and buyers may be the most cost- 
Factoring is a special form of bill discounting 
effective manner of financing them. 
that works through specialized factoring agen-
cies (see box 10.2). Buyers and wholesalers or 
Bill Discounting and Factoring
input suppliers sell their invoices at a discount to 
Input suppliers that sell on credit as well as agri-
the factoring agency, which provides a credit 
businesses or producer organizations that sell  advance (for example, 80 percent of invoice 
products on consignment or on delayed payment  value) to the business or producer organization. 
(for example, 60 days) often struggle with liquid-
The agency collects the receivables when due and 
ity. This limits the amount of sales they can make  makes a final settlement payment to the business, 
on credit, which, in turn, limits the ability of  minus a factor discount (administrative fee and 
smallholder farmers to obtain inputs on credit to  interest). Factoring speeds the turnover of work-
be paid upon delivery of their harvest. Bill dis-
ing capital and provides services such as accounts 
counting and factoring can help to improve cash  receivable bookkeeping and bill collection. In 
flow without requiring additional collateral  addition, it provides some protection from credit 
(which is often not available). Bill discounting and  risk in that the factoring agency conducts a due 
factoring are both financial transactions whereby  diligence assessment of the buyer from whom it 
a business or producer organization sells its  must collect.
Box 10.2  Factoring to Support Agriculture
In Kenya, De Derby Green Ventures Capital  amount of the invoices from the buyers. On 
(DGV) is a limited-liability company, whose fo-
the due date, the buyers pay DGV the full 
cus is value chain financing through factoring,  amount of the invoice, and DGV discounts its 
both in agriculture and in manufacturing. Its  fees and pays the remainder to the supplier as 
mission is to facilitate business linkages by  previously agreed (Obara 2011).
eliminating the financial stress experienced by 
In Guatemala, the MFI Summa provides 
businesses. DGV gives priority to the agricul-
short-term bridge financing to producer orga-
ture sector, which represents 80 percent of its  nizations and their members while they wait 
portfolio.
for buyers to pay them. Even more important, 
DGV allows agricultural suppliers to con-
it also collects the accounts receivable, which 
vert approved invoices and delivery docu-
can be very difficult and costly for producer 
ments into instant cash by discounting them  organizations to handle directly, especially 
at an agreed fee. DGV then collects the face  when they operate far from cities.
Source: Miller 2011.
240 
The New Microfinance Handbook

Factoring differs from credit in three main  credit that originated during the nineteenth cen-
ways. First, the emphasis is on the value of the  tury among European farmers. Warehouse 
receivables, not the creditworthiness of the agri-
receipts involve a tripartite agreement between 
business or producer organization. Second,  (a) producers (or often producer organizations 
 factoring is not a loan; it is the purchase of an  operating on behalf of farmers), who borrow using 
asset—the receivables. While not directly financ-
stored produce as collateral; (b) local financial 
ing producers, it allows input suppliers or buyers  institutions, which lend to producers or organiza-
to access funding, which can benefit farmers who  tions; and (c) a warehouse manager, who provides 
receive advances. The factoring agency provides  storage services. The stored produce is then sold 
the collection service, which can even make other  when prices are generally highest and potential 
financial service providers more willing and able  revenue can be maximized. Agribusinesses also 
to extend inputs on credit or provide advances to  can use warehouse receipts as long as the goods 
farmers. Also, producer organizations who sell to  are stored securely by an independently con-
supermarkets or other buyers on consignment  trolled warehouse. Farmers or other participants 
not only have to wait for payments, but often find  in the value chain receive a receipt from the ware-
that collection is difficult. Due to their location  house stating that they have deposited goods of a 
and collection experience, it can be more effective  particular quantity, quality, and grade, which they 
to have a factoring agency manage this. 
then pledge as collateral to access a loan from a 
third-party financial service provider, such as a 
Warehouse Receipts Systems
cooperative or an MFI (see figure 10.2). 
Warehouse receipt systems (sometimes called 
Warehouse receipt systems can help to 
warrants or warrantage) are a form of inventory  smooth seasonal price variations throughout 
Figure 10.2  The Warehouse Receipts Financing System
Lender
Borrower
Warehouse
1.  Lender and Borrower
     enter into a credit
     agreement
2.  Borrower places goods
     in warehouse
7.  Buyer pays lender for goods
3.  Warehouse issues receipt
8.  Lender releases receipt
Buyer
4.  Borrower offers receipt as
9.  Buyer redeems receipt at
     collateral to lender
 
warehouse for goods
5.  Lender grants borrower a loan
10. Lender applies buyer’s
6.  Borrower sells stored goods
payment to the loan 
     to buyer
Source: Höllinger, Rutten, and Kiriakov 2009.
Agricultural Finance 
241

the year, as they help consumers and sellers to  federations use a “warrantage” system (Miller 
know that supply is available in warehouses.  2011; see box 10.3). 
This can help to forecast demand and revenue, 
leading to a more stable and developed market  Agricultural Leasing
overall. However, for products and commodi-
As discussed in chapter 9, a financial lease, also 
ties for which prices do not generally rise in a  called a lease-purchase agreement, is a viable 
predictable, seasonal fashion, there is little  loan alternative for financing equipment and 
incentive or need to store and use warehouse  durable assets. Leasing uses the agricultural 
receipts.
equipment and machinery acquired as its own 
While many warehouse receipt programs are  collateral, thus providing an alternative for cli-
formally structured, informal credit systems  ents who do not have the traditional collateral 
involving village granaries or regional storage  needed to purchase directly. Leasing is a specific 
centers are common in many developing coun-
financial product governed by distinct legisla-
tries. In Latin America, MFIs have begun using  tion. Leasing and micro leasing have become 
“micro-warrants” as a form of warehouse  common in some countries, but are still rela-
receipt financing for their agricultural microen-
tively new. Leasing is sometimes available from 
trepreneurs, and in Africa, credit cooperative  banks or MFIs, but quite often is available from 
Box 10.3  Warehouse Receipt Systems: Lessons from Niger
In Niger, local farmer organizations and MFIs  opportunities, the enabling regulatory frame-
have adapted the warrantage concept. Since  work, the existence of proper storage man-
its beginnings in the mid-1990s, the warran-
agement and facilities, and sound governance 
tage system has created a relatively popular  within producer organizations. Lessons from 
financial product offered by all MFIs in the  Niger highlight the relative importance of 
country. Producer organizations provide their  these conditions. The constant demand for 
members with storage facilities and also han-
cereal imports from neighboring Nigeria has 
dle their loan transactions. The loans enable  created stable business opportunities for 
farmers to finance several of their household’s  farmers in Niger. Through their organizations, 
income-generating activities during the stor-
farmers have taken advantage of these oppor-
age period, allowing for smoother cash flows.  tunities by building storage facilities and 
Revenues from the activities financed often  requesting joint loans backed by cereal stocks. 
enable farmers to pay back the loan without  Lenders understand the worth of these stocks 
using revenue from the eventual sale of the  and accept them as collateral. Even though 
stored produce.
the court system in Niger makes credit con-
Several conditions need to be met for  tracts difficult to enforce, the combination of 
warehouse receipt financing to work. Some  stable agribusiness opportunities, strong 
important ones include detailed lender knowl-
farmer organizations, and lenders familiar with 
edge of the dynamics of the agricultural value  agricultural markets makes warehouse receipt 
chain, the stability of borrowers’ agribusiness  financing work in the country. 
Source: Interview with Emilio Hernandez, May 2012. 
242 
The New Microfinance Handbook

specialized leasing companies, which may or  • Yield-based insurance. Indemnity payments 
may not be linked with banks or MFIs.
are made when the client’s yield is below a 
predefined level, independent of the damage 
that is measured after the defined loss event. It 
Addressing Client Risk through 
is suited to perils where individual attribution 
Financial Services
to the crop loss is difficult to measure.
Agriculture is subject to production, price, and  • Crop-revenue insurance. The timing and 
marketing risks. These can affect all clients in a 
amount of indemnity payment are defined 
region. While these risks are determined by 
based on a predefined combination of yield 
uncontrollable factors, their effects on income 
and commodity prices, set according to histor-
and loan repayment can be mitigated. Financial 
ical norms in a subarea.
service providers working with low-income cli-
ents, like any financial institution, must mitigate  • Index-based insurance. A predefined index is 
these systemic risks through portfolio and sector 
used to estimate the timing and value of losses 
diversification and, where possible, regional 
suffered by the insured client. The index is cal-
diversity and insurance. In addition, MFIs can 
culated based on historical meteorological and 
also make better agricultural lending decisions 
production data. Examples include some com-
when they improve their management of data to 
bination of temperature, rainfall, wind speed, 
capture and use production and marketing data 
yields, and mortality rates averaged over a sub-
for the most important agriculture sectors of their 
area. Use of an index avoids the need to verify 
clients and regions. 
the value of losses, and its deviation from a 
specified level defines the value of the indem-
nity payment. Examples of indexes include (a) 
Agricultural Insurance
a specified minimum temperature for a mini-
Weather and related natural events affecting 
mum period of time (for frost); (b) a specified 
agricultural production are unpredictable, and 
amount of rainfall in a certain period of time 
risks are increasing with climate change. 
(for excess or lack of rain); and (c) a certain 
Insurance can reduce these risks. While various 
wind speed (for hurricanes).
types of insurance described in chapter 11 are 
Although agricultural insurance is quite 
important for farm households and enterprises,   common in developed countries, it is much less 
insurance products are available specifically for  so in the developing world. The institutional 
agricultural risk. 
mechanisms to obtain relevant data, verify losses, 
Agricultural insurance products can be classi-
develop appropriate indexes, or distribute insur-
fied as four principal types (Kang 2007; Roberts  ance products are limited in many countries, 
2007):
making it costly for insurance companies to 
• Damage-based insurance. Indemnity payments   provide services and difficult for them to offer 
are triggered by the occurrence of a specific  prices that farmers are willing to pay. However, if 
type of damaging event, such as hail, fire, or  a proper index can be determined, delivery costs 
death of animals. These products tend to be  can be significantly reduced because payment for 
used when there is a low correlation between  damage does not have to be verified but is auto-
events occurring within a given area and pay-
matic according to the index. The use of an index 
ment is subject to the value of the loss.
also avoids the risk of moral hazard. This is 
Agricultural Finance 
243

because neither the insurer nor the client can  conjunction with loans through links with insur-
influence the index measurements, usually col-
ance providers. 
lected by a third party such as a government min-
istry. However, like all types of insurance,  Forward Contracts
index-based insurance depends on reliable, his-
Forward contracts commit the issuer to sell a 
torical data. While data collection is improving, it  product with delivery at a future date, such as at 
remains a major drawback for insurance in  harvest. The sale price is fixed at the time of the 
developing countries. A related challenge is  contract. Forward contracts are useful for small-
building indexes that represent losses and avoid  holder farmers, traders, and agroenterprises to 
the risk of not providing payment when it is due  mitigate or “hedge” the price risk, which helps to 
or of providing payment when it is not due (IFC  mitigate the risk for lenders, since future income 
2010; see chapter 11 for more on index-based  is more secure. Forward contracts can also be 
insurance).
used as collateral for loans (see box 10.4). 
In addition, agricultural households face lim-
ited market opportunities and have little access to  Guarantee Funds
complementary services such as credit, savings,  In some countries, governments, donors, or com-
agricultural inputs, or communication infrastruc-
mercial companies offer guarantee funds for agri-
ture. Insurance services bring little additional  culture or for specific sectors or target groups of 
value to these households, and their willingness  farmers or agroenterprises. These are meant to 
to pay for them tends to be low, even if subsidies  reduce the risk of lending. A typical example is a 
are provided. 
fund that guarantees approximately 50 percent of 
For agricultural insurance for smallholder  the loan in the event of default (either shared 
farmers, it is useful to bundle insurance with  equally or the first loss) for a fee of 3 to 5 percent 
other financial products like loans and savings  annually. Lowering the risk gives the lender an 
products. Bundling greatly reduces the transac-
incentive to lend to new or risky sectors and to 
tion costs of delivering payments, deposits, and  lend more. The loan guarantee fund manager also 
premiums. Insurance product management is  provides an additional risk review as part of its 
often beyond the capacity of most MFIs, but it  due diligence. The weakness of loan guarantee 
can be delivered effectively through them or in  programs is the cost, which is unsustainable 
Box 10.4  Crop Receivables
The government of Brazil created the rural  that  commits the farmer to deliver a specific 
finance note, called the cedula produto rural,  quantity and quality of product at a given 
for loans to agribusinesses and producers. The  future date and location. In exchange, the 
note is not a typical forward contract; it is a  buyer pays in advance a certain amount of 
hybrid of forward contracts and warehouse  money that corresponds to the quantity of 
receipts. Its mechanism is very simple—  product specified. In effect, the buyer provides 
farmers issue a rural finance note to a buyer  an unsubsidized loan backed by the note. 
Source: Miller and Jones 2010.
244 
The New Microfinance Handbook

unless subsidized by the government or a donor  The Role of MFIs in Agricultural 
(Zander, Miller, and Mhlanga 2012).
Finance
All financial institutions that provide agricultural 
Lending for Livestock
financial services need to understand agriculture 
While much of the previous description has  and related small and medium agroenterprises in 
focused on crop agriculture, attention must also  order to be effective. Inclusive finance acknowl-
be given to animal husbandry. Providing financial  edges the role that agriculture plays in the lives of 
services for small animals as well as livestock is  the rural poor. Agricultural finance requires an 
common in microfinance and does not pose the  array of financial and nonfinancial services. MFIs 
same risks as crop financing. Small animal raising  alone cannot deliver the breadth of financial ser-
and dairy are often carried out by women. Animals  vices and nonfinancial technical support needed 
provide a means to increase women’s assets,  in the agriculture sector. It is thus more effective 
while also being relatively liquid in times of emer-
for them to work with other service providers to 
gency or need. In addition, raising animals can  deliver the comprehensive financial services that 
diversify income and risk to farmers and make  agricultural households need. For MFIs, under-
them more creditworthy. 
standing the agricultural needs of their clients 
Credit for livestock and other animals is not  and linking with partners that complement their 
without risks, however. Small animals such as  services are keys to making a significant contribu-
chickens, pigs, or cows are often raised at a very  tion to livelihoods.
small scale under rustic conditions without 
Continual innovation is important if financial 
proper care. Poor animal hygiene, lack of proper  institutions are to succeed in reaching small-
pasture and feed, as well as lack of disease con-
holder farmers and agroentrepreneurs in a 
trol can lead to animal losses, sickness to the  cost-effective and sustainable manner. MFIs have 
family, or exclusion from markets (animals that  been successful in applying innovative products 
are sick or do not meet quality requirements are  and approaches to reach the needs of the poor; 
difficult to sell). In addition to capital, farmers  they can and are innovating to serve agricultural 
raising livestock could benefit from other inputs  clients better. For example, in Bolivia FONDECO 
(see box 10.5).
(Community Development Fund), an MFI, has 
Box 10.5  Heifer International
Heifer International and BRAC have long rec-
 pasture improvements, para-veterinary train-
ognized that promoting animal husbandry may  ing, vaccination campaigns, and other services. 
require more than finance. Heifer International  To increase the success of its many clients 
gives loans in kind, with recipients repaying  raising chickens, BRAC instituted hatcheries to 
the loan with offspring. Its success over 60  supply day-old chicks and supported access to 
years around the world has been intricately  improved feeds.
linked to its support for group formation, 
Source: Miller 2011.
Agricultural Finance 
245

Box 10.6  FONDECO: Microfinance Innovations along the Value Chain
• Contract(farming)guarantees—cassavaandwood
• Product-backed loans—livestock and forest products, whereby the product serves as
guarantee
• Agriculturalinsurance
• Micro-warrants(warehousereceipts)—rice,maize,dehydratedpeaches,almonds,quinoa,
and alpaca wool
• Billdiscountingfinance—inputandservicesuppliers
• Microfactoring—hotpeppersandschoolbreakfasts
• Microleasing—agriculturalmachinery
• Buyerguarantees—smallcoffeeproducerorganizations
• Guaranteefunds—inputandservicesuppliers
• Riskfund—potatoesandgrapes.
Source: Adapted from Vargas 2010.
moved beyond simply lending for agricultural 
Agricultural finance depends on the success 
production to offering multiple financial prod-
of the agriculture sector as a whole and the com-
ucts for different parts of the value chain, as  petitiveness and risk profile of the client and the 
shown in box 10.6.
value chain. Long-term investments are needed 
In summary, new approaches to agricultural  to improve production and quality as well as to 
finance reduce costs and risks. Some of these have  build human capacity (skills and relationships) 
been facilitated by increased value chain linkages  and physical infrastructure (irrigation, storage, 
and improved management, communication, and  equipment, and technologies). All are required 
technology systems. Even so, the three Rs of  for a healthy agriculture sector capable of gener-
finance remain critically important for agricultural  ating economic growth and higher incomes for 
finance: the risk of clients and their agricultural  farmers.
businesses, generation of sufficient returns to capi-
tal of the clients, and repayment capacity. There is  Note
no substitution or shortcut for assessing clients 
and their businesses accurately. Cash flow analysis,   1.  These support services are market-based, 
product value chain assessment, and tailoring of 
supporting functions within the market 
system, not facilitation.
loans with the appropriate conditions are critical.
Even with the best assessment, agricultural 
credit should be accompanied by insurance and 
safety cushions. While insurance products can  References and Further Reading
help to mitigate losses, the most important  Becerra, N., M. Fiebig, and S. Wisniwski. 2010. 
insurance is built through savings and accumula-
“Agricultural Production Lending: A Toolkit 
tion of assets, which can be liquidated easily in 
for Loan Officers and Loan Portfolio 
times of need. Easily accessible savings services 
Managers.” Rural Finance Learning Center, 
support farmers. 
FAO, Rome. 
246 
The New Microfinance Handbook

Campaigne, Jonathan, and Tom Rausch. 2010. 
commissioned for the 2011 Global Microcredit 
Bundling Development Services with 
Summit, Valladolid, Spain, November 14–17.
Agricultural Finance: The Experience of 
Miller, Calvin, and Carlos da Silva. 2007.  
DrumNet. Innovations in Rural and Agriculture 
“Value Chain Financing in Agriculture.” 
Finance Focus 18, Brief 14. Washington, DC: 
Enterprise Development and Microfinance 18: 
International Food Policy Research Institute 
95–108. 
and World Bank, July. 
Miller, Calvin, and Linda Jones. 2010. Agricultural 
Christen, Robert P., and Douglas Pearce. 2005. 
Value Chain Finance. Rugby: FAO and Practical 
“Managing Risks and Designing Products for 
Action Publishing.
Agricultural Microfinance: Features of an 
Obara, Beatrice. 2011. “De Deby Green Ventures 
Emerging Model.” Occasional Paper 11, CGAP, 
Capital in Kenya.” In Agricultural Value 
Washington, DC.
Chain Finance, ed. Rodolfo Quirós. Rome 
Das, P. K. 2012. “Agricultural Credit Policy in 
and San José: FAO and Academia de 
India.” Unpublished research paper, 
Centroamérica.
Bhubaneswar, India.
Roberts, R. A. J. 2007. “Livestock and Aquaculture 
Heney, J. 2011. “Loan Appraisal: Agricultural 
Insurance in Developing Countries.” Bulletin 
Lending; Self-Study Guide for Loan Officers.” 
164, FAO, Rome.
Rural Finance Learning Center, FAO, Rome.
Van Empel, Gerard. 2010. “Rural Banking in 
Höllinger, Frank, Lamon Rutten, and Krassimir 
Africa: The Rabobank Approach.” In 
Kiriakov. 2009. “The Use of Warehouse Receipt 
Innovations in Rural and Agricultural Finance, 
Finance in Agriculture in Transition 
ed. R. Kloeppinger-Todd and M. Sharma. 
Countries.” Working paper, FAO Investment 
Focus 18, Brief 4. Washington, DC: 
Centre, FAO, Rome.
International Food Policy Research Institute 
IFC (International Finance Corporation). 2010. 
and World Bank.
“Indexed-Based Agricultural Insurance: A 
Vargas, Edwin. 2010. “Innovaciones financieras en 
Product Design Case Study.” IFC Advisory 
la cadena productiva.” PowerPoint presentation 
Services, Washington, DC. 
at the conference “Agricultural Value Chain 
Kang, M. G. 2007. “Innovative Agricultural 
Finance,” FAO and Academia de 
Insurance Products and Schemes.” Agricultural 
Centroamérica, Rome and San José, Costa Rica. 
Management, Marketing, and Finance 
http://www.academiaca.or.cr/presenta-
Occasional Paper, FAO, Rome.
cion2010/presentaciones/edwin_vargas.pdf. 
Miller, Calvin. 2011. “Microfinance and Crop 
Zander, Rauno, Calvin Miller, and N. Mhlanga. 
Agriculture: New Approaches, Technologies, 
2012. Credit Guarantee Systems for Agriculture 
and Other Innovations to Address Food 
and Rural Enterprise Development. Rome: 
Insecurity among the Poor.” Workshop paper 
FAO.
Agricultural Finance 
247


CHAPTER 11
Insurance
Craig Churchill

Low-income people live in risky environments,  for the poor. Over the past decade, however, 
vulnerable to numerous perils—illness, acciden-
microinsurance has been on a steep growth and 
tal death and disability, loss of property due to  learning curve, in part because of work by the 
theft or fire, agricultural losses, and disasters of  Microinsurance Network and the International 
both the natural and manmade varieties.1 They  Labour Organisation’s Microinsurance Innovation 
are also the least able to cope when a crisis does  Facility. Thanks to their efforts, the experiences of 
occur. For example, an estimated 150 million  microinsurance providers around the world have 
people are adversely affected by out-of-pocket  been documented and analyzed, creating new 
spending on health care services each year.  waves of lessons and guidance.
More than 90 percent of these individuals live 
This chapter describes the need for insur-
in low-income countries. For approximately  ance and key product design issues that need to 
100 million people, out-of-pocket payments for  be considered to make insurance relevant for 
health services are so financially devastating  low-income households. It provides an over-
that they are pushed below the poverty line  view of the types of products, including life, 
(Xu et al. 2007). 
health, property, and agriculture insurance, and 
Microinsurance is much younger than other  describes how insurance can be integrated into 
financial services for the poor. In the original  the financial inclusion agenda. It will be of 
Microfinance Handbook (Ledgerwood 1998), it  interest to practitioners, funders, and other 
received only a passing mention, two paragraphs  stakeholders interested in understanding how 
and a box. At the time, there was very little expe-
microinsurance can help poor women and men 
rience or innovation around insurance services  better manage risk.
Insurance 
249

The Need for Microinsurance
Microinsurance is emerging as a comple-
mentary tool to help low-income people man-
Stakeholders in microfinance often focus their  age risks more effectively. It provides protection 
attention and resources on the productive side of  against specific perils including death, disabil-
finance, particularly micro- and small enterprise  ity, hospitalization, or crop failure, in exchange 
lending. Yet any development gains achieved—
for regular payments proportionate to the like-
such as increased incomes, assets accumulated,  lihood and cost of the risk occurring. Often the 
and jobs created—can quickly be lost if the  term “insurance” is used loosely to refer to gen-
entrepreneur’s business or household experi-
eral risk-prevention and management tech-
ences a peril. Consequently, productive invest-
niques. For example, savings set aside for 
ments must be balanced with similar attention  emergency purposes might be referred to as an 
and resources on promoting protection.
insurance fund. This book, however, uses a nar-
Although people in different countries are con-
rower definition in which microinsurance, like 
cerned with different risks, low-income house-
traditional insurance, involves a risk-pooling 
holds consistently identify the loss of an income  element, which allows large groups of insured 
earner and sickness of a family member as their  entities to share the losses resulting from the 
greatest concerns (Cohen and Sebstad 2006). The  occurrence of an uncommon event (see box 11.1 
dominance of illness is not surprising, especially  for definitions of key insurance terms). 
because of its double impact. An inability to work 
The insured entities—such as persons, 
results in lower income opportunities and addi-
 businesses, households, communities, or even 
tional expenses to cover health care costs. For  countries—are therefore protected from risk in 
families with sick children, small expenses can  exchange for a fee known as a premium. The pre-
quickly mount and have a large financial impact.  mium amount is determined by an estimation of 
Accidents, as well as chronic illness such as  the frequency and severity of the event occurring. 
malaria and HIV/AIDS, require relatively large  Those in the risk pool who do not suffer a loss 
sums. These overwhelming financial pressures  during a particular period essentially pay for the 
frequently fall on women, many of whom assume  losses experienced by others. Insurance reduces 
primary responsibility for the welfare of their  vulnerability as households replace the uncertain 
families. 
prospect of peril with the certainty of making 
Although poor households may have infor-
small, regular premium payments and receiving a 
mal means to manage risks, these strategies  payout if the peril occurs. This risk-pooling func-
generally provide insufficient protection. Many  tion makes insurance more complicated than sav-
risk-management strategies, such as spreading  ings, credit, or payment services. 
financial and human resources across several 
Despite features similar to those of traditional 
income-generating activities, result in low  insurance, microinsurance requires a fundamen-
returns. Informal risk-coping strategies, such as  tally different approach to be relevant for the 
borrowing from friends and family, tend to  low-income market and viable for providers. 
cover only a small portion of the loss, so the  The products generally available from insurers 
poor have to patch together support from a vari-
are not designed to meet the specific characteris-
ety of sources. Even then, informal risk protec-
tics of the working poor, particularly the irregu-
tion does not stand up well against a series of  lar cash flows of households with bread winners 
perils; before the household has a chance to  in the informal economy. Other key product 
fully recover from one crisis, they are often  design challenges include inappropriate insured 
struck by another. 
250 
The New Microfinance Handbook

Box 11.1  Key Insurance Terms
Actuary: A person who calculates insurance and annuity premiums, reserves, and dividends.
Adverse selection: The tendency of higher-risk individuals to seek out more insurance cover-
age on average in anticipation of a greater probability of experiencing the insured event(s). 
Agent: An insurance company representative who solicits, negotiates, or effects insurance con-
tracts, and provides service to the policyholder for the insurer, usually for a commission on 
the premium payments.
Basis risk: The chance that an insurance payout does not match the loss experienced by the 
policyholder. This is a particular concern with index insurance, which pays out based on a 
measurable indicator, such as too much or too little rain, but that indicator may or may not 
correlate well with the policyholders’ actual losses.
Beneficiary: The person or financial instrument (for example, a trust fund), named in the policy as 
the recipient of insurance money if an insured event occurs. 
Benefits: The amount payable by the insurer to a claimant or beneficiary after the occurrence of 
the insured event.
Capitation: Method of payment whereby a physician or hospital is paid a fixed amount for each 
person in a particular plan regardless of the frequency or type of service provided.
Claim: A request for payment of a loss that may come under the terms of an insurance 
contract.
Claim verification: The process whereby the microinsurer verifies and processes claims for 
payouts.
Copayment: Mechanism used by insurers to share risk with policyholders and reduce moral 
hazard, which establishes a formula for dividing the payment of losses between the insurer 
and the policyholder. For example, a copayment arrangement might require a policyholder to 
pay 30 percent of all losses while the insurer covers the remainder.
Covariant risk: The tendency for either (1) many households to be affected by a risk at the same 
time or (2) several risks to consistently occur together.
Coverage: The scope of protection provided under a contract of insurance, and any of several 
risks covered by a policy.
Deductible (or excess): Mechanism used by insurers to share risk with policyholders and reduce 
moral hazard, which establishes an amount or percentage that a policyholder agrees to pay, 
per claim or insured event, toward the total amount of an insured loss.
Endowment: Life insurance payable to the policyholder if living, on the maturity date stated in 
the policy, or to a beneficiary if the insured dies before that date.
Lapse: The termination or discontinuance of an insurance policy due to nonpayment of a 
premium.
Moral hazard: A risk that arises when people with insurance engage in more dangerous 
behaviors or use more services because they know they are protected. An example might 
include failing to take preventative health care measures or making unnecessary visits to 
a doctor. 
Preexisting conditions: These are health conditions that are often excluded by insurance policies 
as a means of controlling adverse selection. To control for this, insurance programs may 
(continued next page)
Insurance 
251

Box 11.1 (continued)
require a health checkup before enrollment, or ask prospective policyholders to answer a 
health questionnaire.
Premium: The sum paid by a policyholder to keep an insurance policy in force. 
Rider: An amendment to an insurance policy that modifies the policy by expanding or restricting 
its benefits or excluding certain conditions from coverage.
Risk pooling: The spreading of losses incurred by a few over a larger group, so that in the 
process, each individual group member’s losses are limited to the average loss (pre-
mium payments) rather than the potentially larger actual loss that might be sustained by 
an individual. Risk pooling effectively disperses losses incurred by a few over a larger 
group. 
Self-administration: Maintenance of all records and assumption of responsibility by a group 
policyholder for those covered under its health insurance plan. Responsibilities include 
preparing the premium statement for each payment date and submitting it with a payment 
to the insurer. The insurance company, in most instances, has the contractual prerogative 
to audit the policyholders’ records. An alternative is third-party administration, whereby a 
specialized company performs the administrative function.
Underwriter: (1) A company that receives the premiums and accepts responsibility for the fulfill-
ment of the policy contract; (2) the company employee who decides whether or not the 
company should assume a particular risk; or (3) the agent that sells the policy.
Waiting period: The period whereby policyholders cannot access certain benefits for some 
time after they enroll. A waiting period has essentially the same effect as excluding preex-
isting conditions except the insurer does not have to incur the claims verification costs.
Source: Adapted from Roth et al. 2007.
amounts, complex exclusions, and indecipher-
and encourage salespersons to focus on larger 
able legal policy language, all of which conspire  policies and more profitable clients.
against effectively serving the poor. 
Microinsurance is just one of several risk- 
Another major challenge in extending insur-
management tools available to low-income 
ance to the poor is educating the market and  households, and so organizations truly con-
overcoming its bias against insurance. Many  cerned about helping the poor to manage risks 
poor persons are skeptical about paying premi-
should assess whether the provision of microin-
ums for an intangible product with future bene-
surance is the most appropriate response. For 
fits that may never be claimed. Insurance  risks that result in small losses or for risks with a 
providers are seen as quick to take one’s money,  high likelihood or high frequency of occurrence, 
but slow to pay it out. In fact, this bias goes in  savings and emergency loans would be more 
both directions. People who work for insurance  appropriate risk-managing financial services. 
companies are usually unfamiliar with the needs  Savings and credit are also more flexible than 
and concerns of the poor. In addition, the culture  insurance because they can be used for a variety 
and incentives in insurance companies reward  of different risks (and opportunities). Insurance, 
252 
The New Microfinance Handbook

on the other hand, provides more complete cov-
Group or Individual Insurance
erage for large losses than poor households could  The primary feature distinguishing group insur-
provide on their own. For these larger risks, par-
ance from individual insurance is that under 
ticipating in a risk pool is a more efficient means  group insurance, many people are insured under 
of accessing protection than if households try to  one master policy. The group policyholder 
protect themselves independently.
decides what type of coverage to buy for the 
Like other financial products, insurance pro-
members of the group and is responsible for 
grams for the poor have to balance three compet-
enrolling members, collecting premiums, dissem-
ing objectives: (1) provide coverage to meet the  inating certificates of insurance and product 
needs of the target population, (2) minimize  information, and assisting members to file claims. 
operating costs for the insurer, and (3) minimize  The policy describes and defines the eligible 
the price (including transaction costs) for clients  members of the group. 
to enhance affordability and accessibility. The 
Underwriting guidelines for group insur-
goal is to strike a balance between broad inclu-
ance generally begin by specifying the funda-
sion, sufficient benefits, low premium rates, and  mental requirements that define a group. The 
sustainability.
main criterion is that the group must have been 
formed for reasons other than to obtain insur-
ance. This mechanism should limit the scope 
Product Options
for adverse selection and allow for easier 
When designing insurance products, various  underwriting and risk management; particular 
options need to be considered. Will the insurance  care needs to be made to implement it properly, 
be offered to groups or individuals? Will it be  as illustrated in box 11.2. Examples of groups 
mandatory or voluntary? What are the coverage  suitable for group insurance include employees 
terms and prices? How will premiums be col-
in a company, labor union members, borrowers 
lected? And how will benefits be paid?
of a microfinance institution (MFI), and affinity 
Box 11.2 AKAM’s Experience with Village-Based Health Microinsurance  
in Pakistan
In 2006 the Aga Khan Agency for Microfinance 
Based on thorough market research, micro-
(AKAM) launched a microinsurance program  insurance experts designed a remarkable 
in Pakistan to test an innovative health micro-
product and innovative processes. The product 
insurance to protect low-income families from 
covered not only inpatient hospitalization cost 
the often ruinous effects of catastrophic health 
(up to US$400 per year), including a follow-up 
care expenditure. The program attempted to 
visit and medication needed after discharge, 
make insurance possible among villagers in  but also one outpatient consultation for every 
the rugged Northern Areas by dramatically  insured person and life insurance for the fami-
reducing transaction costs through group poli-
ly’s bread winner. The product had few exclu-
cies and designing insurance products that  sions and no age limits, waiting periods, 
meet the target market’s needs. 
copayments, or deductibles. Both normal and 
(continued next page)
Insurance 
253

Box 11.2 (continued)
complicated maternity was covered from day 
In addition, insurance utilization greatly 
one. The general intention was to provide cov-
exceeded expectations; claims exceeded pre-
erage for US$5 per year that addressed  miums by several hundreds of thousands of 
people’s needs in a way that would allow them 
dollars between 2007 and 2011. The main rea-
to understand, appreciate, and embrace for-
son was an erroneous assumption regarding 
mal insurance.
membership in village organizations, which 
Because cases of catastrophic health  was neither universal nor static. Although the 
costs of one villager can affect the entire  insurance design assumed that every person 
community, the insurance purchase was  was already a member of a village organization 
intended to be a community decision.  when they were offered insurance, instead 
Applying the principles of group insurance to 
people who intended to use the insurance 
villages would allow AKAM to insure larger 
because of current pregnancies or preexisting 
numbers by selling the product through vil-
illnesses could choose to join one village orga-
lage organizations—thereby reducing the  nization or another specifically to access insur-
transaction cost per person—and protect the 
ance. Market research confirmed the 
program against the risk that only unhealthy 
opportunistic attitude. When asked why she 
people would buy insurance. 
had not renewed her policy, one woman 
Market research indicated, however, that 
answered, “Last year I was pregnant, but this 
the insurance purchase could not be imposed 
year I don’t plan to have a baby, so why insure?” 
on every person in a village: Some were too 
Other factors aggravated this behavior: Not 
poor, and the initial assumption that the better 
all of a family’s children were insured, insur-
off would subsidize the premium of their  ance was bought after the sales window was 
neighbors proved unrealistic. So departing  officially closed, and claims control could have 
from one fundamental principle of group insur-
been more rigorous. Given that much larger 
ance, the minimum take-up rate was reduced 
premium volumes and much larger numbers 
from 100 percent (everybody is insured) to   of insured persons were needed to cover 
50 percent of households in a village organiza-
expenses and reduce the cost per person, 
tion, but with the additional condition that those 
management’s main focus for several years 
households that decided to buy the coverage 
was on increasing scale. It was expected that 
had to include every household member. 
by insuring more people, automatically more 
The outcome of this careful design was not 
healthy people would be insured, reducing the 
as expected. Fewer people than anticipated  unsustainable utilization rates. But this did not 
bought the coverage, and the families who did 
happen, and in the end restrictive product 
were smaller than the average household size. 
redesign was necessary to contain losses. 
Source: Peter Wrede.
groups such as professional or community  financially sustainable. Individual insurance is 
associations. 
often twice as expensive as group coverage 
Individual microinsurance requires a high  because of higher sales, underwriting, adminis-
participation rate among the potential target mar-
tration, and claims costs. The cost for individual 
ket to make the provision of individual insurance  insurance claims can be reduced through more 
254 
The New Microfinance Handbook

rigorous underwriting, such as medical screening  Voluntary or Mandatory Insurance 
(because bad risks are identified and filtered out  Mandatory insurance is the most common type of 
or are limited to lower coverage). However, for  microinsurance and refers to a situation in which 
microinsurance additional screening may not  an organization requires all of its clients to pur-
make economic sense because coverage amounts  chase insurance or it is provided as a loyalty 
are very low; moreover it may run counter to the  incentive to customers (see box 11.3). Mandatory 
social agenda of the microinsurer.
participation ensures a broad cross section of 
A key advantage of individual insurance is  people participate and can help to limit adverse 
that the coverage can continue with the individ-
selection. To be demand driven and client 
ual once group membership ceases, for exam-
focused, one would expect that voluntary cover-
ple, for MFI borrowers who no longer require  age would be the most appropriate. Yet in the field 
loans. Group coverage can be converted into  of insurance—microinsurance in particular 
individual policies using continuation options.  where affordability is so important—a strong case 
To the extent that the group coverage relies on  can be made for mandatory coverage because it 
infrastructure supporting the group (such as  performs the following:
using an MFI for premium collection), continu-
• Enablesinsurerstoreachscale,whichincreases
ation policies may require additional charges 
the accuracy of predicting future claims
and administration. 
Box 11.3  IFFCO-Tokio’s Bundled AD&D Coverage
In India the Sankat Haran Policy sold by IFFCO-
insurance premium, so there is no need for 
Tokio provides accidental death and disability 
the insurer to collect premiums from the cli-
(AD&D) coverage, which is obtained when cli-
ent or, indeed, from the retailer.
ents buy a 50 kg fertilizer bag of IFCCO and 
On the face of it, in a competitive market 
Indian Potash brands. The receipt for the fertil-
for fertilizer and AD&D insurance, it is hard to 
izer bag acts as proof of payment, and the pol-
imagine what value is offered to the consumer 
icy document is printed on the fertilizer bag. 
by this type of embedding. Any consumer 
The amount of coverage is US$90 in the event 
who wanted either fertilizer or AD&D insur-
of an accidental death and US$45 for certain 
ance could buy it separately in the required 
categories of dismemberment and disability. 
quantities without needing to buy the two 
The insured is the purchaser of the fertilizer 
together. However, the rural Indian market is 
bag, and a single person can hold multiple pol-
not competitive, and this may be the only 
icies up to a maximum of US$2,260 in  means of distributing such insurance. It is also 
coverage. More than 3.5 million farmers are 
possible that the addition of AD&D insurance 
covered by this program.
provides an incentive to purchase a particular 
Essentially the program sells prepaid insur-
brand of fertilizer (in much the same way some 
ance, in the sense that the retailer buys the 
Visa cards come with similar coverage linked 
fertilizer, including its insurance component,  to travel). The insurance is compulsory, which 
from a wholesaler. The retailer prepays the  in theory should control adverse selection. 
Source: Adapted from Roth and Chamberlain 2006.
Insurance 
255

• Reduces costs due to higher volumes and member selection to reduce the risks of overusage 
lower enrollment, administration, collection,  and moral hazard, but as shown in box 11.2, such 
and underwriting costs
an approach is not always successful.
• Improves claims ratios because it brings in
lower-risk individuals, which is known as pos-
Terms of Coverage and Pricing
itive selection, who may otherwise opt out or  Many microinsurance products have terms of  
postpone their participation and
12 months or less. Short-term policies are gener-
ally preferred by insurers because long-term insur-
• Reducesvulnerabilitytostafffraudbecauseit ance involves longer-term commitments and thus 
reduces the chance for agents to sell policies  higher risk—it is easier to predict the likelihood of 
and keep the premiums. 
an insured event in the next year than in the next 
Community groups, such as women’s associa-
10 years. For the insured, however, the opposite is 
tions and other community-based organizations,  true: The advantage of long-term coverage is that 
financial cooperatives, MFI borrowers, and small  he or she will have protection over the long term 
business associations, can be leveraged as distri-
without having to reapply for insurance every year. 
bution channels and as a mechanism to protect 
To address the need to balance long-term risk 
against adverse selection. One of the biggest disad-
with client preferences for long-term coverage, 
vantages of mandatory coverage, besides the fact  short-term policies can have a renewable term 
that people are required to buy something that  arrangement whereby the policyholder can con-
they may not want, is that the distribution system  tinue to have coverage up to a maximum age 
tends to overlook the consumers’ need for infor-
without the need to reapply, as long as premium 
mation. Such products generally have excessively  payments are made. Renewable terms combine 
low claims ratios, seemingly the result of people  the advantages of short- and long-term coverage. 
not knowing that they are covered. As one rural  The insured are guaranteed to receive continued 
banker in Ghana noted, “If we tell people all about  coverage, yet the insurer can adjust the pricing, 
the cover, we’d be flooded with claims.” When  up or down for each renewal term, depending on 
offering mandatory coverage, microinsurers 
  its experience. 
(or their agents) need to ensure that clients are 
Although insurance companies tend to exclude 
constantly educated about buying an intangible  high-risk persons, or charge them higher rates 
service that provides security and peace of mind to  than others, microinsurance programs generally 
ensure that they can appreciate the benefits, and  strive to be inclusive. Because the sums insured 
thus lead to the creation of an insurance culture.
are small, the costs of identifying high-risk per-
Microinsurance providers can combine the  sons, such as those with preexisting illnesses, may 
advantages of mandatory and voluntary coverage  be higher than the financial benefits of excluding 
by making insurance mandatory for all members  them in the first place. Consequently, instead of 
of an existing group (which minimizes adverse  pricing products for an individual’s risk profile, 
selection), while providing two or three options to  microinsurance generally uses a group pricing 
choose from. This allows members to opt for the  method. Limiting the number of exclusions and 
coverage level they would prefer and increases the  restrictions lowers administrative costs and 
likelihood they will receive sufficient information  increases efficiency, and the group provides some 
to make informed decisions. Some microinsurers  means of controlling insurance risk.
use groups more effectively than conventional 
Besides using groups, insurance plans incorpo-
insurers by enlisting the support of the groups in  rate various mechanisms to protect against 
256 
The New Microfinance Handbook

adverse selection and overusage, including deduct-
premium payment to a loan is a good example of 
ibles, copayments, and benefit ceilings. With a  this strategy; when clients receive a loan, they 
deductible, all claims below a specified amount are  have cash to pay the premium. This strategy is 
paid by the insured. Copayment arrangements  also one of the easiest ways to achieve high 
mean a portion is paid by the insured and a portion  renewals. Its downside is that only clients who 
by the insurer and are normally structured as a  receive a loan can obtain insurance coverage.
fixed fee, usually a specific amount per office visit. 
Alternatively, a link between savings and insur-
Benefit ceilings limit the overall amount of cover-
ance provides more continuous coverage than the 
age to a specified amount, normally on a per per-
credit-insurance link, and it can significantly 
son basis over a fixed period. Instead of using  reduce the transaction costs. This can be done by 
waiting periods or screening for high-risk persons,  deducting the premium from a savings account 
microinsurance programs often will include grad-
(although there is a public relations risk that 
uated benefits that start small during initial  depositors may not be aware that the money is 
months of coverage and increase over time, which  being deducted). Another more innovative link 
also creates an incentive to renew.
between savings and insurance is to establish a 
fixed deposit account and allow the interest to pay 
Premium Payment Mechanisms
the insurance premium. One challenge with this 
Methods for paying premiums must minimize  method is for the poorest clients to save up enough 
administrative costs for the insurer and transac-
money to deposit in the account. From a manage-
tion costs for clients. In general, the best time to  ment perspective, there is the risk the interest 
collect premiums is when policyholders have  rates that are payable on the account may change 
cash, for example, at harvest time, or when they  and not be sufficient to pay the premiums.
receive a loan or a government cash transfer. 
More recently, insurance is being linked to 
To streamline premium payments, a com-
other financial transactions, such as buying gro-
mon strategy is to “piggyback” the premium on  ceries or cell phone minutes or paying an electric-
top of another financial transaction. Linking the  ity bill (see box 11.4). The emergence of more 
Box 11.4  Collaborating with a Utility Company in Colombia
In response to increased competition,  accident, funeral, home, and vehicle insur-
CODENSA, the largest electricity distribu-
ance. As an equal partner with a significant 
tion company in Colombia, has developed a 
investment in the project’s success, CODENSA 
customer loyalty program to strengthen its 
is committed to maximizing profitability and 
customer base. A core component of the  developing an effective microinsurance busi-
strategy is to offer alternative, nonelectricity 
ness model. Because of aligned interests 
products, including insurance, which can be 
and good project management, the project 
paid through the electricity bill. With this  has enabled more than 300,000 families to 
objective, CODENSA entered into a partner-
manage risk more efficiently by paying 
ship with MAPFRE Insurance in 2003 and 
insurance premiums together with their 
currently offers five products: life, personal 
electricity bill.
Source: Adapted from Smith et al. 2012a.
Insurance 
257

effective payment services, for example, through  it is preferable to require family coverage where 
smartcards and point-of-sale devices or by mobile  possible. 
phones themselves, creates a new platform for 
Even more important than defining which 
premium collection and dramatically expands  dependents are eligible is to identify them in 
potential outreach. 
advance. To minimize claims fraud, each person 
covered by the policy must be individually identi-
fied using official documents (where possible) 
Eligibility
and/or with photographs. It is not sufficient to 
When designing an insurance product, it is also  specify which persons are covered without 
necessary to determine who is eligible to be cov-
explicit identification of the additional persons. It 
ered. Generally it is better to have more people  is also important to control movements of depen-
covered by one product, and therefore a family  dents on or off the policy. For example, to control 
benefit approach, which may include spouses,  adverse selection, clients may have an option of 
dependents, and even parents, creates a number  adding newborn children on to the policy within 
of advantages for microinsurers:
a specified time frame, but not subsequently. 
• Afamilyisagroupofsorts,andconsequently Claims
family coverage carries many of the same  The best opportunity to demonstrate the value of 
advantages as group coverage, including larger  insurance is to pay claims. When the benefits are 
numbers and lower adverse selection risk. All  paid is equally as important as how they are paid. 
other things being equal, the price for a family  Some products pay benefits in phases rather than 
unit is generally lower than the sum of individ-
in one lump sum to cover ongoing expenses. The 
ual premiums.
provision of benefits over a period of time after 
• Familycoveragecanhaveapositiveselection the insured event may have greater development 
effect by purposefully enrolling very low-risk  impact than a lump-sum payment because 
persons. 
demands on the receiver of the payment can be 
significant; if the insurance payout is spent, for 
• Familycoverageoftenhasabettermarketing example, on an elaborate funeral, it is no longer 
effect because the claims are more frequent,  available to help the household cope with the loss 
and thus there are many more examples to  of income from the deceased.
demonstrate the value of microinsurance.
Generally claims are paid only when the 
claim has been verified through a claim verifica-
• Lendersconcernedaboutprotectingtheirloan tion process. Policyholders have the right to 
portfolio realize that borrowers have repay-
efficient claim processing to ensure they receive 
ment problems when death or illness strikes  tangible benefits for the premiums paid. A claim 
family members.
verification process consists of (1) an insured 
The downside of family benefits is that not  event leading to a notification of loss, (2) collec-
everyone has a family, or that some people have  tion of required documents, (3) presentation of 
larger families than others. To deal with the size  the claims application to an intermediary or the 
of the family, microinsurers either