Financial sector linkages

"Financial sector linkages" can be an effective way to expand access to a broad range of financial services in rural as well as urban areas. Financial linkages are defined as mutually beneficial partnerships between formal and informal financial institutions that result in an expansion of financial services to new and/or existing clients. Within this context, expanding financial services does not only imply reaching more of the same clients; but also refers to providing financial services to those previously unserved segments of the population, or to broaden the variety or to improve the quality of financial services and products.

On one side, formal financial institutions have extensive infrastructures and systems, access to funds and opportunities for portfolio diversification permitting them to offer a wider range of services. However, they may be further removed from clients, particularly remote rural clients, which make obtaining adequate information and contract enforcement difficult. Informal institutions, on the other hand, usually operate close to rural clients, possess better information and enforcement mechanisms and are typically more flexible and innovative. However, they can be constrained in the type of services they offer since informal institutions lack resources and infrastructure to serve clients beyond a small geographic area.

In theory, linkages can help the different institutions overcome a weakness in what they can achieve on their own while helping to reduce costs and risks of reaching out to remote clients. In practice we are witnessing an evolution of financial linkages from the non-strategic, traditional bank-MFI relationships of wholesale finance to the more strategic nature of recent partnerships, such as commercial banks and insurers actively seeking non-formal actors (MFIs, SHGs SACCOs) to expand into new markets or MFIs strategically partnering with banks, firms, and governments offering fee-based services (money transfers, payments, salary disbursements, etc) as a way to market new clients while generating new revenue streams.

Library Resources

resource title type year resource
Financial inclusion and health: How the financial services industry is responding to health risks Paper 2018

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This paper begins by explring the context of health, highlighting the diffrent costs associated with maintaining good health, and the efforts of governments to support citizens in managing these expenses. These health costs include non0medical expenses often omitted from the discussion on health expenditure, such as the lost income while ill. Different financial instruments, such as savings, credit and insurance, as well as non-financial services are then discussed, illustrating how they can contribute to managing health expenses. The paper also draws on a number of case studies where FSP's have developed products and services to specifically tackle health needs. 

Macroeconomic implications of financial imperfections: a survey Paper 2017

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This paper surveys the theoretical and empirical literature on the macroeconomic implications of financial imperfections. It focuses on two major channels through which financial imperfections can affect macroeconomic outcomes. The first channel, which operates through the demand side of finance and is captured by financial accelerator-type mechanisms, describes how changes in borrowers’ balance sheets can affect their access to finance and thereby amplify and propagate economic and financial shocks. The second channel, which is associated with the supply side of finance, emphasises the implications of changes in financial intermediaries’ balance sheets for the supply of credit, liquidity and asset prices, and, consequently, for macroeconomic outcomes. These channels have been shown to be important in explaining the linkages between the real economy and the financial sector. That said, many questions remain.

Author Stijn Claessens; M. Ayhan Kose
Publisher Bank for International settlements
Number of Pages 124 pp.
Primary Language English (en)
Region / Country Global
Keywords Asset Price, Financial Accelerator, Financial Linkages, International Linkages, Liquidity
Related Resources
Expanding the Frontier in Rural Microfinance: Financial Linkages and Strategic Alliances Book 2008 English (en)

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Despite significant innovations in rural microfinance over the years, millions of people around the world still do not have access to financial services. Can linkages and strategic alliances between formal and informal financial institutions and private firms help resolve this problem? Drawing on 11 case studies and 1 review conducted in 10 countries in Africa, Asia, and Latin America, the author shows how formal financial institutions and companies use a variety of less formal, often rural, organizations to overcome the information and enforcement problems of serving rural clients. This book is of interest to all involved in rural development, particularly those concerned with financing economic development and innovation.

practicalaction.org - publisher's site  -  English (en)

Author Maria Pagura
Publisher Practical Action Publishing; Published in association with the Food and Agriculture Organisation of the United Nations
Number of Pages 285 pp.
Primary Language English (en)
Region / Country Global
Keywords Rural Finance, Financial Linkages, Rural Development, Strategic Alliances
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Expanding the Frontier in Rural Microfinance: Financial Linkages and Strategic Alliances Book 2008 English (en)

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This resource appears in: Financial sector linkages

Despite significant innovations in rural microfinance over the years, millions of people around the world still do not have access to financial services. Can linkages and strategic alliances between formal and informal financial institutions and private firms help resolve this problem? Drawing on 11 case studies and 1 review conducted in 10 countries in Africa, Asia, and Latin America, the author shows how formal financial institutions and companies use a variety of less formal, often rural, organizations to overcome the information and enforcement problems of serving rural clients. This book is of interest to all involved in rural development, particularly those concerned with financing economic development and innovation.

practicalaction.org - publisher's site  -  English (en)

Author Maria Pagura
Publisher Practical Action Publishing; Published in association with the Food and Agriculture Organisation of the United Nations
Number of Pages 285 pp.
Primary Language English (en)
Region / Country Global
Keywords Rural Finance, Financial Linkages, Rural Development, Strategic Alliances
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Extending the Outreach of Rwandan Peoples’ Banks to the Rural Poor Through Village Savings and Credit Associations Case Study 2007

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Over 65 percent of Rwanda’s rural population are poor and their principal activity is farming. Despite having the physical capacity and even the professional skills needed to undertake successful economic activities, this population completely lacks investment capital.

CARE International based in Rwanda is improving this situation through its CLASSE-Intambwe methodology, which involves mobilizing rural poor into savings and credit associations and linking them to the vast network of peoples’ banks that exist in the country. Although the ‘linking’ aspect is rather young beginning only in late 2003, initial results are encouraging. Today, all 1000 CARE supported savings and credit have savings accounts in their respective peoples’ bank, and many group members have opened personal, individual accounts, thus bringing many into the financial mainstream. This article explains the origins, mechanics and outcomes of this unique relationship.

Author Aeschliman, C.; Murekezi, F.; Ndoshoboye, J.
Publisher Food and Agriculture Organization of the United Nations (FAO)
Number of Pages 16 pp.
Primary Language English (en)
Region / Country Global
Rwanda
Keywords Financial Linkages, Savings
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Linking with savings and credit cooperatives (SACCOs) to expand financial access in rural areas: a case study of CRDB Bank in Tanzania Case Study 2007

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The case study reviews CRDB Bank, the fifth largest commercial bank in Tanzania, and its desire to do ‘something positive’ about the majority of Tanzanians alienated from the commercial banking sector. Although this appears to be a story about CRDB’s level of corporate social responsibility, it may have more to do with a smart, forward thinking bank strategizing to the deal with the inevitability of a saturated high-end, urban banking market.

The author describes CRDB’s strategy of linking with Savings and Credit Cooperatives (SACCOs) as a way to cost-effectively increase the supply of financial services in the rural country side. Some of findings from the study are that there must be the willingness and commitment from management to enter the lower-income market, to make a large upfront investment into the model and to have a long-term vision.

Author Piprek, G.
Publisher Food and Agriculture Organization of the United Nations (FAO)
Number of Pages 30 pp.
Primary Language English (en)
Region / Country Global
Tanzania
Keywords Agricultural Microfinance, Cooperative, Credit Guarantees
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Linkages between CARE’s VS&LAs with Financial Institutions in Rwanda Case Study 2007

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CARE’s Village Savings and Loan (VS&L) methodology is a non-institutional savings-led alternative to credit-centered microfinance institutions. This model has proven especially successful and sustainable in poor, rural areas with bad infrastructure and low population density resulting in small loans and high transaction costs. Based on a belief that savings rather than lending services are more appropriate for and in higher demand by the rural poor, VS&L programs have emphasized savings mobilization through unregulated and usually informal groups that depend on member savings for their loan fund capital rather than external loans. One of the exceptions is the VS&L program by CARE Rwanda, in which Savings and Loan Associations (SLAs) are linked through federations (called Intergroupments, IGs) to external loan funds (provided by CARE) at the Banques Populaires. The main purpose of this case study is to critically document and analyze the SLA linkage to external credit in Rwanda. Taking into account the Rwandan context the case study describes the rationale for the linkage to external credit, lists strengths and weaknesses, and offers recommendations for VS&L and other savings-based financial service practitioners considering to replicate or adapt this model.

Institutional Transformation to Create Linkages that Enhance Rural Access to Financial Services: the Case of the Fundación Integral Campesina (FINCA) in Costa Rica Case Study 2007

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Today FINCA/Costa Rica, originally established in 1984 as a village banking programme with a resource intensive model of creating and funding village banks, has emerged as an organization highly specialized in the creation and linking of incorporated village banks with financial and non-financial actors in Costa Rica, El Salvador, Guatemals, Honduras and Nicaragua.

The case study describes FINCA/Costa Rica’s revolutionary process of institutional innovations over the last 20 years culminating in the transformation from a financial apex organization to developer of the revolutionized village banks in order to improve opportunities for linkages that enhance rural access to financial services.

The authors end the case with several lessons on the importance of organizational flexibility to adjust, strengthening institutional capacity to meet the growing needs of the organization especially as it pertains to personnel and MIS development and creating partnerships and alliances with both public and private entities. Caution is highlighted on the risks of conditionalities embedded into inter-institutional linkages and the unrelenting risk of the state using the partnership for political purposes.

Author Quirós, R.; Gonzalez-Vega, C.
Publisher Food and Agriculture Organization of the United Nations (FAO)
Number of Pages 28 pp.
Primary Language English (en)
Region / Country Global
Costa Rica
Keywords Financial Linkages, Financial Services, Village Banks
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Opportunities for the Creation of Linkages and Alliances to Expand the Supply of Rural Financial Services: José María Covelo Foundation and Its Partners in Honduras Case Study 2007

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The case study José María Covelo Foundation in Honduras describes an interesting story of the foundation’s evolution from a typical second-tier organization providing capacity building training and funding to private development finance organizations (PDOs) to one of a highly sophisticated holding company offering financial, human resource management, administrative, systems, marketing and organizational services to six organizations of the holding group.

The study focuses on a multiplicity of intra- and extra-group linkages with a range of financial and non-financial actors. The authors examine market-deepening linkages for rural finance and provide in-depth analysis of two local organizations and their linkages with Covelo Group among others. This case is rich in detail and at times complex, but provides many lessons for those interested in following a similar institutional development path.

Author Falck, M.; Quirós, R.; Gonzalez-Vega, C.
Publisher Food and Agriculture Organization of the United Nations (FAO)
Number of Pages 29 pp.
Primary Language English (en)
Region / Country Global
Honduras
Keywords Financial Linkages, Rural Finance
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Partnership to expand Sources of Funds for Rural Microfinance in Peru: The Case of Confianza Case Study 2007

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This study explores the way a regulated microfinance institution in Peru, Confianza, links to external partners to expand its sources of funds. The author discusses the impact of recent microfinance regulation has had on the opportunities for Confianza to diversify its sources of funds. The author states that in the Peruvian context regulation plays a significant role in the type and nature of financial linkages informal financial actors can engage in.

In short, regulated MFIs like Confianza have greater access to funds from commercial banks and the government backed apex organization, COFIDE, which appear to be more secure and less vulnerable to the changes of donor priorities. For purposes of comparison the author discusses briefly the challenges faced by ARAWIRA, an unregulated financial NGO, in obtaining funds on a sustained basis.

Author León, J.
Publisher Food and Agriculture Organization of the United Nations (FAO)
Number of Pages 14 pp.
Primary Language English (en)
Region / Country Global
Keywords Agricultural Microfinance, Financial Linkages
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Financial Linkages in the Philippines: Constraints and Success Factors Case Study 2007

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The poverty incidence and income inequality in the Philippines rates among the highest in Asia. Microenterprises are the dominant source of employment and income for the majority of the population, but in the past an oppressive financial policy hindered the flow of small loans from formal banking institutions to microenterprises.

This article examines the People’s Credit and Finance Corporation (PCFC) and its linkages with downstream financial intermediaries as a successful strategy for improving the flow of financial services in rural Philippines. This article is based on an in-depth case study (Quiñones, forthcoming), and is part of a global review on financial linkages conducted by the Food and Agriculture Organization (FAO) of the UN thanks to funding from the Ford Foundation. The PCFC case was selected for this region because of its crucial role in mainstreaming microfinance in the country.

Author Benjamin R.; Quiñones, Jr.
Publisher Food and Agriculture Organization of the United Nations (FAO)
Number of Pages 17 pp.
Primary Language English (en)
Region / Country Global
Philippines
Keywords Financial Linkages, Agricultural Microfinance
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Strategic Alliances for Scale and Scope Economies: Lessons from FADES in Bolivia Case Study 2007

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The case study of FADES in Bolivia makes an interesting case for non-traditional financial linkages. FADES, a non-regulated NGO and the third largest MFI in Bolivia, decided to enter into strategic alliances with several public and private institutions, with the sole purpose of expanding its rural outreach, despite the existence of restrictive legislation and infrastructural constraints. These linkages resulted in new services becoming available to old, and new clients, since the partnerships brought with it inherited clients. The new services range from additional financial services (e.g., remittances, deposit mobilization) to the payment of utilities and social programme benefiting the elderly.

This article introduces FADES’ innovative range of diverse linkages, and share initial results. The authors advice to the the readers is to follow FADES’ progress, and continue to learn from this interesting linkage “laboratory”.

Author Gonzalez-Vega, C.; Quirós, R.
Publisher Food and Agriculture Organization of the United Nations (FAO)
Number of Pages 15 pp.
Primary Language English (en)
Region / Country Global
Bolivia
Keywords Agricultural Microfinance, Financial Linkages
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Indonesia: a Regional Development Bank Linked with Village-based Non-Bank Financial Institutions Case Study 2007

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The case of financial linkages between the Regional Development Bank (BPD) and village credit institutions (LPDs) in the province of Bali demonstrates the impact of banking policies, regulation and supervision on the nature, and to a certain extent, the level of success, of formal and informal financial sector linkages. BPD, mandated by government decree, supervises and provides management training to LPDs in the province. Although other financial ties exist between the BPD and LPDs, the main purpose of the relationship appears to be the transfer of knowledge and assurance of good financial health. The author claims this relationship to be a success but cautions against certain rigidities of the model, e.g., restrictions for an LPD to have saving accounts with other financial institutions.

Author Budastra, I.
Publisher Food and Agriculture Organization of the United Nations (FAO)
Number of Pages 19 pp.
Primary Language English (en)
Region / Country Global
Indonesia
Keywords Financial Linkages
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The Link Between a Microfinance Institution and the Modern Banking Sector Article 2006

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This short article begins by noting that in developing countries, and particularly in rural areas, financial services are usually offered by informal or semi-formal entities. At the same time, formal financial institutions are trying to develop products specifically adapted to the needs of marginalised populations. It suggests that interlinking both institutions combines downgrading and upgrading. The article builds on this by trying to answer the questions a to whether it is possible to envisage converging strategies between formal and the informal sectors that would meet the needs of these populations, using as a reference the experiences of the Community Growth Mutual Funds MC2 in Cameroon.

The article begins by discussing the advantages and disadvantages of the different financial actors and then briefly examines strategies to increase the scope of financial services. It then describes the model adopted by MC2, the Community Growth Mutual Funds, created to integrate rural areas into the development process, before presenting the different links it makes.

ICICI Bank and Micro-Finance in India Case Study 2006

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Linking the formal financial sector with poor microfinance clients seemed impossible even a decade ago. Increasingly such linkages are emerging, either spontaneous or enforced, and it is crucial that we share the knowledge gained from these efforts.

One of India’s most innovative linkage models is ICICI Bank’s recent "facilitation linkage" with several MGO/MFIs. This approach is based on a partnership between ICICI Bank and selected NGOs/MFIs, according to which the latter takes the responsibility of monitoring and recovering loans from individuals and self-help groups, but the credit (and most of the risk) is directly between ICICI Bank and the SHG or individual clients.

Author Harper, M
Publisher Food and Agriculture Organization of the United Nations (FAO)
Number of Pages 44 pp.
Primary Language English (en)
Region / Country Global
India
Keywords Financial Linkages, Financial Services, Outreach, Funding
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Strategic Alliances to Scale Up Financial Services in Rural Areas Paper 2006

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

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

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

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

The findings of this study include:

  • Two manners in which RFIs can scale up access to financial services are by introducing new products and expanding the existing menu of services to a larger client base.
  • Rural markets need access to a variety of non-credit financial services which often only licensed banks, insurance companies, and regulated entities are permitted to provide.
  • With the increase in international migration and the accompanying dramatic increase in remittances, RFIs such as credit unions, rural banks, and non-bank-MFIs have seized the opportunity to form strategic alliances.
  • Strategic alliances with licensed insurance companies has allowed RFIs to overcome resource, technology, and regulatory constraints in order to gain this service both for their own operations and for their clients.
  • Development partnerships may be crafted between RFIs and formal sector banks to establish commercial feasibility of a future formal strategic alliance, while also exchanging knowledge about the dynamics and characteristics of administration of rural finance vs. formal sector finance.
  • Even fully licensed rural financial institutions can benefit from development partnerships with down market, typically informal financial organizations such as SHG, ROSCAS, FSAs, etc., to more quickly achieve critical mass in client base and scale of operations.
Author Gallardo, J.; Goldberg, M.; Randhawa, B.
Publisher The World Bank
Number of Pages 62 pp.
Primary Language English (en)
Region / Country Global
Keywords Financial Sector, Financial Partnership, Partnerships, Financial Linkages, Strategic Alliances
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A Case Study of Aviva Life Insurance and Linkages with Microfinance Institutions Case Study 2006

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India has taken major steps over the last few years to provide basic financial services like banking and insurance to low income clients in the rural areas. Regulatory provisions have been put in place by the authorities to ensure coverage of insurance to disadvantaged section of society. While initially, these provisions were viewed merely as regulatory compliances, insurance companies are increasingly viewing it as an area of opportunity. New market linkages are being put in place and understanding of community based financial institutions is leveraged to reach out to this untapped market.

AVIVA India, a leading global insurance company, has taken initiative and is developing linkages with some leading Microfinance Institutions (MFIs) of India to reach out to this market in a profitable manner. This paper explores some of the nuances of these linkages and makes an attempt to underline the factors responsible for the success and failure of such relationships. The author also tries to assess the impact of these linkages on the clients, intermediary organizations, insurance companies and regulators. Findings from the cases underline the need for a client focused and financially sustainable strategy for tapping this market. The need for investment to develop the market and understand the requirements of clients and intermediaries is also emphasized.

Strategies and Structures for Commercial Banks in Microfinance Paper 2006

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This paper begins by pointing to the rapid rate at which banks have been entering microfinance. It notes that this has been due to the increasing competition many find in their traditional markets as well as the lure of reported high profit margins at the “bottom of the pyramid”. One of the key decisions facing any bank that wishes to downscale (i.e. to offer financial services to microenterprises) is whether to provide these services through an internal unit or through a subsidiary or other kind of external organisation. This paper argues that the degree of success of the microlending program often depends crucially on this choice.

The paper considers two questions a commercial bank may face as part of its business development strategy:

  1. whether the bank should get into microlending? And
  2. whether to do microlending in house or through an external organisation that the bank would own either partially or in full?

It is suggested that in order to answer the first question, the bank must begin by looking at the second question as there are many important advantages and disadvantages of doing microlending in house versus through an external organisation. The paper then analyses the different options.

The opening chapter also covers five additional topics:

  • It briefly examines the performance of downscaling banks, noting in particular their rapid penetration of the microlending sector and the increasing quality of their microloan portfolios.
  • It presents the major reasons banks have given for their rapid entry into microfinance.
  • It discusses the four different organizational structures that banks can use to downscale: the internal unit, service company, lightly regulated subsidiary, and heavily regulated subsidiary.
  • It presents a number of best practices that banks serving the microfinance market should observe.
  • It extends the discussion of one of these best practices by describing in greater detail how the bank’s microlender (that is, the internal unit or external organization doing the microlending) can and should utilize the bank’s infrastructure and services, and do so to best advantage.

The rest of the paper then build on the last three of these topics.

Author Westley, G.D.
Publisher Inter-American Development Bank
Number of Pages 77 pp.
Primary Language English (en)
Region / Country Global
Keywords Financial Linkages, Commercial Banks, Organisation, Outreach
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An Overview of Microfinance Linkages in Indonesia Case Study 2006

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Recognizing the particular richness of linkage arrangements available for study in Indonesia, the authors decided to conduct an overview study as part of the cross-country study of linkages implemented by the Food and Agriculture Organization (FAO) of the U.N. for the Ford Foundation.

This overview provides a descriptive mapping of different linkage models that exist in Indonesia, and reflects on Indonesia’s rich variety and wide range of financial institutions. The linkages are characterized by several small, regulated financial institutions engaging in chain relationships with major financial institutions and grassroots financial actors.

Indonesia also has special apex institutions set up to create linkages and linkages have an explicit role in a new ‘banking architecture’ being created by the central bank. Linkages are categorized based on a distinction between autonomous linkages and those occurring as the result of government or central bank initiative.

Author Conroy, J and Budastra, I
Publisher Food and Agriculture Organization of the United Nations (FAO)
Number of Pages 29 pp.
Primary Language English (en)
Region / Country Global
Indonesia
Keywords Financial Services, Financial Linkages, Outreach, Funding
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Linkages between Banks and Microfinance Institutions in Mali: A Case Study Case Study 2006

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Over the last 20 years microfinance has evolved rapidly in Mali. As of 2003, the microfinance sector consisted of 41 networks with 752 local microfinance institutions (MFIs) and a total outreach of 612,000 clients. Since the mid-1980s, the government-owned agricultural bank, Banque Nationale de Développment Agricole (BNDA), has been the main intermediary offering financial services to MFIs. From the beginning BNDA acted primarily as a channelling bank on behalf of donors until the mid 1990s when it began to act more as a channeling bank.

This paper discusses and compares the financial linkages that BNDA has with the two of the 41 MFIs networks in Mali. First it looks at the liquidity balancing linkages with Kafo Jiginew, a federation of regulated savings and credit cooperatives, which is based on self-reliance through savings mobilization, using bank linkages mainly for liquidity balancing. The second case describes BNDA’s financial linkage with the CVECAON (Caisses Villageoises d'Epargne et de Crédit Autogerées-Office du Niger) network. This linkage is geared to credit expansion more than liquidity balancing, with a significantly lesser emphasis on savings mobilization.

Given the striking difference in strategy between the two networks, the question is posed whether donor generosity leads to MFI complacency.

Author Seibel, H.D
Publisher Food and Agriculture Organization of the United Nations (FAO)
Number of Pages 34 pp.
Primary Language English (en)
Region / Country Global, Africa, Western Africa
Mali
Keywords Financial Linkages, Financial Services, Outreach, Funding
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Formal-informal Financial Linkages: Lessons from Developing Countries Paper 2006

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Despite significant innovations in rural and microfinance over the years, millions of people around the world do not have access to financial services. Can strategic linkages and alliances between financial institutions help resolve this problem? Thanks to funding from the Ford Foundation several researchers set out to answer this question.

The results drawn from 12 case studies conducted in eleven countries in Africa, Asia and Latin America indicate that financial linkages are increasingly used by formal inancial institutions (public or private) to target rural clients. A wide variety of less formal, often rural financial institutions are the linkage partners. Initial evidence indicates that the partnership seem to afford both partners the opportunity to overcome a weakness in what they can achieve on their own. But does this initial appeal translate into anything sustainable and/ or replicable? Although it is certainly too early to tell, financial linkages, while promising, are difficult to set up and manage, require strong less formal as well as formal institutions and seldom result in a significant expansion of financial services beyond credit.

Opening Markets Through Strategic Partnerships: An Analysis of the Alliance Between FIE and ProMujer Paper 2005

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In response to the Bolivian debt crisis of 2001, innovative regulations allowed regulated finance companies or banks to form alliances with unregulated MFIs. This report describes the first alliance formed under this new regulation, created between one of Bolivia’s largest regulated private financial funds, Fomento a Initiativas Economicas (FIE) and the second largest NGO MFI in Bolivia, Programa para la Mujer (ProMujer).

Under the four year agreement FIE set up and staffed a separate teller window in the offices of ProMujer, offering services only for deposit, transfer, and bill payment. In order to manage the risk for each entity, the agreement stipulated that FIE would not offer loans at these windows and provided an exit strategy in the event that the venture did not prove commercially sustainable for FIE. Also all of the start-up costs for the plan (building teller windows, paying consultants, etc) were funded by donors.

The motivation behind the alliance for ProMujer was the vision of creating a more comprehensive service for its clients by giving them safe and convenient savings deposit and bill payment services at the same locations where they received their loans. At the same time FIE was interested in the alliance because of its potential to expand the client base of FIE and provide a low-cost source of funds to capitalize FIE’s loan portfolio.

External factors that made this alliance possible include:

  • A supportive legal framework
  • An intensely competitive microfinance environment that drives MFIs to innovate
  • Clear client demands for better products and services
  • Donor willingness to fund the start-up costs of the alliance

Internal factors that made this alliance possible include:

  • The commitment of senior management
  • Good communication between senior managers
  • A substantial existing deposit base among ProMujer clients
  • Solid institutional reputations in the market

The major findings of the report are:

  • A detailed contract and business plan that outline roles and responsibilities are essential
  • Management commitment and trust between partners are imperative
  • Training and internal marketing are critical for the buy-in of the staff
  • Both institutions should be directly invested in the alliance and share responsibility its design and implementation
  • A regulatory framework must exist that permits (or does not prohibit) such an alliance

This report offers insight into the types of partners best suited for an alliance, the importance of establishing a clear but flexible structure for an alliance, the key role of communications in forming and implementing an alliance, the positive and negative influences of donor involvement, and the dynamic nature of alliances themselves. The primary conclusion of this report is that under the right conditions, alliances such as the one between FIE and ProMujer can be replicated in a sustainable way.

AML/CFT Regulation: Implications for Financial Service Providers that Serve Low-Income People Paper 2005

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Since September 11th 2001, the introduction of measures to combat money laundering and the financing of terrorism have taken on new urgency. Consequently, it is becoming increasingly important for all financial service providers to develop internal controls to protect themselves from exposure to such activities and to comply with regulations. This useful paper focuses on summarising the key implications of the international framework for anti-money laundering (AML) and combating the financing of terrorism (CFT) for financial service providers working with low-income groups.

In general financial service providers are required to:

  • enhance their controls to cater specifically for AML/CFT risks;
  • undertake customer due diligence procedures on all new and existing clients;
  • introduce heightened surveillance of suspicious transactions and keep transaction records for future verification; and
  • report suspicious transactions to national authorities.

This paper recognises that such measures, developed by the Financial Action Task Force (FATF), could bring additional costs of compliance to financial service providers and customer due diligence rules that may reduce the access of low income groups to formal financial services. As such 3 proposals are recommended by this paper:

  1. gradual implementation of new measure
  2. the adoption of a risk-based approach to regulation
  3. the use of exemptions for low-risk categories of transactions

The challenge set out by the authors, therefore, is the need to strike a balance that promotes prudential practices at a reasonable cost for financial service providers that want to offer services to less well-off clients.

The paper includes two interesting case studies. The first looks at AML/CFT implementation in Mexico by two different financial service providers. The second notes that South African authorities have adopted a more flexible approach to client identification and verification and have introduced a compliance exemption that relaxes requirements for a category of clients known as "mass banking clients": those clients with small balances and small size transactions.

The final annex to the paper neatly sets out some suggested actions financial service providers can take to move towards AML/CFL compliance regardless of the status of their country’s compliance with the international guidelines.

Opening Markets Through Strategic Partnerships: The Alliance Between ICICI Bank and Cashpor Case Study 2005

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The strategic linkage described in this case study presents an interesting demonstration of how ICICI Bank, India’s largest private bank, hopes to reach millions of low-income clients in regions where it has no physical presence by outsourcing credit processes to MFIs operating in such regions. Although ICICI outsources operations to more than 30 MFIs, Credit and Savings for the Hardcore Poor (CASHPOR), an MFI with a vision of reaching one million rural poor women in eastern Uttar Pradesh and western Bihar in Northern India (home to 37 percent of India’s poorest people), is among the largest with approximately 70,000 active clients.

Under the partnership CASHPOR acts as a service agent for the bank undertaking the loan analysis, processing, and recovery of the loans. In exchange ICICI, as per the Central Bank guidelines, approves all loans based on the recommendations of the MFI and advances funds to CASHPOR in an uninterrupted manner to facilitate the disbursement of loans, all of which are recorded on the bank’s balance sheet and in the bank’s name. Both CASHPOR and ICICI share in the credit risk.

One of the key factors in bringing about this relationship was the regulatory framework within India. By Indian regulations, 40% of each commercial bank’s lending must be made to the agricultural enterprises for export and small-scale industries sector. Also by law, an MFI cannot borrow more than eight times its net worth. MFIs therefore, are often caught in a vicious cycle of limited operations, low profitability, and loss making as they struggle to achieve financial self-sufficiency—all resulting in an inability to raise capital. Thus, the MFIs are unable to borrow the funds necessary to increase scale, and in turn, profits and capital.

Both parties view the partnership as a success. ICICI is satisfied because the portfolio exceeds ICICI’s expectations for volume and quality, contributes to ICICI’s priority sector lending quotas, and promotes a positive image of ICICI in areas where ICICI’s presence is very limited. CASHPOR also has benefited by securing a reliable, uninterrupted flow of funds, which has allowed it to achieve scale of operations while complying with regulatory requirements related to capital adequacy.

Initially the partnership faced challenges such as low levels of risk sharing, creating new procedures for loan documentation, and difficulties in facilitating the flow of funds and reporting. The ongoing challenges to the partnership include creating an exit strategy, establishing capital adequacy for CASHPOR, aligning the costs and benefits of the partnership equitably, new product development, and institutional capacity development.

This study finds the most important elements to this partnership’s success are having committed senior management, developing mutual trust through good communication, and allowing sufficient flexibility for the partnership to adapt to changing circumstances.

The partnership between CAHSPOR and ICICI presents an innovative financing model for others to consider. Not only are the two partners happy with the arrangement, but also the Partnership Model is now being replicated throughout India with ICICI and other commercial banks. As global microfinance markets deepen and grow more competitive throughout the world, the incentive to form these types of partnerships will undoubtedly increase.

Opening Markets Through Strategic Partnerships: The Alliance Between SAL and Three Lebanese Commercial Banks Case Study 2005

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The Access to Microfinance and Enhanced Enterprise Niches (AMEEN) linkage described in this case study presents an interesting demonstration of how local commercial banks are able to outsource client mobilization, loan analysis, and follow-up to another organization, while funding the credits themselves. Through this linkage, AMEEN, a for-profit commercial services company in Lebanon, has secured a stable source for on-lending to microenterprises, while the commercial banks are able to enter a new market without the heavy upfront investment requirements in staffing and technologies.

AMEEN essentially provides the upfront service for the loan through its loan officers who market the products, conduct analyses of businesses to be financed, participate in the banks’credit decision making, and ensure prompt repayment of the loan. In exchange, the banks that AMEEN partners with, Jammal Trust Bank, Credit Libanais, and the Lebanese Canadian Bank, generate the loan agreements and disperse the funds, and give AMEEN a fraction of the fees and interest earned on the loans. It is important to note that AMEEN’s survival is solely dependent on it forming partnerships with other institutions (it does not have any independent operations).

Designing a solid yet renegotiable agreement was essential to the success of the partnerships. The agreement between AMEEN and each of the banks specified the loan terms, how risk and funds would be shared, the responsibilities for joint marketing of the products, loan origination and management criteria, targets for lending, portfolio quality and default, compensation for both partners (in terms of interest and fees split), and a non-exclusivity clause which allows AMEEN to engage in microfinance lending with other financial institutions.

However the program continues to face challenges including: misunderstanding by bank staff, adjustments in the compatibility between AMEEN’s and the banks’ management information systems, changes in branch locations in which AMEEN products are offered, and a low client retention rate (about 60%).

The main findings of this study were:

  • Bank selection and detailed agreements with each bank partner are essential
  • There is a need for clear understanding of bank expectations of the product and sector
  • A risk-sharing agreement at the start-up phase is important for gaining bank support
  • There should be a goal of increasing value added for the partners and clients
  • It is important to differentiate microfinance products from other bank products
  • Management information systems adjustments between the two partners need to be planned for

This case study offers insight into structural options available to donors/financial institutions entering the microfinance market and considers the importance of establishing clear guidelines for and expectations of the various parties, benefits, cost implications, and efficiencies gained through the structure. The primary conclusion of the study is that the structure can be replicated under the right conditions and that it is an interesting way for commercial banks to become involved in a sector that, although perceived as risky and lacking profitability potential, can be both profitable and socially rewarding.

Author Green, Colleen; Estévez, Ignacio
Publisher USAID
Number of Pages 30 pp.
Primary Language English (en)
Region / Country Global
Lebanon
Keywords Financial Linkages, Strategic Alliances, Partnerships
Related Resources
SHG Bank Linkage - a tool for reform in Indian cooperatives? Paper 2004

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India is notable for the self-help group (SHG) bank linkage movement which has helped to bring financial services to large numbers of poor people. SHGs are member-owned and controlled financial service enterprises, providing savings and credit services to their members. They usually distribute their profits to members and they facilitate members’ access to education and training. They are, in effect, micro cooperatives. They are linked to bigger financial institutions to keep their savings and provide additional capital for on-lending to members.

SHGs have increasingly been seen as good business for banks – they are a source of deposits and reliable at repaying loans. The most widespread financial service providers in rural areas of India are cooperatives. There are over 93,000 primary societies, served by 367 district cooperative banks with 12,000 branches and there is a further tier of state level apex cooperative banks. The cooperatives, however, have a relatively small share of SHG business. This paper examines why this is and argues that it would be in the interests of the cooperatives to increase their share of SHG business. Many primary societies have extremely poor loan repayment records, often below 50%, and this could be improved by taking on more reliable business which the SHGs represent.

The primary societies represent the main competitive advantage of cooperative banks because no other banking institution can match this outreach. However, the primary societies are not required by law to take out deposit insurance and they are thus, a less secure place for people to keep their savings. The failure of the cooperative banks to reach out to SHGs seemed largely to be that they did not think they could compete with the service levels of the commercial banks and regional rural banks.

Although the authors of this paper could not quantify the potential financial impact of cooperatives increasing their SHG business, they did consider the results would be beneficial, e.g. in terms of improved loan recovery ratios, improved credit:deposit ratios and improved representation of communities by having more women members. They recommend, therefore, that the staff of primary societies should be exposed to successful SHG linkage experiences and that district banks should actively promote their services to SHGs and SHG promotion institutions. They do note, however, that no SHG should be encouraged to do business with an institution that lacks deposit insurance.

Transaction Costs of Self-Help Groups: a study of NABARD’s SHG Banking Programme in India Paper 2004

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High transaction costs (TC) are one of the impediments to bank loans to the poor in low-income countries. As earlier studies have shown (Seibel & Dave 2002), bank TC can be lowered substantially by lending to self-help groups (SHGs) as financial intermediaries. Under the SHG Banking Program of the National Bank for Agriculture and Rural Development (NABARD) in India, over one million self-help groups with 16 million members (90% women), comprising some 90 million household members of the rural poor belonging to scheduled castes, were linked to 36,000 bank branches and financial cooperatives at commercial interest rates (March 2004).

As the program, which in contrast to former programs is not mandatory, continues to grow rapidly, the question becomes all the more pertinent whether the success of financial intermediation by SHGs is due to overall lower TC or a shifting of TC to SHGs and their members. In Karnataka State, 78 SHGs with 1160 members were selected for a pilot study. TC of SHGs were found to be low, comprising real costs of 0.62% and opportunity costs of 0.60% of loans outstanding to members. Real costs of members were 0.04% and opportunity costs 2.3%. It is tentatively concluded that SHGs are an efficient intermediary for bank loans to vast numbers of the rural poor. The study provides a methodology that can be used in more representative national and local samples.

Banking with Self Help Groups: How and Why? Document 2003

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This manual has been prepared for the branch managers of banks which are moving into the microfinance market using the self help group - bank linkage model. It has been written by the National Bank for Agriculture and Rural Development in India and is thus particularly directed at Indian bank managers. However, it provides an excellent description of what self help groups (SHG) are and how they are established, which could be applicable in any environment where this linkage model has been chosen as the means for a commercial bank to engage in microfinance.

The manual describes the role of animators in group formation and the books that an SHG must learn to keep. Specimen pages from savings and loan account registers and a cash book are provided in an annex. The process of linking an SHG to a bank is described in details and a clear simple checklist is provided for a bank manager to use to determine whether an SHG is functioning well and is, therefore, creditworthy. Example values for each criterion in the checklist are given under the heading of very good, good and unsatisfactory.

The final part of the manual explains clearly the advantages of doing business with SHGs and the importance of maintaining close contact with groups in order to maintain the quality of the SHG loan portfolio. Additional annexes provide copies of the agreement that must be executed by group members to authorise certain group members to be signatories for the bank account and a specimen application form and articles of agreement for use by banks while financing SHGs.

This handbook for branch level bankers is complemented by the multimedia presentation “The Luminous Link” which is referenced here in the RFLC and is available from NABARD.

The Mutuelles Communitaires de Croissance (MC2) Article 2001

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This article describes the experience of CCEI Bank in Cameroon which has set out to provide appropriate and sustainable financial services to rural people and entrepreneurs. Their strategy involves the creation of village mutual funds which are linked to CCEI, a commercial bank, and includes a policy of maintaining low interest rates.

The strategy involves the following actors:

  • Village populations who are the only ones able to take the initiative to establish a new Mutuelle communitaire de croissance.
  • The CCEI Bank, which provides training for the MC2 agents, loans for the development of the mutual fund, financial auditing and cash security.
  • ADAF - an NGO - which assists the MC2 with financial accounting and training of staff in management techniques, marketing and rural sociology, and acts as intermediary between the MC2 and national or international organisations.

Each MC2 is a mutual fund, owned and managed by its members, and provides the following services:

  1. Ordinary savings accounts
  2. Current accounts that can be used to make transfers and cash cheques
  3. Flash cash accounts - deposit certificates created by CCEI Bank, which enable holders to receive "flash cash" travellers cheques.

The MC2 state that reducing poverty is one of their objectives but their services are available to the whole village population. They make loans for both productive and social purposes but have a very rigorous loan appraisal procedure. The MC2 network has also made an agreement with an insurance company to offer members insurance products.

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