I had a mind-stretching visit last Wednesday from Bindu Ananth, president of the IFMR Trust in India. She and I, along with IFMR Trust chairman Nachiket Mor and others, participated the day before in a task force my colleague Liliana Rojas-Suarez has convened to draft policy principles for increasing access to formal finance.
I spent much of the conversation trying to place the IFMR Trust on my mental family tree of microfinance, and felt much like a biologist scratching her head over where to place the platypus on the tree of life. My thumbnail sketch:
Among other projects, the Trust is working to bring the bank branch---a building where tellers, human or otherwise, help customers conduct their financial business---to the poor The modern twist is to use broadband technology to tie disparate branches to headquarters cheaply, and in real time, allowing the delivery of a suite of financial services broader and more flexible than those offered by traditional microfinance. For example, customers can deposits as little as 20 cents in 5 seconds thanks a bit of technology that reads fingerprints and smart ID cards (I hope I got the details right). The Trust is not a bank, a mutual fund, or an insurance company, but serves an agent for all three. From my American point of view it is an institutional platypus too, a tax-paying not-for-profit. It operates on a quasi-commercial basis, hoping to inspire the big players through its cost-recovering examples. A major investor is the ICICI Bank, of which Mor was once Deputy Managing Director, and where Ananth played a key role in the microcredit linkage program.
A few points from my notes:
- The "community banking" program targets people less by income than by geography. It might set up branches in districts likely to be high in poverty---remote and rural---and then serve 70% of residents, some quite poor, some well off, instead of the 10-20% that Ananth says a fast-growing microcreditor might pick up. It reminds me of Procredit banks in this respect.
- Ananth says the branches can deliver credit at an interest rate equivalent to 12%/year, a third of what Indian microfinance institutions (MFIs) charge. Some of that gap comes from MFIs extracting monopoly profits, which they reinvest for fast growth. Some comes from the economies of scale the community bank branches realize by serving more of the local population.
- For the time being at least, the community bank branches too are local monopolies. A major challenge is to train staff not to follow religious, caste, and gender prejudices into abuses of power over clients different from them.
- The Trust also inculcates in branch workers the idea that they are wealth managers, not just loan officers. Their job is to offer a package of services appropriate to each client's situation---to recognize, for instance, that a single woman with children and elderly parents depending on her income is a prime candidate for life insurance. The real power of finance, Ananth told me, lies in its fluid nature. Think of our services, she tells staff, as noise-canceling headphones that can absorb some of the financial shocks of life in poverty.
- As the Trust is not hell-bent on growth, it has the luxury of time to randomize the placement of new branches, to the potential delight of researchers who can use the program as a laboratory.
My thoughts on all this:
- The contrast with conventional microfinance is striking. The dominant microcredit models that reach the poorest---solidarity group lending and village banking---rely on face-to-face interactions, group meetings, and a lot of paperwork. The IFMR community banking system does not stretch quite so far in reaching the customer. Customers must travel what we in the U.S. might call the last mile in order to reach the branch. Once there, however, clients hook directly into the formal, digital financial system.
- The system seems to shift the relative cost effectiveness of savings vis-à-vis credit, which could be a very good thing. As I learned from Stuart Rutherford, and as I wrote in chapter 2, savings and credit serve most of the same functions in life. Savings is safer, but credit traditionally dominated microfinance in part because most non-profits are rightly prohibited from taking savings, in part because credit may be easier to mass-produce, via one-size-fits-all loan programs.
- While there is much excitement (hype?) about the potential for modern technologies, especially mobile phones, to put new financial services in the hands of the poor, the IFMR system stresses the technology on the "back end." Someday most Indians may bank the way I do, by ATM, credit card, and the web browser. Perhaps the stepping stone will not be mobile phone banking, but visits to a local bank branch wired by broadband to global finance.
I'd need to see more evidence before I was persuaded the IFMR Trust has found a new solution to the old problem of providing financial services in tiny quanta to poor people without losing your shirt. But the Trust offers intriguing ideas. I'd welcome confirmations, refutations, critical thoughts.