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Abstract
This case study examines the scaling-up experiences of two microfinance
institutions: the Nirdhan Utthan Bank Limited (NUBL) in Nepal and the Self-Help
Group (SHG)-Bank linkage program of the National Agricultural Bank for Agriculture
and Rural Development (NABARD) in India. Both NUBL and NABARD groups use
self-regulation (peer selection, peer monitoring, and peer enforcement of contracts) as
key to gaining access to services not otherwise available to them.
There are two community-based drivers. First, loan products are closely driven
by client preferences, as evidenced by strong demand to join the program, high
repayment rates, and very low dropout rates. Second, the process of organizing clients
into groups has a significant empowering effect, providing voice and attendant
bargaining power to an impoverished class.
Standardization of rules of conduct and basic service delivery mechanisms (and,
in the case of NUBL, standardization of financial products themselves) was key to swift
replication in both India and Nepal. In Nepal, where the density of commercial banking
services was low, NUBL chose to provide financial services itself. In India, where the
density was already very high, NABARD recognized the core advantages of group-based
finance but adopted the "linkage" model that linked groups of poor women to preexisting
commercial banks.
The NABARD experience is government-led. NUBL, on the other hand, was
established as an alternative to government action. In both cases, government policy in
the form of mandatory "priority sector" credit played and continues to play a critical
role in facilitating expansion. The subsidy content (explicit and implicit) of both NUBL
and the NABARD program is quite high, and continued expansion of both programs is
highly conditional on whether the policy regime of directed credit continues. Any change
in this policy will deal a severe blow to both of these institutions.
Provisioning group-based credit is costly, because it is highly staff time-intensive.
In the case of NUBL, staffing requirements are so high that it has not been possible to scale-up services in more remote and sparsely populated mountainous areas of Nepal. In
India, expansion of services in the more remote northeastern states has been hindered by
the high cost of setting up and operating SHG-promoting institutions. One option in both
countries is to induce the development of group federations that become self-financing
and -regulating. Instances of well-functioning group federations are emerging in parts of
India, and federations may well be the key to consolidating gains made so far in ensuring
that the programs are primarily driven by the interests of clients and making the transition
to an eventual end of subsidies.
Finally, quality of the broader national environment is very important in
facilitating growth of institutions. NUBL's growth leveled off just as expansion of SHGs
accelerated in India. This was not a coincidence. The Maoist insurgency in Nepal
severely restricted development of the microfinance sector, while the supporting
environment in India facilitated its own unparalleled expansion.