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FDC 1996-01: Bank-NGO Linkages and the Transaction Costs of Lending to the Poor Through Groups: Evidence from India and the Philippines

The Foundation for Development Cooperation's Banking with the Poor project stresses the importance of linkages between commercial banks on the one hand, and non-government organizations (NGOs) and self-help groups of the poor (SHGs) on the other, as a mechanism for channeling credit to the poor on a sustainable basis. The Foundation asserts that advantages such linkages can reduce the transaction costs of lending and borrowing. To test this, the Foundation commissioned two studies, one in India and one in the Philippines, to quantify the transaction costs of commercial banks and NGOs in lending to the poor, and the transaction costs facing poor borrowers. The Indian study compared the transaction costs incurred by banks when lending to the poor through various channels, and found that transaction costs were much lower where banks used NGOs and SHGs as intermediaries. Transaction costs facing borrowers were also significantly lower. This suggests an important role for NGOs in the intermediation process. The Philippines study looked at the question from the perspective of the NGOs. It found that NGOs could channel credit to the poor with lower transaction costs, as a proportion of loans granted, than most other institutions. Nevertheless, the small loans and short maturities inherent in lending to the poor inevitably lead to transaction costs being relatively high compared to the value of loans outstanding at any one point in time. This highlights the need for NGOs to minimize costs as far as possible, with the study suggesting a number of measures that would help them to achieve financial sustainability. While more research is needed, the results of the two studies generally support the central premise that linkages with NGOs and SHGs can enable banks to provide credit to the poor on a sustainable basis. It is therefore important that governments and donor agencies do not lose sight of the importance of fostering such linkages, through provision of appropriate forms of support.

PinoyME Foundation
Authors Keywords
Conroy, John D.; McGuire, Paul B.; microfinance; lending; transaction costs;
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Published in 1996 and available in the FDC or can be downloaded as full text Downloaded 6,214 times since November 25, 2011