Community-Driven Development and Scaling-Up of Microfinance Services: Case Studies from Nepal and India

This paper examines the scaling-up operations of two microfinance institutions (MFIs): 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.It identifies the following common features of the programs:

• Use of self-regulation as a key to gaining access to services;
• Loan products driven by client preferences;
• High demand to join the program, high repayment rates and low dropout rates;
• The process of organizing clients into groups that provides them with bargaining power;
• Standardization of rules of conduct and service delivery mechanisms;
• Government policy in the form of priority sector credit that plays a critical role in facilitating expansion;
• High dependence on subsidies.

The paper identifies the following differences in the programs:

• NUBL chose to provide financial services itself. NABARD adopted the linkage model that linked groups of poor women to pre-existing commercial banks;
• The NABARD experience is government-led, while NUBL was established as an alternative to government action;
• The Maoist insurgency in Nepal stopped NUBL's growth, while the supporting environment in India has facilitated the expansion of SHGs.

The paper concludes that provisioning group-based credit is costly, because it is highly staff time-intensive. A possible solution would be to induce the development of group federations that become self-financing and regulating. This could be the key to making the transition to an eventual end of subsidies.