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The Hidden Champions of Low-Income Banking

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Over the past few years, the concept of microcredit -- providing working capital loans to micro-entrepreneurs typically in the informal economy -- has come under scrutiny. A new generation of specialized microfinance institutions (MFIs) seemed to have perfected the model of extending these small loans backed by some form of social collateral. The initial success of the Indian MFI SKS probably epitomized both the hope for gains in scale and efficiency and concerns that this new type of rapidly growing mono-line credit MFIs had lost sight of their original social mission. SKS's high-visibility stock market IPO in September 2010 drew scrutiny of its business practices and ultimately triggered a political backlash in its Indian home-state of Andhra Pradesh, from which Indian MFIs have yet to fully recover.

The fascination with SKS and the political economy situation in Andhra Pradesh, where the state government runs a competing scheme, has arguably overshadowed a more significant financial inclusion development in other parts of the world: The rise of hidden champions of broad-based, low-income retail banking in developing countries.

In places as diverse as Bolivia, Cambodia, Mongolia, Kenya, and Peru, erstwhile MFIs chose a different route. ACLEDA (Cambodia), BancoSol (Bolivia), Equity Bank (Kenya), Mibanco (Peru) and Xac Bank (Mongolia) became regulated deposit-taking banks and essentially opened up modern retail financial services for the first time to large swaths of the low income populations in their home markets. Their global peers are not the SKSs of the world but successful retail banks such as ICICI in India or Bank Danamon in Indonesia that similarly pioneered low income banking for the emerging middle class in their countries.

Take Equity Bank in Kenya as an example, which I visited earlier this summer. It started as a socially-oriented, small business in low-income finance. After rapid initial growth, it converted in 2004 into a licensed commercial bank under the Kenyan Companies Act. Today it accounts for half of Kenyan deposit accounts (by numbers, not value given its lower-income customer base). Its mission remains "to offer inclusive, customer-focused financial services that socially and economically empower our clients and other stakeholders." A 2012 NBER paper reports on research that studied Equity Bank's branch expansion and found that the positive correlation between Equity Bank presence and account usage was higher for Kenyans with low income, no salaried job, and less education.

Or take ACLEDA Bank in Cambodia, where I was a year ago. It started as a donor-funded project in 1993 as the country came out of major turmoil. Initially focused on microcredit, it became a specialized bank in 2000, and a deposit-taking commercial bank in 2003. Since then, it has vastly grown its depositor base and now accounts for more than 20 percent of the total Cambodian market in total loans outstanding and deposits in value terms. By number of customers it accounts for more than 60 percent of depositors. ACLEDA, too, remains committed to its roots and continues to make public commitments to its social mission and regularly reports against them in its "Environmental and Social Sustainability" report.

At the risk of over-simplifying, this broader set of MFIs-turned-banks seems to have several characteristics in common: They had visionary and forceful leaders, who also recognized the need to institutionalize and strengthen governance as they became bigger; they were connected early to the global microfinance community that provided catalytic growth capital, but arguably more important, enabled idea-sharing and peer learning; they maintained strong financial performance, but did not lose sight of their origins and the need to maintain strong ties with their original customer base; they operated in an environment that enabled conversion to regulated bank status, and once allowed to, they dramatically grew a deposit base with the dual benefit of savings being an important client need and their deposits being an important source for lower cost, stable, and local balance sheet funding. In most cases, these players also expanded geographically across borders, which likely helped them stay on their toes and sharpened their appreciation for understanding diverse customer needs and their ability to work in different regulatory and business environments.

Globally, an estimated 2.5 billion working-age adults -- more than half of the total population -- are excluded from formal financial services according to the World Bank/Gallup Findex data. As a result, poor households, typically in the informal economy have to rely often on age-old informal financial mechanisms that can be highly unreliable and significantly more expensive that the formal sector alternatives. In a number of markets with an enabling policy and regulatory environment, hidden champions of low-income banking such as the once highlighted here have made a real difference towards the financial inclusion of the poor in their home markets. We have a lot to learn from them.