Banking the Unbankable: Community Finance in Asia
By Somsook Boonyabancha
Most urban slum dwellers in Asian countries cannot access conventional systems of finance. To get a loan, you need to prove you are creditworthy. But without a pay slip, you are unbankable. People living in poor communities need access to loans and other forms of financing to develop solutions to the serious problems they face, writes Somsook Boonyabancha. With a variety of models and scales ranging from small community funds to national-level networks, community finance is a popular and growing tool that promises to open up new possibilities for the people most in need.
Most urban slum dwellers in Asian countries can’t access conventional systems of finance. To get a loan from most banks, you have to have a regular job. But most of the poor earn their living informally and their income is irregular. They have no pay slip or other documentation to show to a loan officer. Without this, loan applicants are considered a credit risk, and as a result, they are unbankable. In addition, formal finance systems tend to engage people as individuals. But the poor’s ability to survive depends on collective support systems. Few financial institutions will work with a group, and as a result, almost nothing of formal finance trickles into poor people’s pockets. However, people living in poor communities need access to loans and other forms of financing to develop solutions to the serious problems they face. Community finance can fill the finance vacuum and help the urban poor become beneficiaries of development.
In Asia, systems of community-managed finance have been growing in scale, variety, and sophistication over the past few decades. For example, in community savings groups, people in a poor settlement pool their small savings to provide loans for individual needs or group development projects. Even at this small scale, community finance offers people the possibility and the power to act independently and promptly—which is critical, because waiting for the government or anyone else to do things for them is not going to help. With a funding system of their own, poor people can address individual or collective needs, whatever they are. But most importantly, they decide, and they can act right away.
It’s not just a financial resource; the savings groups help scattered members of poor communities learn to trust each other, make decisions together, and build their power to think, plan, manage, and govern collectively. In this way, community finance systems help a community marshal the knowledge and skills of its individual members and coalesce them into a more organized, more active, more collective, and more equitable development force. Community savings and community funds are tools that bring people together and allow them to start a whole range of development initiatives on their own. Thus, community finance is not only a financial development tool, but also a tool for empowering people to bring about change for the better in their lives and communities.
Most Asian societies are still encumbered with top-down governance structures and inactive and bureaucratic local institutions. But community-controlled finance systems can dispel that stagnation and unlock the development skills that already exist within poor communities to deliver badly-needed development. When people have their own resources, they can move forward—and eventually, they may be able to persuade the government and other stakeholders to follow.
Community finance has become a popular and important tool for Asia’s organized poor, and it is growing in a big way. There are many models: the basic small borrowers’ group, such as the Grameen Bank system in Bangladesh, or the small savings group of 10-15 women, like the Women’s Coop in Sri Lanka. City-level or ward-level funds link several small groups under a larger umbrella, and provide the small groups with access to larger pools of shared finance. Some of the city-level funds now flourishing in hundreds of Asian cities have become important negotiating points, helping communities get land, engaging local authorities and other stakeholders, and developing new collaborations. Community-level funds are too scattered to do much. But city-level funds (and the larger network and regional funds) link these scattered communities together and increase their energy, collaboration, negotiating power—and their possibilities. These funds can even scale up to the level of national community development funds, which are now active in many Asian countries.
The legal arrangements for community finance systems range widely. For example, very informal savings groups and funds—like those in Cambodia, India, and Myanmar—have flourished without any legal status at all, but have won acceptance and support from local authorities, despite the absence of any particular law to legitimize them. Other community finance systems have developed under the umbrella of existing laws, such as cooperatives like women’s savings cooperatives in Sri Lanka and Nepal, and housing cooperatives and homeowners’ associations in Thailand and the Philippines.
Some of these community finance systems are starting to link up with formal financial institutions, which can support the growth of community funds at a national scale. In Thailand, for instance, the government’s national community fund provides an umbrella under which poor communities can start their own community-based funds, and then link those community-based funds together into city-level funds that the community networks manage themselves. Also in Thailand, communities can form registered housing cooperatives, and with that legal status, they can get housing loans from formal finance institutions and buy private land or lease public land for housing projects. The legal status of cooperatives, as seen in Thailand, Sri Lanka, and Nepal, can open up a lot of possibilities for poor communities.
There are still considerable gaps between the world of formal finance and these informal community finance systems. To close these gaps will require more adjustment, more compromise, and more creative tweaking to connect the two worlds. These people’s finance systems still need support to grow in scale and acceptance, but that support has to come with a light touch: it shouldn’t stifle the liveliness, the flexibility, and the practical informality that allow them to work for poor people’s lives.
- Banking the Unbankable: Community Finance in Asia - 10. April 2018