by Tamsin Harriman

Village Banking is a micro-finance methodology in which a micro-finance initiative (MFI) sets up community-run banks in poor villages. At first, the MFI makes loans to the Village Bank, which it then lends out to its members. The MFI also trains the Village Bank's leaders, and provides help with accounting when needed. Eventually, however, the goal is that the Village Banks have enough savings accounts and income from loan interest that they become self-sustianing, loaning out only their own money and operating independently.

With that goal in mind, the Village Banking methodology allows villages to self-select their members, without input from the MFI. This is great because it gives members a real sense of independence and ownership of their Village Bank. It also allows the Village Bank to expand more organically (new members can join whenever the Village Bank decides to allow them, rather than having to wait for approval from the MFI). However, it can create some problems. Because the relatively wealthier villagers are usually more influential in the community, they are often allowed membership in the Village Bank even though they do not meet its selection criteria (which are suggested, though not enforced, by the MFI). These are often people who could utilize the traditional banking system, but choose to join the Village Bank instead. Unfortunately, their participation often means that the poorest people are less able to benefit from the Village Bank, because of lack of capacity.

Since the goal of micro-finance is to help the very poorest people lift themselves out of poverty, this situation is not ideal. However, the problem is difficult to solve. In order to prevent this situation entirely, the MFI would have to become part of the screening process for new members, taking at least part of the responsibility away from the Village Banks. Unless the MFI wants to remain involved in the Village Banks' operations indefinitely, however, this is not a viable option. One solution (though far less certain of success) is for the MFI to consistently remind the Village Banks of why they were created, what their mission is, and which demographic they should be targeting.

One MFI in Thailand that is beginning to experience this problem is the Common Interest Foundation in Chiang Mai. They are currently working to implement a third solution, one that strikes a decent balance between the previous suggestions. Common Interest is now researching potential areas for expansion even more carefully, in order to make sure that it only sets up operations in villages that are not only very poor, but in which all or most of the villagers meet their poverty criteria. This way, the Village Banks are free to choose their own members, and the MFI does not have to worry about who is allowed to join. This solution is good because it allows both the MFI and the Village Banks to achieve their goals. However, it is not perfect, because again, the MFI does not constantly monitor its Village Banks. Therefore, given the available solutions, MFIs using the Village Banking methodology must accept that there is always going to be the risk of this problem developing. It is worth the risk, though, for the benefits of Village Banking.