Where Village Banking Began

In 1984, while working in a USAID project with farmers in Bolivia, John Hatch conceived a small loan program for low-income farmers that put them in charge. The program allowed them to obtain loans without collateral – their main obstacle to accessing credit – at interest rates they could afford. It brought groups of neighbors together, giving them the power to collectively disburse, invest and collect loan capital as they saw fit. His program became known as “Village Banking.”

Four weeks after its launch, the program served some 14,000 families with loans worth $630,000, demonstrating a tremendous demand for working capital among the rural poor. Encouraged by the results, Hatch began training others in the Village Banking methodology, and new programs began to take root throughout Latin America.

Lending to Women, Building Communities: a Method Becomes a Mission

Hatch founded FINCA in 1985. But not until 1986 did Village Banking find its historical focus. That year, Hatch started a small program in El Salvador to provide credit to low-income women involved in commerce and petty trade, or “microenterprise.” This focus was extremely successful in improving family welfare; the women’s businesses began to thrive after only one or two loans, their income grew, they posted exemplary repayment rates, and, above all, their children ate better. John Hatch was convinced that he had found an important tool to enable families to lift themselves out of poverty.

There were additional benefits. Because the women came together to borrow capital, they began to support one another – and each other’s businesses. If one local microenterprise grew and attracted more customers, it benefited all the tiny businesses in the neighborhood. Village Banks became focal points for grassroots community development.

Latin America and Africa: Fertile Ground for Village Banking

Buoyed by the success of the program in El Salvador, FINCA grew, opening Village Banking programs in Mexico, Honduras, Guatemala and Haiti in 1989.

In 1992, FINCA entered Africa, to see whether it could duplicate its success in Latin America on the continent where poverty was most severe. FINCA Uganda opened that year. Political instability, the HIV/AIDS epidemic, and widespread lack of familiarity with credit and savings practices proved challenging. Nevertheless, FINCA Uganda, and FINCA’s newer programs in Malawi, Tanzania, Zambia, and the Democratic Republic of Congo have proven among the most successful in the region.

By the end of FINCA’s first decade in 1994, Village Banking programs in Latin America and Africa benefited some 50,000 low-income families.

New Economies

In 1995, FINCA entered its third region – Eurasia – opening a program in Kyrgyzstan. Despite widespread unemployment, lack of familiarity with the basic principles of entrepreneurship, and an economy in which credit was virtually unknown, FINCA was able to stimulate the economy at the grass roots. The Kyrgyzstan program grew quickly and became a model for others in the region: Georgia and Azerbaijan in 1998; Armenia and Russia in 1999; Kosovo, where FINCA was among the first economic development organization to arrive after the cease-fire in June of 1999; and Tajikistan in 2003. To meet clients’ needs in the industrialized economies of Eurasia, FINCA adapted its services to include larger individual loans.

FINCA entered its fourth region – the Greater Middle East – in 2003 when it opened a program in Afghanistan. FINCA Jordan opened its doors in 2008. For both of these affiliates, FINCA’s development of financial services that comply with Islamic religious principles has been of utmost importance. Not loans per se; the murabaha “loan” FINCA offers in both countries is a pre-approved and mutually agreed upon sale contract that explicitly itemizes the sale of a commodity for cash plus a markup, including administrative costs associated with the transaction.

New Products, New Partnerships

While remaining committed to providing low-income entrepreneurs with access to working capital, FINCA was testing other financial products. FINCA Uganda introduced low-cost credit life insurance policies coupled with micro loans. The insurance repays the loan in the event of the client’s death and makes a cash payment to the policy’s beneficiary, decreasing the risk of default and helping to relieve financial stress on the grieving family. From Uganda the insurance scheme grew to serve FINCA clients in other countries in Africa and in Latin America.

Other innovations followed. FINCA worked with MTN, Uganda’s largest telecommunication company, and the Grameen Technology Center to bring mobile pay telephone service to Ugandan villages. FINCA Uganda also began providing loans for solar home systems, which provide a sustainable source of electricity for lighting and other uses. In Malawi, FINCA partnered with the Bill & Melinda Gates Foundation and The Johns Hopkins University Bloomberg School of Public Health’s Center for Communication Programs to integrate HIV/AIDS prevention education with Village Banking. Meanwhile, in the Americas, FINCA’s partnership with Visa allowed Mexican Village Bankers to receive their loan disbursements on debit cards rather than by checks, increasing clients’ access to their funds while lowering costs and improving security.

Finally, and most importantly, FINCA was among the first microfinance institutions to turn its attention to providing clients with secure savings services to complement the provision of working capital loans. Mobilizing savings required FINCA’s affiliates to acquire formal banking licenses. In 1997, FINCA Kyrgyzstan became the region’s first formal financial services institution for low-income entrepreneurs. In 2004, FINCA Ecuador and FINCA Uganda also became formal financial institutions who serve the working poor. More recently, FINCA’s affiliates in the Democratic Republic of Congo and Zambia have received permission to take deposits.

Channeling Commercial Capital to the Poor

As demand for FINCA’s services grew, its programs needed to access even greater amounts of capital to lend to the poor. So in 1997, FINCA established the Village Bank Capital Fund (now the FINCA Capital Fund). This financial fund provided guarantees to FINCA programs, enabling them to borrow commercial capital and to amplify their outreach. This was a revolutionary innovation; the Fund secured for poor clients what they had traditionally been denied: commercial capital.

In 2009, FINCA partnered with Deutsche Bank to introduce another revolution, securing capital commitments of $21.2 million for the FINCA Microfinance Fund B.V., the first-ever single microfinance network sub-debt deal. The fund, which has only private sector investors, was 100 percent oversubscribed and brought a new pool of investors to the microfinance industry. The offering is providing FINCA affiliates in the Democratic Republic of Congo, Mexico, Armenia, Azerbaijan, Kyrgyzstan, Georgia and Tajikistan the financial flexibility to on-lend an estimated $100 million in additional loan capital, as well as make the investments in staff, branches and other infrastructure to support its expanding microfinance lending and deposit taking programs.

“Microcredit” Becomes a Household Word

The microfinance sector was changing and growing. In 1997, FINCA co-sponsored the first global Microcredit Summit, where 2,000 policymakers, practitioners, and donors agreed to provide 100 million of the world’s poorest families with credit for self-employment. Acknowledging microcredit’s potential as a tool to alleviate global poverty, The United Nations proclaimed 2005 the Year of Microcredit. In 2006, the Nobel Committee went a step further, awarding the Nobel Peace Prize to Muhammad Yunus and Grameen Bank, and thereby recognizing microcredit’s contribution to world peace.

At the end of FINCA’s second decade, its programs had become models for outreach and sound financial management. The FINCA network surpassed the $100 million mark in loans outstanding to the world’s working poor, and 13 of its 21 programs had achieved “sustainability,” covering their operating costs with income from lending.

Rising to the Global Challenge

As it celebrates its 25 years of providing financial services to the world’s poor, FINCA today provides a broad array of financial services to more than 700,000 low-income individuals – the vast majority of them women and mothers. Across the 21 countries that it serves, FINCA has more than $320 million in outstanding loans and is on pace to disburse as much as $800 million in loans by year end. But to help meet the UN Millennium Goal of cutting world poverty and hunger in half, FINCA committed to an ambitious plan for growth:

• Open Village Banking programs in ten countries where FINCA’s services are needed most.
• Build 100,000 Village Banks in the world’s most destitute neighborhoods.
• Reach one million of the world’s working poor with financial services they couldn’t otherwise obtain.

Meanwhile, FINCA continues to invest resources in countries with the greatest need. Most recently, following the January 12, 2010 earthquake that struck Haiti – which left an estimated 230,000 dead and as many as a million homeless – FINCA has redoubled its efforts to support the poorest country in the hemisphere. FINCA established the Haiti Earthquake Relief Fund to enable its program in Haiti, which served over 12,000 clients prior to the earthquake – 90 percent of them women – to recover from the devastation and address its clients’ needs for new financial services.

Across the globe challenges persist, but FINCA’s clients have proven that they can persevere through wars, natural disasters and financial crises and FINCA intends to stand by its clients and continue to innovate in the provision of loans, insurance and savings accounts that they need to change the course of their lives and their children’s lives.