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Strategic Alliances to Scale Up Financial Services  in Rural Areas

By Bikki Randhawa and Joselito Gallardo (FSE), Mike Goldberg (LCSFR)
 

Despite more than 25 years of large financial investments and technical assistance programs, access to financial services in rural markets has not expanded at the massive scale and on the financially sustainable basis that have been expected.  Can strategic alliances be used to scale up financial services in rural areas?

A new piece of sector work aims to analyze the motives of selected rural finance institutions (RFIs) in the alliances they form with other commercial and non-profit organizations.  It examines how constraints to access and delivery of financial services in rural markets are relieved through strategic alliances. The analysis points out the types of RFIs that are effective in helping formal sector entities to penetrate rural markets, highlights the new financial products (such as international remittances and micro-insurance services) that result from these alliances and the objectives of  different models of strategic alliances. 

Conceptual framework for  strategic alliances and development partnerships in rural finance

What lessons can be drawn from the strategic alliances between firms?  Business firms structure strategic alliances with other firms to achieve one of five specific objectives.  These are (i) overcome a resource constraint, (ii) manage transactions costs, (iii) acquire new technical and management skills, (iv) build customer loyalty by enhancing product value, and (v) gain competitive advantage and market position.  The underlying principles of strategic alliances in the business world apply as well to the collaborations in rural finance.  In both cases, the alliances can be used to address similar strategic objectives. One difference is that collaborations in rural finance may have a strategic or development orientation: institutional relationships can be grouped into strategic alliances at one end of the spectrum and development partnerships at the other end, as illustrated in Chart 1 below. 
 

Chart 1.  Spectrum of development partnerships and strategic alliances

The collaboration between a RFI and its partner(s) is strategic when the RFI obtains a financial or economic advantage and the intangible benefits beyond those explicitly included in the partnership arrangement (formal or informal) can be gained by the parties involved.  On the other hand, the collaboration is a development partnership when the gains and benefits (including the intangible ones) are not shared between the participating institutions but have a unidirectional flow from a development partner to the RFI.  Instruments and mechanisms made available to the RFI to meet an identified objective may not be charged at market cost.  The less-than-market costing injects an element of permanent or temporary subsidy.  Some development partnerships may progress, in time, into commercially-driven strategic alliances, while others may not go beyond the developmental relationship.

The RFIs analyzed in the study employ strategic alliances and development partnerships with commercial banks, insurance companies, international remittance service networks and other financial institutions, development organizations, apex organizations and umbrella federations and commercial enterprises, to help them achieve two or more main objectives.  These objectives are: (a) ease resource constraints, (b) manage transaction costs, (c) improve product value to clients and customers, (d) access new technical knowledge, skills, systems and infrastructure, and (e) position the institution or product strategically for competitive advantage.

Findings - strategic alliances and development partnerships in rural finance

The experiences of the RFIs in the study show that objectives to scale up access to financial services in rural markets can be met by structuring strategic alliances or development partnerships with commercial or development organizations.  The dynamics of access to financial services in rural areas has at least two important aspects: first, availability of a varied array of financial services other than credit and second, increasing numbers of rural market participants who make productive use of the financial products.  Non-credit financial services such as savings deposits, remittances/money transfers, payments facilities (through ATMs, smart cards and check cashing), discounting of warehouse/storage receipts, input-supply and output-marketing contracts, and insurance products are important in rural markets.  These products expand not only the range but especially the scale of access to financial services available to households and small-scale producers and businesses in rural areas. 

The experiences of the RFIs in scaling up financial services underscore three important areas: (a) the development partnerships that RFIs sought with commercial or development organizations are informed by one or more objectives; (b) the types of RFIs actively engaged in strategic alliances, and (c) the financial products and services with established market demand and dependent on strategic alliances for delivery.

a.       Development partnerships of RFIs with commercial and development organizations are aimed at one or a combination of the same fundamental objectives driving strategic alliances.  In some cases, these objectives are access to financial resources and infrastructure, expanding the menu of services for clients and enhancing organizational status.  In other cases, the development objectives are mainly to penetrate into rural markets at manageable costs and build up technical knowledge of rural-based microfinance.  Another key objective in development partnerships is securing long-term funds to backstop the development of a critical mass in operations and market areas to establish market share.

b.         Engaging rural finance institutions in strategic alliances.  RFIs that are effective in expanding the range of products and pushing the boundaries of access comprise credit unions/cooperative financial institutions, agricultural banks, non-bank rural/microfinance institutions and rural banks with a well-established presence in rural markets. Postal financial service networks have also been reported in other studies to have the potential and the capability to help expand the delivery of financial products and services in rural communities. The commercial alliances and development partnerships are determined principally by the strategic goals and the new or additional financial products and services that the RFIs focused on. 

c.         Financial products with established market demand and dependent on strategic alliances for retail delivery – such as delivery of international remittances, various insurance products, payments and transfer facilities (check-cashing, access to ATM networks, money transfers) are the focus of RFIs’ strategic alliances with commercial and financial institutions with the legal charter and organizational capability to provide the product or service.  The alliances are indispensable because the RFIs may have the legal charter to offer the products (international remittances and insurance), or have the technology and infrastructure to provide the additional services (check-cashing, access to ATM networks, money transfers). 

Operational implications for the World Bank

(a)  Necessary conditions for strategic alliances.  Certain conditions must be present for strategic alliances to be formed and generate synergistic economic benefits.  First, there should be a range of informal and semi-formal institutions serving rural markets, complemented by formal financial institutions that have the legal status to offer a range of financial products and services such as commercially priced credit lines, check cashing and affinity-based ATM facilities, domestic correspondent banking services for money transfers and payments, and international remittances. Second, the legal and regulatory framework must clearly establish the types of services that each institution can provide, and the business collaborations that are permitted.  As strategic alliances to scale up access to financial services in rural areas is a new theme in rural finance, it is important to understand the process by which strategic alliances contribute to outreach to new clients and markets and the introduction of  new products.

(b)  Questions to address early in project preparation.  A basic requirement to be addressed early in project preparation is the collection of relevant information on rural markets, RFIs and the demand for financial services from households and businesses. These sources of key information in specific countries include Household Income and Expenditure Survey data, Living Standards Measurement studies, periodic reports and surveys of microfinance network associations, postal financial services, banks, and credit union federations. 

Additional information can be derived from the World Bank’s Economic and Sector Work that can contribute to understanding the barriers to strategic alliances in rural financial markets.  Data and information collected and analyzed early in the project preparation phase will be instrumental in addressing a number of important questions, including the legal and regulatory framework, the existence of registries for movable assets, credit information systems, factoring and warehouse finance systems, the extent of client demand for new financial and other products, determining if there is a presence of well performing RFI and MFIs and the existence of technologies that could decrease transaction costs.

(c)  Critical operational issues.  If the conditions are right for strategic alliances in rural finance, the World Bank and its partners can raise interest and awareness by sponsoring seminars, workshops and other events to bring likely partners together, to identify key legal and regulatory constraints, institutional capacity needs, and technological challenges.  World Bank projects, grants and counterpart funds can be used to disseminate examples of successful strategic alliance experiences and encourage experimentation. Since this is a new approach to rural finance and other services, many institutions may not be aware of the options, advantages, and limited risks that exist in strategic alliances with experienced RFIs. This awareness-raising work should take an inclusive approach, inviting urban-based financial services providers, insurance companies, credit card providers, health service providers, money transfer operators and others who might consider strategic alliances in rural markets.

Strategic alliances require time to be established, and often last much longer than the typical World Bank project cycle. Standard investment loans of three to five years can resolve some of the roadblocks to strategic alliances and promote greater outreach in rural markets. There are also at least two principal World Bank products that help to surpass the time limitations often imposed by the loan project cycle. Learning and Innovation Loans (LILs) can encourage experimentation that could result in improved coverage of rural financial markets. Adaptable Program Loans (APLs) which can be structured in phases for a total of 12 to 15 years are indispensable in fleshing out the long-term vision for the developmental results of a particular World Bank sectoral intervention.

Summary based on an upcoming publication, “Strategic Alliances to Scale Up Financial Services in Rural Areas, by J. Gallardo, M. Goldberg and B. Randhawa (World Bank).