Poor people of the country often do not get any banking services. As a result, they have to depend on informal sector, which has been playing a vital role without accountability and transparency.
Micro savings ought to come under the operational purview of the micro investment through social networking. To make it happen societal banking system is required, otherwise micro savings cannot give good results and it may eventually create problems experienced by countries like Uganda and Rwanda.
In Bangladesh interest rate on lending in the informal sector is much higher than the formal sector, though informal sector employs 87 percent of the labour force including wage labourers, self-employed persons, unpaid family labour, piece-rate workers and other hired labourers.
Informal sector mostly depends on informal credit market and borrows from friends and relatives. The informal credit market is unregulated and expensive. Social networking and societal banking may help informal sector in meeting their needs for finance in a relatively lower cost.
Microloans, also bearing high interest rates, are not viable option for the informal sector. Those seem to do more harm than good to the poorest, since it is intended more to do business than to fund enterprises.
So, an integrated funding mechanism needs to be developed to encourage creative entrepreneurship so that poor downtrodden people can come up with innovative business ideas and help themselves to fight poverty. More intensive and pragmatic policy should be developed for the development of the social enterprises particularly for self-motivated entrepreneurs. Not only small and medium enterprises but also micro enterprises should get special priority and supports to create jobs and help millions step out of poverty.
We had carried out a study to develop a theory on how social networking facilitates can empower people to form social capital and accumulate funds for social investment. Social intelligence and social enterprises can transform micro savings into micro investment.
Societal banking can be developed under a regulatory framework and may start working with a collaborated effort of Palli Sanchay Bank, Karmasangsthan Bank and Postal Savings Deposit.
Societal banking idea is larger than agent banking or mobile banking. It will widen the scope of financial inclusion and help gradually transform informal sector into formal businesses.
Technological diffusion, innovation, creativity and suitable regulations by the local level planning with local level law are the key to deepening financial inclusion, paving the way for transforming micro-savings into micro-investment. Societal banking will help to expedite the process of social networking and ultimately empower people below poverty line.
However, social education in the form of formal or non-formal is very important to act as a complementary.
Societal banking: Dutch and Ugandan models
Rabobank was founded in the Netherlands more than a hundred years ago as a co-operative bank providing access to financial services for small farmers and offering a secure option for savings to the local community. The driving force behind the Rabobank Group has always been to create opportunities for individuals and organisations to participate fully and independently in economic activities.
Rabobank has developed an integrated concept of sustainable rural financing in developing countries. In addition, Rabobank participates through its different departments in international platforms and partnerships concerning the challenge of economic development in developing countries.
While simply expanding access to banking services will benefit a minority, broader success may be unobtainable unless the quality of services is simultaneously improved. There are also challenges on the demand side, however. More works need to be done to understand what savings and credit products are best suited for the majority of rural households.
Village Community Banks (VICOBA) have benefited people in an Ugandan community reducing their income poverty by enabling the poor to save and access credits. VICOBA lending model is a unique and an effective tool for development of rural communities.
What is VICOBA?
VICOBA is a tailored micro-finance programme designed to provide credit to low-income people who need capital to start their own businesses. The programme brings together groups of 25 to 50 people, mostly women, and allows them to combine their savings to create a community-based bank in a village near Kampala, capital of Uganda.
Members can then take loans to fund micro-enterprises and self-employment initiatives. VICOBA is a community-based system that provides mutual support and encouragement to empower community members to work together to create sustainable development. Its missions are:
To increase the ability of community groups to identify, utilize and develop their local resources
To provide increased access to credit to community initiatives
To increase off-farm employment and self-employment opportunities
To ensure long-term success by providing participants with accounting and business management skills
To help individuals fulfil their dreams and to improve living standards for the wider community
After four years of operation, the results showed:
The number of VICOBA beneficiaries has increased four-fold since 2011
The total number of people who have benefitted from the program is 294
Over 50 members are currently undergoing training to join the programme
The number of men joining the program has increased from 4% in 2011 to 12% in 2014
Women are taking the lead in influencing community development
Of those involved in the VICOBA program, 10% are parents or guardians of children with disabilities. These families are being empowered to fight poverty, supporting the Kitega Community Centre's primary objective to support disabled children.
In terms of funding, 51% of participants have borrowed from the VICOBA community bank. They have used the funds to start up their own businesses and create self-employment opportunities.
Businesses established through VICOBA borrowing include: Farming (pigs, poultry and cattle), crops, retail shops, vegetable stalls, tailoring businesses, restaurants, and the construction of rental houses. Around 90% of VICOBA participants are involved in farming.
Over 250 businesses have been established during the past four years, with a number of beneficiaries establishing at least two businesses. Some participants have up to five businesses.
Participants agree the knowledge and skills they acquired through the VICOBA training has helped them to expand their businesses.
In terms of sustainability, 80% of businesses started are still in operation after three years.
The VICOBA program has led to a great improvement in participants' household incomes, which has helped families meet their basic needs such as food, shelter, and education.
For every business started, around 10 lives are transformed. (this is the average size of VICOBA participants' households)
In terms of community development, 72 percent of VIOCOBA participants are actively supporting local initiatives. We see this as a clear sign that the VICOBA model trains leaders who are capable of bringing about real and lasting change within their communities.
Societal banking can change rural Bangladesh
Income inequality and savings demonstrate a nonlinear relation in Bangladesh. Savings behave differently at different level of income inequality. Moreover, this nonlinear relationship is due to changes in economic policy. Policymakers should come forward to think how societal banking with the applicability of the social networking can be used in local level community development planning of the country.
Rural savings will be turned to rural investment leading to social entrepreneurship. People will become more empowered than before involving in social networking. This may be supported by technology, innovation and suitable regulations.
Social entrepreneurship can be systematically developed through Societal banking which can act for social welfare. Societal banking will reduce the informal lending at the rural area.
Social networking and societal banking may be applied for transforming micro savings to micro investment through creating social capital. This will also help to transfer to formal sector from informal sector. Employment opportunity accompanied with economic growth should be raised in the formal sector. This will help to attain equitable growth, social justice and removing income inequality.
If we cannot take the benefits of demographic dividend then it may transform to demographic bomb. Actually, financial inclusion is feasible thorough arranging societal banking under regulatory measures.
Macroeconomic stabilization depends on successful implementation of investment and positive return on investment. We need to see improvement in Gini coefficient index by ensuring social justice and equitabswwle distribution, and thus removing income inequality.
Systematic procedure and legal status for Societal banking should be developed which will replace current agent banking system also. To implement sustainable development goal there is no other alternative but to creative alternative banking system in the rural areas so that poor people are encouraged to save and invest locally. It will create jobs for themselves and show them way out of the vicious circle of poverty.
[The writer is Professor at Dhaka School of Economics.]