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This case study examines the scaling-up experiences of two microfinance institutions: the Nirdhan Utthan Bank Limited (NUBL) in Nepal and the Self-Help Group (SHG)-Bank linkage program of the National Agricultural Bank for Agriculture and Rural Development (NABARD) in India. Both NUBL and NABARD groups use self-regulation (peer selection, peer monitoring, and peer enforcement of contracts) as key to gaining access to services not otherwise available to them. There are two community-based drivers. First, loan products are closely driven by client preferences, as evidenced by strong demand to join the program, high repayment rates, and very low dropout rates. Second, the process of organizing clients into groups has a significant empowering effect, providing voice and attendant bargaining power to an impoverished class. Standardization of rules of conduct and basic service delivery mechanisms (and, in the case of NUBL, standardization of financial products themselves) was key to swift replication in both India and Nepal. In Nepal, where the density of commercial banking services was low, NUBL chose to provide financial services itself. In India, where the density was already very high, NABARD recognized the core advantages of group-based finance but adopted the "linkage" model that linked groups of poor women to preexisting commercial banks. The NABARD experience is government-led. NUBL, on the other hand, was established as an alternative to government action. In both cases, government policy in the form of mandatory "priority sector" credit played and continues to play a critical role in facilitating expansion. The subsidy content (explicit and implicit) of both NUBL and the NABARD program is quite high, and continued expansion of both programs is highly conditional on whether the policy regime of directed credit continues. Any change in this policy will deal a severe blow to both of these institutions. Provisioning group-based credit is costly, because it is highly staff time-intensive. In the case of NUBL, staffing requirements are so high that it has not been possible to scale-up services in more remote and sparsely populated mountainous areas of Nepal. In India, expansion of services in the more remote northeastern states has been hindered by the high cost of setting up and operating SHG-promoting institutions. One option in both countries is to induce the development of group federations that become self-financing and -regulating. Instances of well-functioning group federations are emerging in parts of India, and federations may well be the key to consolidating gains made so far in ensuring that the programs are primarily driven by the interests of clients and making the transition to an eventual end of subsidies. Finally, quality of the broader national environment is very important in facilitating growth of institutions. NUBL's growth leveled off just as expansion of SHGs accelerated in India. This was not a coincidence. The Maoist insurgency in Nepal severely restricted development of the microfinance sector, while the supporting environment in India facilitated its own unparalleled expansion.


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