Journal of International Development: Vol. 8, No.

2,289-305 (1996)

DISCIPLINING OR PROTECTING THE POOR? AVOIDING THE SOCIAL COSTS OF PEER PRESSURE IN MICRO-CREDIT SCHEMES
RICHARD MONTGOMERY Centre for Development Studies, Swansea, U K

Abstract: This paper utilizes case studies from Bangladesh and Sri Lanka to explore a disadvantage of group lending schemes: the unnecessary social costs of repayment pressure. The author argues that extending credit and meeting the needs of the poor need not be incompatible. The poor can be protected from socially damaging peer pressure lending practices via flexible repayment schedules, savings facilities and short-term, high-interest consumption loans. The analysis suggests protectional devices for poor borrowers, better staff performance indicators, and self-management of some resources by the poor.

INTRODUCTION
This paper uses a Bangladesh case study (BRACs Rural Development Programme) to highlight how top-down repayment pressure can lead to forms of borrower discipline which are unnecessarily exclusionary, and which can contradict the broader (social) aims of solidarity group lending. In contrast, a Sri Lankan case study (SANASA Thrift & Credit Cooperative Societies) provides an example of collectively managed financial services which are adapted to the specific needs of members. This case study also provides evidence of how the poorer within a credit programme can be protected from the need to activate overt peer pressure through a variety of protective mechanisms (flexible repayment schedules, savings facilities and immediately available, short term, high interest consumption loans). Overviews of the case study institutions are presented after brief outlines of solidarity group lending, the principles of peer pressure, and a schematic discussion of poverty in relation to the roles of financial services. The case studies are then considered in terms of their contrasting success in avoiding the social costs of

This article derives from field research carried out in 1992-93, funded by an ODA ESCOR grant. The research was part of the wider project on finance for low income groups administered by the Institute for Development Policy and Management, Manchester, undertaken in collaboration with David Hulme, Paul Mosley, Debapriya Bhattacharya and Graeme Buckley. Thanks are also due to Dinal Fernando and Tamana Siddique, who were my interpreters in Sri Lanka and Bangladesh respectively.
0954-1 748/96/020289-17 0 1996 by John Wiley & Sons, Ltd.

290 R. Montgomery repayment discipline. These costs include an heightened perception of risk, the erosion of mutual trust and willingness to support fellow solidarity group members, and ultimately an increased likelihood that the poorer and more vulnerable will be excluded from such groups.

SOLIDARITY GROUP MICRO-CREDIT SCHEMES

Solidarity group lending schemes involve the formation of groups in which some or all members in the group are jointly liable for each individuals loans, thereby creating an alternative to conventional loan collateral requirements (which poor people can rarely fulfil). From the lenders perspective such joint liability lending enables a transfer of default risks from the institution to the borrower, and can reduce the transaction costs of providing a large number of small loans (by concentrating clientele in groups, at regular village based meetings, rather than dealing with individual borrowers at different times). The reduction of costs and risks, and the maintenance of high repayment rates, facilitate financial viability for the lending institution. The economic and financial arguments for joint liability are complemented by social development objectives. A recent review of solidarity group schemes in Africa, Asia and the Americas states that:
The mutual trust arrangement itself; at the heart of the group guarantee, has profound social implications. The solidarity group, because of its basis in mutual support, frees borrowers from . . . . dependent relationships. Further, the peer group itself, becomes the building block to a broader social network. . . . . The social objectives of mutual self-help and poverty alleviation, remain fundamental to the broader goals of these peer group lending schemes (Berenbach and Guzman, 1992, p. 4)

The success of solidarity groups in terms of these broader social objectives varies from programme to programme, and country to country. Nevertheless, the language of such social objectives, including phrases such as mutual support and empowerment, persists among the staff and supporting agencies of peer group credit schemes (e.g. Westergaard, 1994; Lovell, 1992). However, the case study schemes discussed in this paper provide contrasting examples of the extent to which members develop mutual trust, and are prepared to support individuals facing distress. Where such trust and support fail to develop, the result can be institutionalized suspicion which enhances the perception of risk amongst solidarity group members. Certain forms of repayment discipline imposed on solidarity groups, if not tempered by additional mechanisms to protect individuals, may contradict these social objectives of generating trust and mutual support.

PEER GROUP PRESSURE AND EXCLUSIONARY TENDENCIES

Despite the success of targeted and pro-poor credit schemes based on joint liability,

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there are a range of examples from different countries suggesting that either the poorest remain difficult to reach, or that if they do join a programme their membership is shorter than average (see Osmani, 1991, p. 322; Rutherford, 1994, pp. 95, 123). To understand this evidence of exclusionary tendencies the theoretical ideal of peer group dynamics needs to be considered. The ideal of peer groups based on social collateral implies that groups screen and self-select their own members to form relatively homogenous groups. The implicit idea of equality also assumes that they constitute a similar degree of default risk to each other. Two features of this group homogeneity ideal are open to question, and suggest that it is both rare and impractical. First, differences in apparent economic well-being between poor individuals and households in a single community may appear superficial to outsiders, but are often significant for those encouraged to join a credit programme. The failure to recognize these differences is often evident in the way formal schemes recruit members according to pre-set village level targets (as opposed to facilitating the self-selection process which may result in wide differences in group sizes in different communities). Such recruitment practices interfere with the ideal selfselection process assumed by peer group theory, and joint-liability groups are often much less homogenous in practice. Second, the ideal of peer group homogeneity would appear realistic only when economic well-being, and the state of poverty, is assumed to be stable and static. This assumption is untrue when the dynamics of poverty are taken into account (discussed below). An individual borrower facing a short term (or fundamental) crisis in income or cash flow may suddenly shift from being an ideal peer to a bad risk if such a crisis coincides with outstanding repayment obligations. Thus, poor people experiencing fluctuations in economic well-being, and variations in vulnerability to contingencies and economic stress, are likely to regard group homogeneity over time as unrealistic. When peer groups are in reality less homogenous than the ideal suggests, the way peer pressure works in practice is called into question. The ideal suggests self-monitoring by individuals of each other and a concern with having to pay fellow borrowers outstanding loans if they default. In practice, repayment discipline is influenced by additional considerations. As will be argued below in the case of BRACs credit operations, staff pressure is crucial for triggering peer pressure because staff threaten to withdraw access to future loans for a larger group of borrowers-beyond the smaller, formal jointliability group. The way in which such pressure is brought to bear increases the perception of risk, and erodes the potential for mutual trust and support arrangements. This increases the exclusionary tendency implicit in many peer group schemes. In contrast, SANASA cooperatives depend on a broader concept of member responsibility rooted in stronger collective management among the members, and the provision of a range of mechanisms which down-play the perception of risk, actively encourage mutual trust and support, and provide protectional support for members facing economic difficulties. These protective mechanisms underline the importance of providing flexible financial services in general, and savings facilities in particular.

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POVERTY, COPING MECHANISMS AND THE NEED FOR FLEXIBLE FINANCIAL SERVICES
The poverty reduction potential of micro-credit schemes is commonly perceived as a promotional process through which poor households graduate out of poverty. This graduation can be simplified as breaking a vicious circle of low investment low income - and low investment by injecting capital in the form of credit to generate productive employment, higher incomes and more investment. However, this model of poverty and the focus on credit as the solution is simplistic, because a range of factors other than investment reproduce poverty and define its qualitative dimensions. Apart from facing limited investment opportunities in activities for which demand may be low, poor households need to cope with vulnerability to economic stresses caused by a variety of factors. Some of these factors are due to structural dimensions of an economy (inflation, seasonality, etc.), others are connected to familial or life cycle effects (such as variable household dependency ratios over time), and others are related to sudden crises such as death or illness in the family, natural calamities or other acts of God. In addition, poor households face sporadic lumpy claims on expenditure which are difficult to cope with for cash flow reasons. These forms of economic stress induce fluctuations in income, purchasing power, consumption and threats to productive resources, and require households to use a range of coping strategies in order to survive. The many factors determining economic well-being, and the inherent vulnerability of poor people, suggest that promoting households through credit services is likely to be more successful if households coping strategies are effective. Credit is also debt, and constitutes a risky strategy for the poorest and most vulnerable to economic stress. Outstanding repayments can place an additional burden on poor households if such obligations coincide with other contingencies or crises. Even the small weekly repayments required by some micro-credit schemes place a strain on those households without regular cash flow. In seasonal economies, especially those with high unemployment and low market demand such as Bangladesh, cash flow problems lead to extensive informal borrowing among group members and their kin in order to service regular and fixed weekly instalments. Helping households to cope with stress implies both a need for repayment flexibility, and the potential contribution of savings and consumption loans to the medium-stress coping strategies outlined in Table 1. The need to strengthen household coping strategies is particularly important for the poorest and most vulnerable, but similar problems are faced by the better off amongst the poor, even if such problems occur less often. In addition, the supplementing of coping strategies through flexible financial services can encourage and actively support attitudes of mutual trust and support between borrowers, enabling the social objectives of solidarity group development to be actualized. This schematic outline of poverty has concentrated on the economic dimensions of deprivation (income, assets and vulnerability) which justify the need for protective as well as promotional support to the poor (which flexible financial services can provide). However, as illustrated in the Sri Lankan case study, where conditions of mutual trust and support can be created in semi-autonomous solidarity groups, such groups are also providing opportunities to counter the more

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Table 1. Schematic hierarchy of coping strategies, approximately ranked by degree of reversibility and value of resource commitment.Source: adapted from Maxwell & Frankenberger (n.d.) and field work interviews. Coping with economic stress
Low-stress coping strategies

Comments
Primarily effective for dealing with minor shortfalls in income; are relatively low value and reversible; insufficient for meeting major crises and contingencies

Expenditure saving activites (gathering fuel, fodder, culinary condiments from common lands) Changes in diet (cheaper foods) and reduced consumption (eating less) Periodic migration by one or more household members to look for higher wage income Calling in small informal debts from kin and neighbours
Medium-stress coping strategies

Using up cash savings Pledging future labour in return for advanced wages or loans Taking cash or kind loans from kin and neighbours Taking cash or kind loans from moneylenders and shopkeepers
High-stress coping strategies

Likely to help counter sudden crises and contingencies, but are less reversible and reduce future coping capacity. They may therefore act as ratchets forcing a household further into poverty (especially if an initial crisis is compounded by subsequent shocks) Hard to reverse; indicators of severe distress and increased vulnerability to further stress. May constitute ratchets from which a household may be unable to recover

Mortgaging or pawning assets (utensils, jewellery, land etc.) Sale of non-productive assets (initially small ones, such as household utensils; or larger ones such as housing materials, tin roofing sheets etc.) Sale of working capital at knock-down prices (e.g. stocks of paddy to be husked, petty trading goods to be sold) Sale of productive assets (small animals, livestock, tools, plots of land etc.)

qualitative dimensions of poverty, namely isolation and powerlessness (Chambers, 1983; 1988). Semi-autonomous solidarity groups can effectively enhance poor peoples influence over how services are controlled and managed, and in a small way can contribute to their empowerment.

CONTRASTS BETWEEN BRACS RDP AND THE SANASA COOPERATIVE NETWORK

The summary of design features in Table 2 presents the main contrasts between BRACs Rural Development Programme in Bangladesh and the SANASA Federation of Thrift and Credit Cooperatives in Sri Lanka. While both programmes are notable for their rapid expansion in the 1980s and 1990s, and both are of comparable size in terms of members, BRACs RDP is more formalized, has a top-down banking structure with a professionalized field staff, and its lending operations have been capitalized by donor funding. In contrast, SANASA is a loose, three-tier federation of cooperatives, based on village level groups which are run by volunteers, manage their own accounts, and are capitalized predomi-

294 R. Montgomery
Table 2. Comparative summary of BRACs RDP and SANASA cooperatives, based on 1993 data BRAC Rural Development Programme
Formation and Started in 1986, developed out of previous history pilot projects; financial services accompanied by other programmes including health, education and training.

SANASA Federation of Thrift & Credit Cooperative Societies

Reawakeningof village co-operatives in late 1970s and early 1980s. A Federation was formed in 1980, to provide technical support and banking services to lower level cooperative units. Approx. 8,000 village level Primary Thrift and Credit Cooperatives (PTCCSs), most of which are members of 27 District Unions, which in turn are members of the apex Federation. Nearly 800,OOO (over 50% women), of whom 65% were in PTCCS affiliated to DUs and the Federation. Remarkable expansion from approx. 20,000 members in 1981. Mainly rural, open to all; prior to 1980s dominated by rural middle income groups; reawakening process has successfullyencouraged poorer peoples membership and the formation of targeted societies; 1992 survey showed 52% of membership below the poverty line. Strong emphasis on a variety of saving facilities as well as loans in all societies. Loan lengths and equivalent interest rates vary between 1 and 24 months, and 16% to 8Oy0 pa. Common to find as many as 12 different loan types in individual PTCCCSs, and at least three types of interest rates. Members must save regulary. but have a choice between higher interest term deposits and open access accounts. All societies provide instant loans, which can be issued on the spot and are for consumption purposes; normally due to be repaid in a month; incur high interest rates (equal to 80% pa). While the Federations technical operations are subsidised by donors, individual PTCCSs are financed by members share capital, own savings

Organizational 165 Area Offices (effectively banking structure branches) overseeing 20,000 Village Organisations (VOs).

Membership

Approx. 830,000 (82% women). Remarkable expansion from 150,000 members in 1986-transferred into the new RDP from previous pilot programmes. Only rural; the functionallylandless (i.e. less than 50 decimals,) poor are eligible. Targeting generally successful;various surveys indicate between 10% and 20% of members have more than 50 decimals.

Poverty focus

Financial services provided

Focus on credit, mainly 1 year term, repaid in weekly instalments. Borrowers must stipulate a productive use of loans. All loans at 20% pa interest rate at time of fieldwork. Compulsory weekly savings and security deposits deducted from loans. Also deductions from loans into a Group Trust Fund (GTF). However, individualssavings controlled by Area Office staff (not VO members), and appears to be rarely used. Consumption loans recently introduced, but take 2 4 weeks to process, and are therefore not useful for meeting immediate contingencies.

Source of finance

Donor funding to Dhaka head office (down lent to Area Offices). Subsidiesobscure estimation of the degree to which operational profits provide finance for lending

Disciplining or Protecting the Poor? 295

Source of operations. According to available 1993 finance (cont.) financial data, members saving constituted under 30% of the value of outstanding loans.

and societies operating profits. These forms of own capital provide a basis for borrowing from DUs under a range of schemes. 1992 data indicate that 97% of outstanding loans granted by PTCCSs are financed by various forms of deposits. PTCCSs are normally between 80120 members, but the range is large (societies of 20, and even 700 members exist). Liability is distributed in most societies by a guarantor system (two persons guarantee another individuals loan). Peer pressure effectively operates at both guarantor and R C C S levels. Protectional mechanisms of open access savings and instant consumption loans reduce incidence of peer pressure exclusions from

Solidarity group Ideal VO size 50-55 members. VO average and liability size in 1993 was 40 members. Ideally, each features VO made up of 5-7 member joint-liability groups which according to field interviews rarely exist.

Ideally, VO has a management committee of several members, but are in practice run by one or two key individuals. Joint liability and peer pressure operates at the VO rather than small group level in practice, and is strongly influenced by hierarchical staff-member interactions.

mccs.

Nature of members participation

Members have no formal influence over savings and credit policy, despite widespread dissatisfaction about lack of access to savings. RDP financial services are uniform throughout Bangladesh.
VOs control no group resources (all deposits, including GTF, controlled by professionalised A 0 staff).

PTCCSs are run by volunteer staff from the membership (external pressure does not apply unless society has overdue loans with the DU) Savings and credit rules are decided by FTCCS members collectively. Guidelines from DUs regarding portfolio composition and interest rates are broad and flexible. Individual societies differ greatly in the services which they provide, because of differing member needs in contrasting local economies.

Note: BRAC figures include branches. VOs and members who are part of the Rural Credit Project (RCP)-a second stage RDP into which financially mature Area Offices graduate after 4 4 years of operation. In terms of financial services offered to members, RDP and RCP are identical (BRAC Sratbical Report, December 1993). For further details of RDP and SANASA see Hulme et al. (1994) and Montgomery et al. (n.d.) forthcoming.

nantly by member shares, operating profits and-most importantly-savings deposits. BRACs financial services focus predominantly on the provision of credit for productive activities, mainly in the form of one year term loans. Regular weekly savings (which are minimal) and security deposits and Group Trust Fund donations are deducted from loans, but these interest bearing savings deposits are not accessible to members. It is not clear that GTF money is ever formally returned to

296 R. Montgomery individual members, and access to personal savings is defined by the principle of allowing 25 per cent withdrawal after five years of membership, and larger withdrawals after 10 years of membership. The only other way to withdraw savings is to leave RDP altogether. These rules, while apparently ensuring that savings deposits are returned to members in due course, mean that savings are not a potential coping mechanism for BRAC members, and that the only real day-today financial services offered by BRAC are loans (which must have a stipulated investment purpose). Unlike BRAC, SANASA strongly emphasizes savings mobilization through various forms of deposits, and village cooperatives offer a range of loan facilities (short and long term, with varying interest rates). Loan use is not prescribed. Short term (and higher interest) consumption loans are one of the most popular and common services provided. BRACs Rural Development Programme in Bangladesh provides an example of a relatively rigid, top-down, credit-focused scheme which is maintaining high repayment rates, but at the cost of a section of its membership and its original social development objectives. In contrast, SANASA cooperatives provide a greater variety of more flexible financial services, which are controlled and adapted by solidarity groups themselves. SANASA cooperatives continue to maintain a high degree of financial discipline without incurring the social costs evident in the BRAC case study. The differences in services, solidarity group dynamics and the way peer pressure operates in practice are the focus of the remainder of this paper.

FINANCIAL SERVICES, PEER PRESSURE AND SOLIDARITY GROUP DYNAMICS IN BRACS RURAL DEVELOPMENT (RDP)
What happens when an individual fails to make repayments on time? Field work in three districts (Rajbari, Faridpur and Sherpur), including interviews in 30 BRAC VOs during 1992-93, revealed that the ideal of peer group pressure based on a small joint-liability group of 5-7 members is too simple. The actual process of maintaining discipline is more complex. BRACs repayment schedules for all loan sizes are uniform: weekly repayments of a loan are started soon after disbursement, and are divided into 52 equal instalments including both principal and interest. An individuals difficulty in meeting such instalments is quickly evident at the weekly VO meetings. Staff are eager to ensure no shortfall in the overall amount collected in such meetings, partly because one of their key performance indicators is on-time VO-level repayment. This emphasis on discipline means that individuals in difficulty will commonly seek immediate help to keep up. In practice, this means approaching kin or close friends, rather than relying on the small formal peer group. However, kin and friends are rarely able or prepared to help with more than a few instalments. When this coping strategy, or any other way of raising cash (as outlined in table 1) fails, BRAC field staff rarely impose pressure on the formal joint-liability group, but work through VO leaders instead. The VO leaders commonly treat overdue instalments as a VO level issue. If the individual continues to default on their instalments, and the outstanding amount

Disciplining or Protecting the Poor? 297 grows or the loan term expires, the VO leader and group (VO) as a whole comes under pressure from the field staff. Rather than invoking the idea that four other members are jointly liable for the outstanding loan, field staff threaten to withdraw access to loans for VO members in general. The use of this sanction was freely admitted by programme staff in several of the five area offices in which fieldwork was carried out; and it is because of the widespread use of this sanction that it is the VO, not the formal sub-groups within a VO, which becomes the jointliability group in practice. In reality the 5-6 member joint-liability groups rarely exist, and especially in older VOs ordinary members cannot name the sub-group leaders stipulated in BRACs formal blueprint of V O structure. Because of staff pressure, and the implications of an individuals late repayments or default for all VO members, collective action against such individuals can be severe. Several VOs provided examples of individuals who had been made to drop out because of their lack of repayment discipline. While it is difficult to confirm in precise terms the economic status of such drop-outs, anecdotal accounts clearly suggested that they tend to be the poorer among a VOs membership. This exclusionary pressure on the poorer and more vulnerable members is an issue that is rarely discussed in the literature on the successful Bangladeshi microcredit schemes. However, one of BRACs own research studies recounts a conversation with BRAC women in which . . . . they told . . . . with pride that they had pulled down a members house because she did not pay back her housing loan (Khan and Stewart, 1992). This dramatic example of violent collective action may not be common- more subtle social sanctions within a community may be all that is necessary. However, examples of forced acquisition of household utensils, small livestock, or other assets of defaulting members were mentioned in several of the VOs. In cases where fellow members had been reluctant to take such collective action they were either directed by field staff to do so, or the field staff themselves had carried out such actions. The scale of this exclusionary problem is difficult to estimate. However, BRACs own statistical reports show a significant drop-out rate amongst RDPs membership. Data for 1992 suggest an annual drop-out rate of 16 per cent, and for 1993, a 10 per cent rate. It is not clear how many of these drop-outs are leaving for reasons other than peer or staff pressure because of poor repayment discipline. Some are certainly leaving BRAC because they are unhappy about the lack of access to personal savings. However, our impression is that most of the drop-outs are leaving because of an inability to fulfil the rigid requirements and discipline inherent in the BRAC lean repayment system, and most of these drop-outs are the poorer among the membership. Even when the immediate reasons for dropping out are stated as being the lack of access to savings, there is a link between this overt cause and the inability to cope with rigid repayment schedules. When borrowers face difficulties due to seasonal or short-term cash flow problems, access to savings facilities and consumption loans have the potential to help the borrower through a period of tight cash flow. At present, BRACs consumption loans go through the same lengthy administrative procedure as other loans, taking several weeks to be approved. This means they are rarely useful for members unless they can foresee a cash shortage and plan ahead. The other potential source of consumption credit would be a managed

298 R. Montgomery
Group Trust Fund-which could supply the resources necessary to provide such short-term loans. Since the GTF is under the control of field staff, and they have no mandate to allow everyday use of this money, such an option is not open to VOs and their members. The lack of savings or consumption loans means that BRAC provides no accessible rapid response mechanisms to protect borrowers when they face short term or more fundamental difficulties in meeting their weekly instalments. In combination with staff sanctions and VOs collective peer pressure, poorer members in distress are faced with few options but to pay up or drop out. Before moving on to the contrasting case of SANASAs financial services, it is important to summarize key points made so far in order to draw out some of the wider causes and implications of the way collective loan liability and peer pressure work in practice within the BRAC programme. In summary:
0 0

The formal 5-6 member joint-liability group rarely exists in practice; a late repayer or defaulter is faced with pressure from field staff working through VO leaders and the total members, who are threatened with limited access to future loans unless the instalments are covered: apart from limited support from kin and friends, there are no mechanisms to protect an individual defaulter from forced acquisition of assets and exclusionary pressure; mechanisms such as VO level resources (the GTF), personal savings and contingency coping consumption loans are not accessible. perceptions of the risk which individuals in distress pose to the VO are enhanced, and the tendency for VOs to weed out more vulnerable individuals who are bad risks is increased, contributing to a programme drop-out rate of between 10 and 16 per cent in recent years.

The wider causes of exclusionary pressures lie not only in programme designwhich places emphasis on repayment discipline rather than protection-but in the nature of members participation and staff-VO relations in general. From the accounts of members of older VOs, and comparing older RDP areas with newer RDP areas, there has been a shift in the nature of staff interaction with members from a relatively egalitarian and participatory mode towards a more hierarchical and managerial mode. A recent report from BRACs Research and Evaluation Division describes this as a shift from a bhai (brother) culture to a sir culture. In RDPs early days, field staff used to be addressed as brother or (in rare cases where there are female field staff) sister. Nowadays, field staff are more likely to be called sir (Mustafa and Ara, 1995). This shift in staff-member relations is partly explicable by (i) the role which field staff play in managing VOs and the absence of any member control over resources or decision making roles; and (ii) the effect of RDPs rapid expansion in recent years. (A third contributing factor may be BRACs shift towards women-only recruitment, and the fact that most field staff are men; the real power of (male) field staff over (female) members may therefore be reinforced by cultural norms of higher male status.) Unlike in RDPs previous pilot programmes, VOs do not control any resources of their own. They have no control over savings accounts or any VO fund. Transactions are recorded at the weekly meetings, but the VO does not keep the records. The management of activities clearly rests in the hands of field staff. In addition, the present generation of field staff in RDP have no experience of

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BRACs earlier programmes which by all accounts were more participatory (the Outreach and RCTP programmes in the early 198Os, see Lovell, 1992). To keep up with RDPs rapid expansion in the last few years, and cope with a significant rate of staff turnover, BRAC has had to employ staff with less experience and possibly less effective training. High turnover of BRAC staff seems to be caused by the attractiveness of alternative employment, and regulations such as the inability of field staff to bring their families to live in or near their postings. Also, such new staff are inducted into a programme focused on credit, with strong career incentives to maintain strict discipline. Arguably, this emphasis on maintaining discipline has been enhanced by the need to justify RDPs rapid expansion to donors. Unlike in previous years, when field staff were ideally facilitators for strengthening solidarity groups (VOs) into village level institutions, present day RDP staff are more likely to perceive themselves (and be perceived by members) as policemenand debt collectors. The results of RDPs expansion are an increasingly rigid and credit-focused financial service system, controlled by staff not members, with an emphasis on discipline rather than protecting poorer members. This emphasis on discipline is transmitted throughout the VO through the staff-leader-member relationships. The VO becomes a credit-onlygroup, focused on maintaining majority access to loans, rather than providing broader mutual support for individual members. Without access to other services, and VO controlled resources, VOs cannot develop into broader, more effective mutual support groups. The way in which risk is perceived, and the way in which peer pressure operates in practice, mean that there is a notable gap between the rhetoric of BRACs social objectives, and the reality of solidarity group practices. This tends to undermine members willingness to extend support to the more vulnerable, and ultimately encourages their exclusion from the VO. This conclusion is highly suggestive of the impoverishment implications of untempered repayment discipline.

FINANCIAL SERVICES, PEER PRESSURE AND SOLIDARITY GROUP DYNAMICS IN SANASA VILLAGE LEVEL THRIm AND CREDIT COOPERATIVES
SANASAs structure, financial services, procedures and degree of member participation all contrast with RDPs. The three-tier federation comprises approximately 8,000 village level thrift and credit cooperatives, with approximately 800,000 members (see table 2). The average size of these primary societies is therefore 100 members. A distinguishing feature of the network is the heterogeneity of these cooperatives. Some are as small as 20 members, and there are several which have become small banks in their own right, with up to 700 members. Within each district there is a local Union in which most primary societies are members, and each District Union is a member of the Colombo based Federation. As a pyramidal structure of federating cooperatives, representation of members is evident at all levels of the hierarchy, in collaboration with professional staff at district and central levels. The Federation and District Cooperatives provide financial and technical ser-

300 R. Montgomery
vices for primary level societies (i.e. deposit services and loans, and certain forms of training in financial procedures, interest rate policies and book-keeping). This pyramidal structure allows cross-lending between regions and primary societies, and is able to access funds from the formal banking sector and donor organizations. One of the key successes of the Federation system involves higher-level functionaries providing the educational and technical support to show primary societies how different types of savings and credit services can be priced, managed and accounted in a financially viable way. The ideology of SANASA features savings mobilization, profitable provision of financial services to various socioeconomic groups and self-reliance at all levels. In practice, the upper levels of the pyramid remain highly subsidized by donor funds; but primary (village) societies have minimal operating costs because they are managed by members who volunteer or are elected to take on administrative roles. Societies are managed by small elected committees reporting to monthly meetings of the general membership. Despite the heterogeneity of members within individual societies, these meetings are highly open and participatory. In most society meetings, clear agendas are set to discuss policies, individual loan applications or the case of individuals requesting help with arrears. In most meetings the longest agenda item is an open forum in which discussions can be initiated by ordinary members. This ability of ordinary members to participate and play influential roles is also based on the openness of accounts. The office holders always provide a summary of the last months transactions at the start of a meeting (and many societies display running financial summaries on the walls of their book-keeping room). Because of the small number of borrowers it is difficult for any information to be concealed, and this transparency reduces the likelihood of malpractice by members in managerial positions. These participatory practices contrast with those of BRACs Village Organization. These dynamics are also strongly influenced by the nature of the financial services provided. The striking features of SANASA financial services are variety and flexibility. This derives from individual societies responding to local needs, based on the occupational composition of the membership and the nature of the local economy. Societies operating near market centres with many members carrying out petty trading activities tend to have a different range of loan facilities than societies comprising mainly small farmers, who are more interested in seasonal production and consumption credit. This heterogeneity of financial services stems from primary societies autonomy and their ability to determine their own rules. Unlike the BRAC RDP, SANASA societies have a variety of loans in terms of size, length of repayment and interest rates to reflect these differences in purpose, needs and risk. It is not uncommon to find societies of 60 members offering over 10 different types of credit facilities for different purposes. One common type of credit provided by primary societies is consumption credit, which are known as instant loans. Unlike the BRAC consumption loans, which need to go through a lengthy formal application process, village cooperatives provide these loans literally overnight to people in distress. Consumption loans are normally due to be repaid within one month, and the annualized interest rates are much higher than other loans (often the equivalent of 80% pa), reflecting both the higher risks and transaction costs of providing such a service. In addition, much more emphasis is placed on savings. Some societies use

Disciplining or Protecting the Poor? 301 security deposits on loans, but more emphasis is placed on voluntary savings in various forms of deposit accounts. Interest rates on savings vary according to type of access and length of deposit (i.e. open access or short-term savings receive lower rates than long-term fixed deposits), and many societies provide special schemes according to member demand: for example, savings schemes for children which parents can subscribe to; or advance purchase schemes for agricultural inputs, such as fertilizer, which the cooperative can buy in bulk for a group of members. Rather than excluding poorer people SANASA cooperatives have managed to convince societies of the viability of bringing poorer people in as members. This downward expansion in the membership is in contrast to the pessimistic literature on cooperatives roles in poverty alleviation, and is discussed in a related paper (Hulme and Montgomery, 1994). The inclusion of poorer members has been easiest in the new geographical areas into which the Federation has expanded the cooperative network (e.g. Puttulam, Hambantota and Moneragala districts). In many of these areas, it is the poor who are forming the new societies, and the middle income and wealthy who have been left out. However, even among older societies in the more economically vibrant districts (e.g. Kurunegala) the Federations educational activities have encouraged older societies to extend their membership, undertake special initiatives and provide facilities for poorer community members. Devices to encourage poorer people to join include revisions in membership rules which previously discriminated against them. Traditionally, members have to make a share purchase to join (Rupees 240 in 1992; wage rates averaged Rs 40-50 per day at this time). With the encouragement of the Federation and District Unions, most societies now allow this share purchase to be made in monthly instalments over an annual period. A 1992 study of 15 societies in both wet and dry zone districts showed that SANASAs membership generally reflects the economic composition of wider society, but that the poor predominate to a greater extent than might be expected (Hulme and Montgomery, 1994, p. 367). 52 per cent of members appeared to be below the official poverty line (a proportion which is higher than the FAOs most recent estimate of 46 per cent for the country as a whole (IFAD, 1992, p. 37). In addition, the proportion of women members in primary societies rose from a relatively low representation to over 50 per cent by 1990, and the proportion of single and widowed women participants is higher than official estimates of their numbers in the population as a whole (Hulme and Montgomery, 1994, p. 367). In several districts there are societies that have been initiated by women, and which were joined only later by men. The field study also produced evidence to show that SANASA cooperatives are bringing real benefits to poorer people (Hulme et aL, 1994). Flexibility in repayment systems is one feature which makes SANASA cooperatives effective in meeting poor peoples needs and problems, quite apart from simple access to credit. While a monthly instalment system is common for repayment schedules, there is a great deal of individual variation within a single society. Variations are negotiated and agreed upon with the management committee and approved at the general monthly meetings of all members. This flexibility is possible because societies are run by neighbours, who are available to ordinary

302 R. Montgomery members at almost any time (unlike a professionalized banking system, where all actions have to be carried out at set meeting times with programme staff). Flexibility in repayment and institutionalized access to savings and consumption loans allows poorer members, or those facing short-term crises, to manage their cash flow more effectively without recourse to the ratchet-like coping mechanisms outlined in table 2 (above). Because of these protective mechanisms the activation of exclusionary peer pressure is less common. Liability in SANASA cooperatives is superficially similar to the practice of handling liability in BRAC VOs. Rather than small sub-groups within a cooperative, SANASA encourages both a reliance on one or two friends who will act as guarantors for an individuals loan, and a society-level ideology of member pressure. This higher level of member pressure on individuals works because of the concept of hot as opposed to cold money. This metaphor was used to explain the fact that societies capital is predominantly members shares and savings-money which is hot and must be handled carefully because it belongs to ones neighbours. Default means that an individual is stealing from neighbours. Cold money includes funds which come from the formal banking system-often perceived as belonging to the state, and therefore treated with less respect. One of the crucial roles of the Federations down-lending of outside funds is to ensure that there is never too much cold money in the system, which might encourage members to default. This concern with avoiding too much cold money derives partly from SANASAs experience with the governments Million Housing Programme in the 1980s. This programme saw poor repayment amongst many societies that had formed primarily in order to be included in this subsidised housing scheme. Societies which are not based on self-mobilized hot money have generally been less successful in the long term. In practice, genuine default is unusual and exclusion of members due to such difficulties was rare within the 15 societies we studied. The need to resort to guarantor liability is avoided by adapting repayment schedules to individual circumstances, indicating a high level of intra-society trust and mutual support. Underlying this trust and support is also an individuals social need to avoid losing respect within the community-a situation with ramifications wider than merely losing access to financial services. Examples of exclusionary pressure on individuals were rare in these 15 societies, and were clearly the result of the flexible financial services they provide. Flexibility in repayment scheduling, savings access, and instant loans protects more vulnerable members from outright default, and thereby avoids the need for joint liability and overt and aggressive peer pressure. The reasons for SANASAs success in bringing more benefits to poorer people, and enabling societies to maintain control over their own affairs and financial services, lie in a variety of factors. But in contrast with RDP and the social costs this programme incurs, two aspects stand out. First, the range of savings and consumption loan services meets the needs of poorer and more vulnerable members to a much greater extent that RDPs more inflexible, limited (credit-focused) financial system. This means that while cooperatives are based on underlying peer pressure to repay, there are several mechanisms to protect both the individual borrower and the cooperative from the need to use such peer group pressure.

Disciplining or Protecting the Poor? 303

Second, SANASA primary societies are run and managed completely by members, who make the decisions on what services their cooperative will offer, and what types of needs the cooperative will meet. The Federation, which includes representatives from District Unions, continually passes on lessons and examples from one area to another. The result has been a proliferation of services, adopted and adapted differently in different areas. As a result, many more SANASA cooperatives have successfully extended their services from merely middle income groups to low income and much more vulnerable groups.

SUMMARY AND CONCLUSIONS

The Bangladesh case study is a programme which fails to provide protectional devices to balance the negative repercussions of maintaining repayment discipline. BRACs policies of inaccessible savings, unattainable Group Trust Funds and limited consumption loan facilities mean that RDPs financial services fail to contribute to the coping strategies which the vulnerable poor use to manage cash flow problems and economic stress. The programmes emphasis on repayment discipline, and the way in which VOs become the joint-liability group in practice is evident in the ways by which peer pressure is activated and reinforced by occasionally aggressive field staff. Such pressures on members create conditions in which the perception of default risks and mistrust of each other are increased. The ideal and ability to provide mutual support are undermined, and the tendency to exclude those facing temporary or sporadic repayment problems is strengthened. In sum, RDPs emphasis on disciplining rather than protecting the poor entails social costs which contradict the broader objectives of solidarity group schemes. That these costs are avoidable is suggested by the contrasting case of the highly heterogenous SANASA cooperatives in Sri Lanka. Exclusion of poorer members due to repayment problems is rare, because of a range of coping mechanisms provided by cooperatives (flexible repayment schedules, open access savings and instant consumption loans). These various financial services encourage a decreased perception of individual risk, encourage more mutual trust and support, and meet the practical needs of poorer people more effectively. The provision of support to individuals in distress is more feasible because individual societies are run by their own members, and savings and credit facilities are adapted to local needs and demand. The responsiveness of SANASA financial services lies in the semi-autonomy, self management and transparency of cooperatives, which allow a high level of member participation. This level of solidarity group autonomy, resource control and active participation by members differs sharply from the top-down, credit-focused BRAC Rural Development Programme. The fact that BRAC fails to meet members needs as effectively as it could was evident during fieldwork discussions. Access to savings, GTF resources and instant consumption loans were all issues of concern to members. In addition, they felt BRAC is insensitive to members views about policy development in general. While BRAC has successfully experimented with open savings accounts, some of the managers resist this idea (for reasons which are unclear at the time of writing). BRAC has also experimented with federations of VOs at local level, but this

304 R. Montgomery

extension of members representation and participation has not been taken beyond pilot stages. One cannot help but suspect that member representation would increase the pressure on RDP to develop alternative financial services which might differ among regions. This would not only slow down the donor supported expansion (and be hard to sell), but also create a need for new administrative and procedural arrangements. Overall, the comparison between BRAC and SANASA suggests a number of practical lessons and design issues:
0

donors and programme managers need to avoid placing too much emphasis on repayment discipline without encouraging and supporting additional protectional devices for poorer borrowers, and accept that such programme development may entail slower organizational growth and longer time horizons for financial viability; micro-credit schemes need to develop a broad concept of financial services for the poor, including various types of loans for consumption as well as investment, and the inclusion of various forms of interest bearing savings facilities; solidarity group programmes need to create staff performance indicators other than repayment discipline, and create incentives which encourage attention to social development objectives; facilitating members participation in local management, policy design and procedural development is necessary if financial services are to develop in ways that are responsive to local peoples needs; if solidarity groups are to achieve broader social objectives and roles, they must have at least some resources which are self-managed, and can be used as local members deem appropriate (either through savings mobilization, or through accessible group trust fund arrangements based on security deposits).

BRAC (and other micro-credit schemes) could well learn from the experience of SANASA when considering options for future programme development, and ways of achieving the broader social objectives of institutionalising village level organizations as mutual support groups. Without such changes, RDPs continuing process of going to scale will remain a supply driven expansion-rather than a demand led evolution-of financial services for the poor.

REFERENCES
Berenbach, S. and Guzman, D. (1992). The Solidarity Group Experience. Bethesda: Gemini Working Paper No. 31. BRAC (Bangladesh Rural Advancement Committee) (1992). Statistical Report, Rural Development Programme and Rural Credit Project. Dhaka: BRAC. BRAC (1993). Statistical Report, Rural Development Programme and Rural Credit Project. Dhaka: BRAC. Chambers, R. (1983). Rural Development: Putting the Last First. Harlow: Longman. Chambers, R. (1988). Poverty in India: Research and Reality. Sussex: Institute of Development Studies Discussion Paper No. 241. Hulme, D. and Montgomery R. (1994). Cooperatives, credit and the poor: private interest, public choice and collective action in Sri Lanka, Savings and Development XVIII (3), 359-82.

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Hulme, D. and Montgomery R. with Bhattacharya D. (1994). Mutual finance and the poor: a study of the Federation of Thrift and Credit Cooperatives (SANASA) in Sri Lanka, Working Paper on Finance for Low Income Groups No. 11. IDPM, University of Manchester. IFAD (1992). The State of World Rural Poverty. London: Intermediate Technology Publications. Khan, N. and Stewart, E. (1992).Institution Building and Development in Three Womens Village Organisation: Participation, Ownership and Autonomy. Dhaka: BRAC Research and Evaluation Division unpublished paper. Lovell, C. H. (1992). Breaking the Cycle of Poverty: The B R A C Strategy. West Hartford: Kumarian Press. Maxwell, S. and Frankenberger, T. R. (n.d.). Household Food Security: Concepts, Indicators, Measurement. A Technical Review. Unicef & IFAD. Montgomery, R., Bhattacharya, D. and Hulme, D. (n.d.). Credit for the poor in Bangladesh: the BRAC Rural Development Programme and the Government Thana Resource Development and Employment Programme,. In (ed) Mosley P. and Hulme D. Finance Against Poverty. London. Routledge. Mustafa, S. and Ara, I. (1995). Main Findings Report of the R D P Impact Assessment Study. Dhaka: BRAC Research and Evaluation Division. Osmani, S. R. (1991). Social Security in South Asia. In E. Ahmed et al. (eds) Dhaka: Dhaka University Press. pp. 305-394. Rutherford, S. (1994). Final Report of Study on Alternative Credit Delivery Systems for the Thana Resource Development and Employment Project. Unpublished report. Westergaard, K. (1994). Peoples Empowerment in Bangladesh-NGO Strategies. Copenhagen: Centre for Development Research Working Paper 94.10.