Community banking for development: The case of Community Bank in comparative perspective 1994–1996

The perception has existed that most formal financial institutions are incapable of breaking old habits. Traditional financial institutions are incapable, owing to the design of corporate governance, to deliver cost effective financial services to underdeveloped and marginalised poor people. The granting of microloans to the poor or the informal sector by financial intermediaries is seen as unprofitable. Despite strong demand for relatively small credit allocations, financial intermediaries are reluctant to supply credit to the poor or informal sector because of perceived high default rates, lack of collateral and high transaction costs. The latter involve two categories of cost, ie real resource costs of acquiring, screening, selecting and enforcing contracts, and gathering relevant information about the borrower, as well as the costs incurred in case of default due to imperfect information on informal sector activities. Further costs arise in providing service outlets in villages and small towns, or in the South African case, security-risk urban townships. The consequence of these considerations is that informal sector lending, or the provision of credit to the poor, has not been undertaken on any significant scale by formal sector financial intermediaries.