Banks are targeting the ‘missing middle’ in developing countries – but should they be reaching further down the financial pyramid?

by 15th Dec 2014
Asiya (right) has revived her dressmaking business thanks to a loan from her village savings group (Bangladesh, 2013) Asiya (right) has revived her dressmaking business thanks to a loan from her village savings group (Bangladesh, 2013)

I have just spent a few days in Dhaka talking to the Bangladesh Central Bank and a number of the key commercial banks in the country, as part of a research project into the role of banks in furthering financial inclusion. At CARE International, our focus is on the poorest people at the ‘bottom of the pyramid’, and the research so far has posed a key question – what do we think of banks placing a strong emphasis on the Small and Medium Enterprise (SME) market, rather than reaching further down the pyramid?

CARE’s perspective

CARE’s engagement in financial inclusion is based on our model of Village Savings and Loan Associations (VSLAs), where a group of people in a poor community come together to save and to lend to one another. We’re now working to link these groups to the formal financial sector as their needs for financial services become more pressing and more sophisticated. So our approach to financial inclusion is quite strongly focused on bridging the gap between ‘bottom of the pyramid’ individuals, particularly women, and the commercial banks.

The problem of the ‘missing middle’

The research which CARE International UK is currently doing with Accenture, the global consulting firm, aims to uncover key trends in the role of banks in furthering financial inclusion in developing countries, with a particular emphasis on women living in poverty. However, we’re finding that some banks, both under central bank guidance and operating from their own commercial interests, are taking a specific interest in providing banking services to previously unbanked small businesses.

These businesses, sometimes sole practitioners but often having a small number of employees, are not among the poorest people in the countries where the banks work. But they are an important sector whose needs are widely recognised in the development community as not being met by the commercial banking sector. The lack of banks providing credit and services to these businesses is often characterised as the ‘missing middle’.

The challenge for our research

The question that we as a research team face is how much credit (sorry for the pun) we should give to banks which have a very strong commitment to this generally under-served and important market, but which may be doing very little for micro-enterprises, individuals and savings groups.

The reason for asking is that in two of the countries which I have now visited for our research, there is a strong emphasis, and a lot of innovation, from banks in reaching out to the small enterprises that comprise the ‘missing middle’. New products are being developed, new sales channels are being established, and banks are competing on convenience, rates, value-added services offered and brand positioning.

What I think we should do

It seems to me that we should be supportive of these efforts to address the ‘missing middle’, particularly when the businesses being supported by the banks are rural and/or run by women – traditionally the two most egregiously under-served market sectors.

However, we must continue to challenge the banks to reach even further down the pyramid, to the one person micro-enterprises, and indeed to people living in poverty who do not even have the opportunity to build a livelihood enterprise. Many banks will argue that this is the role of microfinance institutions: in a future blog I will pick up that challenge and attempt to explain why we still think the banks have a key role to play, even at the very ‘bottom’ of the pyramid.

Gerry Boyle

I lead CARE International UK’s policy analysis and advocacy around value chains and dignified work. I originally joined CARE as the Senior Policy Adviser on Private Sector Engagement. With the advent of our new Global Programme Strategy which put a particular emphasis on women’s economic empowerment, my focus changed a little, although I still work extensively with issues in the private sector and with CARE’s corporate partners.

Until recently I spent a lot of my time on financial inclusion, now looked after by my colleague Fiona Jarden. I also co-chair the Bond Private Sector Working Group.  Immediately before I joined CARE I worked for Oxfam as Head of Business Relations for about three years, but the vast majority of my career was spent as a management consultant including being a consulting Partner at Deloitte, where for a time I led Deloitte UK’s Consumer Business consulting practice, serving many major multinationals. My original degree was in Law from Oxford University, and in 2008 when I left Deloitte I did an MSc in Philosophy and Public Policy at LSE.

One good thing I've read

Amartya Sen’s Development as Freedom. It provides a framework for many people’s modern understanding of what is development, based on a profoundly human-centred approach rather than anything instrumental. And to check whether one personally is doing enough to fight poverty, I recommend Peter Singer’s The life you can save: Acting now to end world poverty – it’s very clear and easy to read but very challenging! Finally, Ha-Joon Chang’s Bad Samaritans: Rich nations, poor policies, and the threat to the developing world is a very readable guide to economic development which argues strongly against many of the prevailing orthodoxies.

Email: boyle@careinternational.org

Twitter: @gerryboyle10