Kristie Wang

Innovations in Financial Inclusion: Community Development and Co-operative Strategies: Ashoka Changemakers has Launched the G20 Financial Inclusion Challenge

Editor’s Note: Last week, the Mexican Presidency of the G20 and Ashoka Changemakers officially launched the G20 Financial Inclusion challenge during the summit in Los Cabos. It signaled the G20’s continued prioritization of financial inclusion as a component of stable and vibrant financial systems. Visit the competition page and read about the latest innovations in financial inclusion—or enter your own for a chance to win a grand prize of US $100,000 in unrestricted funding.

There are 2.7 billion adults worldwide without access to financial services like savings accounts, insurance, and credit. Social entrepreneurs are looking at hard lessons from the microfinance crisis, and are creating a new class of innovations to meet the financial needs of impoverished communities.

They are redesigning banking models and applying holistic approaches that address systemic barriers like high transaction costs and the lack of flexible loan products tailored to the poor. For example, Bankomunales improves upon informal borrowing networks to make them more secure and efficient.

Founded by Ashoka Fellow Salomón Raydan, Bankomunales organizes communities to form borrowing circles that pool capital and self-determine interest rates and repayment terms for microloans up to $500. Members act as “shareholders” of the bank and receive returns via interest payments.

Why focus on informal networks? Establishing branches in impoverished communities is prohibitively expensive for most traditional banks. And microfinance institutions must charge relatively high interest rates (typically between 26 and 60 percent) in order to recover transaction costs and remain financial viable. (The smaller the loan amount, the higher the interest rate must be.)

Bankomunales’s co-operative approach sidesteps the need for formal financial institutions and mobilizes capital and networks of trust that are already present in the community. Because the bank is community operated and owned, interest rates fluctuate between 4 and 5 percent.

“The microfinance movement brought the evil of loan sharks to the world’s attention,” Raydan said. “But not all informal borrowing is evil. People have been borrowing money from family and friends for ages. They just need a more secure, reliable, and efficient way to do so.”

Raydan believes that models like Bankomunales are needed to reach people that formal institutions will not serve because doing so isn’t profitable. Once the poor can save money safely and access microcredit at low interest rates, they can ultimately raise their incomes until they are eligible for banking services from the formal financial sector.

“Models like Bankomunales serve as complements to the formal banking and microfinance sector—not competition,” Raydan said. “The reality is that after 40 years, microfinance has reached 150 million people—only 2.5 percent of those in need.

“It’s not working efficiently or fast enough. But when Bankomunales members reach a particular point of income generation and outgrow what the community bank can provide, they can then enter the formal system.”

Other social entrepreneurs like Joaquim Melo are also pioneering community-driven approaches to banking. Melo’s organization, Banco Palmas serves a favela, or shantytown, located outside of Fortaleza, Brazil with a population of 30,000.

By creating Banco Palmas, Melo aimed to address a repeating cycle of poverty that plagued many microenterprises in Brazil: local entrepreneurs could not access credit to start or grow businesses, and impoverished residents could not buy. As a result, entrepreneurs tended to fail and communities remained trapped in poverty.

Banco Palmas confronts these challenges through a three-pronged strategy. It offers two types of credit: microloans for businesses and purchasing credit for consumers via a credit card valid only at local businesses.

To encourage consumer spending to stay local, the banking model incorporates a unique twist—Palmas, a form of local currency that consumers can spend at a discount at local businesses. (Palmas can be exchanged for official currency for a small fee).

Owned and operated by the community, the Banco Palmas is able to keep interest rates low (set at a sliding scale), and can invest all profits back into the community. It also leverages local relationships to gauge credit worthiness and determine flexible borrowing terms. Borrowers are vouched for by neighbors or institutions like churches and clubs for their ability to repay their loans.

The result: a vibrant, sustainable local economy. An astonishing R$1.2 million circulates in the community each month. Local businesses are empowered to produce, residents have the ability to buy, and the entire community benefits economically and socially.

Melo views this virtuous economic circle as the key to lifting communities out of extreme poverty and preparing individuals for participation in the formal marketplace. And through partnerships with large commercial banks, Banco Palmas is able to offer formal banking services like savings accounts, pension services, and bill payments.

Financial inclusion is proving to be an exciting and rapidly changing area of innovation. It will be interesting to see how mobile technology drives new banking models.

Other trends to watch include microinsurance, cashless payments and remittances, improved technology platforms, and banking partnerships with local retailers. Many of these solutions eliminate distance barriers and slash transaction costs.


Bankomunales was first piloted in rural indigenous communities in Venezuela. It has since been successfully replicated in more than 300 communities in 17 countries and has mobilized more than US $50 million in investment and credit, using capital sourced entirely from within the communities.

The Banco Palmas model has been replicated in 52 communities in Brazil and resulted in the formation of the Brazilian Network of Community Banks. It has created more than 2,000 local jobs. Efforts to found hundreds of similar banks are in progress.

financial inclusion, microfinance