villagefinance

Savings bank in Cambodia. Keeping the savings promise is about far more than record-keeping.

Poor villages remain out of reach of many essential microfinance products. This is not a product development problem; it is a chronic and agonizing market failure resulting from a failure in the governance of microfinance transactions.

Oliver Williamson writes that “[a] governance structure is usefully thought of … as an institutional framework in which the integrity of a transaction, or related set of transactions, is decided” (The Mechanisms of Governance, p. 11).

For example, a savings account is a ‘related set of transactions.’ For it to be genuinely safe and flexible, a number of supply-side promises must be kept. These include:

• protecting all savings from loss;
• paying correct interest at an agreed schedule; and
• providing withdrawal options under pre-agreed conditions.

Each of these promises adds to the cost and complexity of transactional governance.

Williamson argues that contracts are inherently incomplete, and that transactional uncertainty is central to all business decision-making.  Given this circumstance, parties to a contract must often continue negotiating its terms long after it is executed.

In the oral village, savings transactions are not contemplated in law or tradition. The literacy of savers is an administrative fiction, sealed with a thumbprint. Villagers may question the willingness or capacity of leaders to keep complex savings commitments, so they keep their money at home. The devil of transactional governance lurks in the details that undercut trust: especially the effectiveness of mechanisms of accountability and transparency.