Ebook Commercial Banks In Microfinance: New Actors In The Microfinance World
This is one of the first reports written about the role of commercial banks in microfinance. The reason is simple: there has been little to tell because commercial banks have been so notably absent in this field. In their absence, microenterprise lending has developed on an alternative track through a large number of non-governmental organizations (NGOs) and other specialized financial institutions.
Dedicated to improving the lot of the poor in developing countries, these microlending NGOs first entered the microenterprise field in the 1980s, responding to the critical income and employment opportunities of their urban and rural clientele. Today some leading NGOs have created financial technologies that serve increasing numbers of the poor, generate repayment rates that compare favorably to many traditional commercial banks’ own loan performance, and have achieved increasing levels of sustainability, even to the point of outright profits without subsidies (Christen, Rhyne, Vogel, and McKean).
Nevertheless, the majority of NGOs have encountered serious problems of sustainability. This suggests there may be serious flaws in the NGO approach that need to be acknowledged. These appear to emerge from their organizational design; i.e., property rights and governance structures, features that are generally strengths in commercial banks. At the same time, NGOs usually are not responding to the widespread demand for deposit services from their clienteles, a demand effectively serviced by banks. Finally, it should be noted that the most successful, pathbreaking NGOs, two of which are investigated in this study, are currently transforming themselves into regulated financial intermediaries that incorporate deposit services as a growing part of their services.
A surprising number of commercial banks in developing countries are now beginning to examine the microfinance market. Stiff banking competition in many countries has forced some to diversify into new markets. Some seek a new public image. Others have heard about the profits of successful microenterprise banks in Indonesia and financial NGOs-turned-banks in other countries. Over the last five years, their exploration of this new market has been facilitated by donor-funded loan guarantees, central-bank rediscount lines, and specialized technical assistance. Although the initial funds for loans frequently came through donor intermediated sources, commercial banks in time began to draw upon their own deposit sources for a growing share of their total funds for microloans.
While traditional commercial banks and finance companies are beginning to look at ways to service the large number of potential clients for small loans, many microenterprise lending NGOs with heavy case loads have begun to scale-up operations by transforming themselves into regulated banks or specialized financial institutions offering microdeposit facilities as well as microloans. The new NGOs-turned-banks and the traditional banks are beginning to converge on a single potentially profitable market but from two sharply contrasting financial worlds.
NGO and bank operations, however, hardly begin to cover the demand for microfinancial services. NGO programs are generally minuscule in each country, and the banking sector is still by and large just initiating its entry into this market niche, although in some countries banks are already larger providers of loans to microentrepreneurs than NGOs (Almeyda, 1996).
The U.S. Agency for International Development (USAID) has been concerned with the question of how to expand services to microenterprises on a sustainable basis, and in November of 1996 it sponsored a conference with 17 regulated financial intermediaries from 16 countries. Among the participants were state-owned banks, private commercial banks, regulated finance companies and NGOs that had transformed themselves into banks.
The event was a first attempt to convene bankers involved in microfinance to share their experiences, learn best practices from one another, and discuss obstacles to further expansion. This study draws principally from interviews held with these bankers. In a preliminary fashion, it documents some of this fledgling and diverse experience.
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