Banks are entering the field of microfinance in Latin America at a very rapid pace, and now supply 33% of total microcredit in the region. While banks had long shunned microfinance, they have been increasingly drawn to this sector by increased competition in their traditional markets, the lure of high profits from microlending, and the potential for rapid growth in a still largely unserved market. Despite the increasing interest and rapid entry of banks, many continue to suffer from the revolving door syndrome, in which a bank enters microfinance with high expectations and leaves disappointed, perhaps after only a few years or even less. Typically, the bank has lost money or earned only meager profits for all of its efforts.
In this course we will examine 9 best practices to help banks avoid such failures, drawing on lessons from numerous cases of success and failure experienced by banks in microlending in the recent past. One of the key best practices is choosing the best structure in which to place the bank’s microlending operations, whether this be an internal unit within the bank, a service company, or a lightly or heavily regulated subsidiary. We will examine the pros and cons of each of these structures, how these pros and cons and the resulting choice of best structure depend on numerous country and individual bank characteristics, and how the success or failure of the entire microlending operation can hinge on the choice of structure.
We will discuss linkage models, in which a bank teams up with with an NGO or other microfinance institution in order to reduce costs or broaden the availability of services to clients. Among other topics, this discussion will examine and critique the ICICI Bank Partnership Model.
Finally, we will examine the elements of an appropriate microlending methodology and how banks must adapt their lending practices to the very special nature of the microenterprise sector. The inclusion of this topic reflects the fact that another major reason banks fail in microfinance is because they do not offer products and utilize processes that are appropriate to microlending. We will examine the major differences between lending and microlending and discuss strategies for overcoming the challenges presented by the latter. We will contrast individual, group, and village bank lending techniques, discuss when each is appropriate, and examine best practices for each.
This course is designed for the managers, executives, and other staff of banks and financieras that are offering, or are considering offering, financial services to microenterprises. It is also designed for personnel from microfinance institutions, donors, governments, northern NGOs, social investors, consultants, and any others with an interest in how to make microfinance work within the context of a bank or financiera, or with an interest in best practice microlending methodologies.
