Formalizing Microcredit: Crossing the Bridge Between Non-Governmental Organizations and Commercial Banks

This paper reviews the existing literature on micro credit with a focus on the involvement of commercial banks in micro credit operations. The paper explains that:

• NGOs, are not only effective at reducing poverty, but are also sustainable as market entities;
• Many NGOs are transforming into commercial banks and many banks are getting involved in micro credit.

However, this transformation faces some difficulties, which are:

• Lack of skilled human resources, proper institutional capacities and a developed financial infrastructure;
• High transaction costs, combined with low profits;
• Internal conflict between the NGOs' goal of serving the poor and earning maximum profits.

The paper concludes that:

• In recent years, a number of NGOs have transformed themselves into formal banking institutions because of the demand, and desire, to improve and expand their services;
• Many banks have also involved themselves in micro credit and have, thereby, diversified into new markets and have raised profits, while cultivating their image as socially responsible institutions.

The paper recommends that:

• Both banks and NGOs should invest in adjusting their structures, operations and human resources;
• There is a need to:
  • Explore mechanisms fostering financial sustainability;
  • Analyze and document the experience of several MFIs, who have developed and used lending technologies that balance low transaction costs with high repayment rates;
  • Understand the administrative structures and processes that ensure transparency and control of operations;
  • Develop flexibility to deal with the changing environment or unexpected shocks.