The Service Company Model: A New Strategy for Commercial Banks in Microfinance

This paper explores the manner in which commercial banks can serve microfinance markets. The paper states that banks have distinct advantages and they can offer serious competition to traditional MFIs. Banks have the benefit of:

• Network of branches;
• Low cost funds;
• Brand equity.

However, in the absence of market knowledge and suitable products, banks are unable to participate in microfinance markets. Using case studies from Haiti and Ecuador, this paper presents the advantages that banks could derive by partnering with a service company:

• Service company does the work of promoting, evaluating, approving, tracking and collecting loans;
• Loan remains in the books of the bank.

The service company model:

• Establishes a long-lived structure with its own governance;
• Provides a more transparent framework for operation;
• Is an attractive structure for involving technical partners as investors and participants in governance;
• Retains all the advantages that the bank can bring in the microfinance market.