Village Banks: The New Generation - How IFAD Helped FINCA Set Its Village Banking Programmes on the Road to Commercialization

This paper discusses the benefits and constraints to commercialization among MFIs, focusing specifically on FINCA International Inc. (FINCA). FINCA received a grant from International Fund for Agricultural Development (IFAD) to aid its transformation process.

MFIs are increasingly transforming into commercial banks to meet their growing needs for capital. Transformation offers benefits as well as challenges to MFIs. Benefits include growth in assets, portfolio expansion, product diversification and the ability to better serve their target markets. Obstacles include:

• Lack of MFI capacity to produce business plans and cash-flow estimates;
• Lack of transparency, adequate internal controls and management information systems;
• Unfamiliarity of mainstream financial institutions with MFI objectives and methods;
• Bank hesitation to lend to MFs.

Donor resources can help MFIs lessen commercialization risks. IFAD’s grant of US $600,000 to FINCA helped it to access commercial funding and increase village banks’ earnings, assets and scale of operations. FINCA was able to refine the village banking model, and reward clients and groups that met higher performance standards. It was also able to increase outstanding loans and number of clients while decreasing administrative costs.