Commercial Bank and MFI Linkages: Tools for Assisting MFIs in Partnering with Commercial Banks
This guide explains the concept and process of service agreements between MFIs and commercial banks. It highlights negotiation and documentation issues that MFIs are likely to encounter when entering into a service agreement with commercial banks. Servicing arrangements involve MFIs that act as service agents or partner banks for commercial banks. MFIs may consider engaging in servicing arrangements with banks in order to:
- Diversify, expand, or lower cost of funding from banks;
- Reduce pressure from risky capital adequacy ratios;
- Encourage downscaling by local banks to reach microcredit markets;
- Gain credibility as service agent before servicing the MFIs own portfolio;
- Tap into economies of scale of commercial banks.
The guide discusses the role of documentation and negotiation in service agreements, and describes the use of term sheets. It explains the provisions of a service agreement, namely, introductory provisions, financial terms, representations and warranties, covenants and termination/expiration provisions. It includes a sample term sheet, checklist for MFIs considering service agreement and a note on the role of legal counsel.
