Commercial Banks and Microfinance

This paper explores the provision of microfinance services by commercial banks. It studies downscaling models used by financial institutions to enter the microfinance market and defines regulatory provisions for governing downscaling operations. The paper distinguishes between upgrading of MFIs as regular financial entities and downscaling of commercial banks to increase the outreach of financial services. It discusses four commonly used downscaling models, namely,

• Creation of an internal microfinance unit in the bank;
• Establishment of a financial subsidiary legally separated from the bank undertaking microfinance activities;
• Creation of a service company that generates bank owned microcredits;
• Formation of strategic alliances with nonbanking institutions in the microfinance sector.

The paper identifies advantages and disadvantages for banks when competing in the microfinance market. It presents examples of successful implementation of various microfinance models, and analyzes microfinance regulations and government policy initiatives in Brazil, Chile, and Colombia. The paper includes a case study of downscaling operations in Argentina.