Tapping the Underserved: Formal and Semi-formal Financial Institution Partnerships

This paper analyzes the pros and cons of strategic partnerships between MFIs and Formal Financial institutions (FFIs).

The paper points out that while several constraints hinder MFIs from offering services beyond credit to their clients, FFIs often lack the systems and incentive to focus on the poor. A partnership combining the strengths of MFIs, namely, efficient distribution base, extensive outreach and good relationships with the poor, and that of FFIs, namely, technical know-how and regulatory mandate to offer complex financial instruments, could overcome these issues and further financial inclusion. The paper suggests potential products that such a partnership could offer:

• Microfinance-driven life insurance that extends beyond basic credit-linked insurance and protects against disease and asset loss;
• Money transfer and remittances through MFIs;
• Services such as bill payment and purchase of train and bus tickets.

The paper presents a framework illustrating the operational aspects of an MFI-FFI partnership. It also points out the challenges for MFIs and FFIs in ensuring a successful partnership. The paper concludes that the key to overcoming these challenges lies in choosing partners carefully and defining the roles and responsibilities of each partner.