Commercial Banks in Microfinance: New Actors in the Microfinance World

This paper shares findings of a survey of commercial banks that participated in a USAID conference to examine the expansion of banking services to microenterprises in the developing world.

Commercial banks typically cite the risk of default, high costs, socio-economic and cultural barriers as reasons that prevent their entry into microfinance. Despite these constraints, banks have various organizational and structural features that allow them to offer microfinance services. The paper states that:

• Substantial financial liberalization offers better prospects for experiments in microfinance;
• Commitment of top management is necessary for thriving microfinance operations;
• Scale of operations depends on the degree of independence of the MFI;
• Use of deposit base to finance microfinance portfolios depends on the opportunity costs of using deposits;
• Image or bad publicity concerns associated with charging higher interest rates to poorer clients deters banks from setting up microfinance operations.

Finally, donors can help develop and encourage the adoption of prudential regulatory frameworks that recognize the special nature of microfinance. They should support dialogue between banks providing microfinance services and regulators to help educate supervisory authorities on the difference between microfinance and traditional banking.

This document is available in French, Spanish, Arabic and Chinese here.