Commercial Banks in Microfinance: Best Practices and Guidelines for Project Design, Monitoring, and Evaluation
By Glenn Westley (06/07, MSM-138, En, Es) See also Microenterprise
It has been shown repeatedly in Latin America and the Caribbean that microfinance is a highly profitable market segment that is greatly underserved. Although banks are significant players in this market, supplying about one-third of the region's total microcredit, they continue to suffer from the revolving door syndrome, in which a bank enters microfinance with high expectations and sometimes leaves disappointed, perhaps after only a few years or even less. Typically, the bank has lost money or earned only meager profits for all of its efforts. There are two main causes for this syndrome, which has affected numerous banks. First, there is the technical failure that these banks often don't really understand microfinance and how to make it into a profitable business line. Second, there is the commitment failure that these banks often are not sufficiently committed to microfinance that they are willing to do the many things needed to make microfinance work and also to wait the years it can take for the microfinance portfolio to grow to where it has an appreciable impact on overall bank profits.
Banks have an enormous capacity to deliver microfinance services (that is, to downscale) given their many inherent advantages such as extensive branch networks, well-established back office systems, large capital base, access to loanable funds, system of private ownership which encourages sound governance and the efficient delivery of services, control by established regulatory authorities, and ability to offer deposits, loans, and other financial services. Hence, downscaling failures represent not only a great waste of resources but also of opportunities. It is hoped that by following the best practices discussed in these guidelines banks will realize their potential to help serve the many millions of microentrepreneurs who currently lack financial services and thus achieve the double bottom line of serving their shareholders as well as the greater social good.
This document aims to provide guidance to IDB staff on how to prepare bank downscaling projects, from the design phase through to monitoring and evaluation-using any of a number of IDB project vehicles. Given the importance of bank commitment, the document also emphasizes choosing banks that are committed to offering microfinance services and on structuring the project in ways that ensure this commitment. Staff interested in furthering the financial democracy goals of the IDB's recent Opportunities for the Majority (OM) initiative will often find that banks and bank downscaling operations offer an excellent avenue for achieving rapid results in this important area.
Last updated: 06/20/07
