Search Results for: Microfinance Institutions Bill India

Downsizing of commercial banks, greater number of partnerships, increasing amount of local currency deposits, and the integration of the commercial and microfinance sectors—all current trends—are tightly linked.

As commercial banks have realized that poor people’s finance can be profitable, an increasing number have gone down market to tap lower income clientele. The World Bank’s microfinance unit, the Consultative Group to Assist the Poor, estimates that there are currently around 225 commercial banks “engaged in microfinance”— a figure that is increasing.

The main reasons for the emergence of commercial banks at the low-income level are: 1) Competition in existing markets driving banks into new ones, 2) Excellent repayment rates by micro-entrepreneurs, and 3) Technology allowing the poor greater access while transactions remain cost-effective. Though governments in some developing countries have required commercial banks to work in certain sectors, banks are increasingly lured in by the low risk, stability, and potential growth opportunities in the microfinance market. They are entering either directly by utilizing their own resources such as an internal microfinance unit, or with existing providers through partnerships.

Partnerships between MFIs and commercial banks have enabled each to leverage their competitive advantages. While MFIs are more knowledgeable at the community level for instance, banks have the advantage in greater access to capital and existing infrastructure. The meeting of the commercial and microfinance sectors has come about through their collaboration. MFIs have scaled up to “access higher levels of credit, augment their portfolios, and strengthen management and efficiency levels,” while commercial banks have purposely scaled down to profit from this emerging industry. Both types of institutions “scale-up and scale-down” by redesigning their financial products to suite the clientele they are targeting.

Integration between these sectors leads to another current trend in microfinance—the increase in deposits as a source of funding. It is important for MFIs to turn from foreign debt investment, which is vulnerable to foreign exchange risk, to their own domestic and regional markets so that domestic savings can be transformed into “productive loans for the poor.” Due to limited knowledge and a lack of trust beyond the community, the local poor may therefore be more inclined to make deposits into local savings accounts. Within the last year for instance, the number of accessible savings and loan accounts among the poor has gone from 750 million to 1.4 billion. Furthermore, and importantly, foreign currency risk can be avoided when MFIs borrow and lend in the local denomination.

One of the main links between these trends is technological advancement. Efficient technology has allowed smaller and simpler banking transactions to become more cost effective, motivating commercial banks to scale down and reach a greater number of people. Low cost ATMS with picture and voice prompts for example, are bringing in rural and illiterate clientele. An in-country example is the State Bank of India, which is reaching out to whole villages through 10,000 personal computer kiosks with ATMs. Regional MFIs that are scaling up on the other hand, are able to link into international ATM networks, forcing greater integration of the two sectors. Local currency deposits have the potential to increase further from an expansion of service machines and phone banking systems. Such progress in physical banking and financial services infrastructure poises microfinance to emerge as an asset class.

1) Main article discussed in entry, United Nations Capital Development Fund (UNCDF): “Microfinance—Where We Are Now: And Where We Are Headed.”
2) The Consultative Group to Assist the Poor (CGAP): “Commercial Banks and Microfinance: Evolving Models of Success.”
3) “Microfinance Sustainability through Private Sector Partnership.”
4) Inter American Development Bank (IADB): “Savings Becomes First Source of Funding for Microfinance.”
5) “Managing Foreign Exchange Risk: The Search for an Innovation to Lower Costs to Poor People.”
6) “Microfinance: Facts and Figures.”
7) “Financial Institutions with a ‘Double Bottom Line’: Implications for the Future of Microfinance.”
8) “WSBI’s Contribution to the Collection of Data on Accessible Finance: Telling the Supply Side of the Story.”