Learning

Financial sector linkages

Category:

Why may microfinance institutions need “strategic alliances” with formal financial institutions? How can such alliances be made and managed? MFIs have always been most concerned, quite rightly, with their links ‘down’ to their clients. Should they work through groups or individuals, what kinds of groups, what kinds of NGOs or community institutions should they work through, and how; these are the main questions that have preoccupied their management.

More recently, however, as MFIs have matured and started to look beyond their original funders, and to offer new products in addition to micro-credit, they have started to look ‘up’ to more formal financial institutions (FFI), such as commercial banks, insurance companies, and many others, and to forge new alliances, for new purposes. And many of these formal institutions are themselves starting for the first time to look ‘down’ to the microfinance market, and to examine the potential of MFI as intermediaries through which they can deliver their services to the growing market of ‘the poor’.

This set of session guides is designed to assist trainers who want to help MFI and FFI staff to identify and manage such strategic alliances more effectively, for the ultimate benefit of their clients. They are suitable for a two day workshop.

It is assumed that participants have a basic understanding of finance. They should know the difference between debt and equity and they should understand the concept of gearing. If they do not, the instructor must fill the gap.

Resources

Session 1: What kind of institution should an MFI be?

This session is designed mainly for staff of MFIs and those who work with them, rather than for bankers or staff of other financial institutions which may be involved in partnerships. The aim is to enable participants to identify the range of possible legal forms which an MFI can take, and to select the appropriate form for a particular institution at a particular stage in its evolution. This is extremely important as it will affect the types of alliances that can be created with other financial institutions and the willingness of investors to entrust them with their funds.

Session 2: Types and sources of finance for MFIs

This session is intended to enable participants to identify and describe the different types and sources of on-lending finance which are available for MFIs and to select the appropriate type for particular institutions in the stages of their development. It is designed for staff of microfinance institutions rather than bankers.

Session 3: What kinds of institutions can MFIs link to?

This session is designed to enable participants to identify the different types of institutions with which their MFIs may be able to make mutually satisfactory linkages or strategic alliances, and to identify their respective priorities and needs in order to negotiate relationships which satisfy all parties.

Session 4: Case Study

The objective of this session is to enable participants to identify the potential of partnerships between a large commercial bank and local MFIs, but also to see the potential dangers from both parties’ points of view and, thus, be able to minimise them. The session is based on a case study of ICICI Bank in India and the linkage model that it developed with local MFIs.

Session 5: Alliances and partners beyond funds

This session is designed to enable participants to identify MFI clients’ needs for services other than credit which may require alliances with other financial service partners, and to identify appropriate partners for the provision of these services.

Session 6: Negotiating for “Win-Win” Outcomes

The objective of this session is to enable participants to identify ways whereby linkage arrangements can be negotiated so that they are optimal for banks, MFIs and ultimately their clients. The session is based on a role play between a bank executive and the finance officer of a MFI.