Banking the Underserved: New Opportunities for Commercial Banks
This paper, from April 2005, focuses on banks rather than microfinancial institutions as providers of financial services to the poor. It asks whether banks have a commercial interest to enhance the quantity, quality, and range of financial services provided to clients who had previously not been considered a profitable market, the “unbanked” poor. The answer, according to this study, is a qualified “yes”. The paper is based on six case studies of institutions: Sogebank/Sogesol in Haiti, Banco Wiese Sudameris in Peru, Hatton National Bank in Sri Lanka, Stanbic Bank in Uganda, Khan Bank in Mongolia, and Capitec Bank of South Africa. The paper would be most useful for commercial bankers looking for arguments in favour of expanding into the unbanked market, though on another level it would also serve policy-makers in governments and international organisations.
The purpose of the study was the document the actual financial experience of a diverse sample of commercial banks that have opted to expand into microfinance as a new line of business. Received wisdom regarding commercial banks in microfinance suggests that they tend to enter the market for social reasons, either as good citizens or under pressure from government, and have stayed because they did find a profitable market. This is only part of the story, as the study shows: other spurs to “downscaling” (marketing to micro rather than macro customers) include a poor macroeconomic environment, as in Haiti, or even a new regulatory environment, as in Mongolia. The study was not able to give an unequivocal answer as to the profitability of microfinance for the banks under consideration, due in some cases to the banks’ own refusal to provide the necessary data, or due, indeed, to such data never having been collected. However, five of the six banks examined in the study show a favourable result with microfinance. Some banks created a new subsidiary company to enter the microfinance sector, while others simply traded on their pre-existing network of local branches to offer a diversified range of financial products to rural and poor clients.
The conclusions of this study are that the most successful bank ventures into microfinance are the ones that the bank takes most seriously and to which it applies the most attention. Banks are often in an excellent position to develop a presence in the microfinance market as they already have the necessary systems (though information systems, it must be stressed, should be modified to incorporate microfinance products), branches, and staff. In all the cases studied, the microfinance product being offered covered the direct financial and operational costs and effectively paid for part of the overhead. Banks that created subsidiary companies like Sogesol in Haiti benefited most from this, as the service company paid explicit rents and other fees to its parent. Of the case studies, that of the Khan Bank of Mongolia provided a particularly interesting example of a former state bank serving a rural clientele, which through changes to regulation and an energetic leadership managed to step back from the brink of disaster and turn itself around, making significant profit from microfinance.