Getting the Recipe Right: The Experience and Challenges of Commercial Bank Downscalers

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This Working Draft notes that commercial banks and other regulated actors continue to enter the microfinance world – in a process it calls downscaling. In theory downscaling is a good solution to microentrepreneurs’ lack of access to credit. Banks have plentiful resources and a large infrastructure to reach out to thousands of clients. Surveys and anecdotal evidence collected for paper chapter, however, indicate that downscaling is a difficult endeavour.

It suggests that the experience of these new entrants in microfinance has been mixed. A few commercial actors have succeeded, others are struggling and some have simply given up. This parallels the experience of microcredit non-governmental organizations (NGOs). But unlike the NGOs which are buttressed by a strong sense of mission as well as donor funds, most commercial banks usually make their decision to exit the market quickly. For this reason, there are already a number of well-known cases of bank exit.

However, the paper goes on to argue that looking across the range of commercial experiences, there are at least four reasons to be cautiously optimistic:

  • Today more commercial banks are using “microfinance best practices” than ever before.
  • Some commercial actors have expanded their client base very quickly to the tens of thousands, faster than many of the leading microcredit NGOs, and at minimal cost to donors.
  • New types of commercial actors have emerged. There is no single downscaler profile, but instead, commercial institutions of all shapes, sizes and orientations have entered the market.
  • Some of these commercial actors are showing important profits in their microlending operations, in some cases, these returns exceed those of other bank departments.

This paper contains the following five sections:

  1. What happened to the 18 pioneering banks offers an update of the 18 banks featured in the 1997 Commercial Banks in Microfinance paper. The experience of these banks has been quite mixed.
  2. 2001 survey results presents the results of a bank survey conducted for purposes of this chapter in early 2001 to which 42 banks responded. It divides the banks into four peer groups and presents survey findings, among them the use of best practices, the types of methodologies used, loan sizes, and their technical assistance needs.
  3. Hurdles of downscaling, draws from the original paper, the 2001 survey and interviews, and overall trends. It analyzes some of the challenges banks face in developing a microcredit portfolio and explores why banks exit.
  4. Role of donors discusses which types of commercial institutions are the best partners for donors as well as the most appropriate interventions for donors.

The paper ends with a summary of the most important findings, remarks regarding the ingredients for downscaler success and some future challenges.

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