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The Service Company Model: A New Strategy for Commercial Banks in Microfinance
This paper highlights that commercial banks have been increasingly important players in the development of microfinance services in Latin America over the last few years. It suggests that commercial bank “downscaling” to the microfinance market is good news for microfinance customers because banks can offer them a full range of financial services, including credit, savings and fee-based services. It suggests too that it is important for microfinance as a whole, because with their extensive physical, financial and human resources, banks can launch and expand microfinance services relatively inexpensively. As such, if commercial banks become serious players in microfinance, they may offer strong competition to traditional MFIs.
The paper also believes that there is a perception within the microfinance community that commercial bank entry into microfinance will be short-lived or shallow. It points out, however, that ACCION International has developed relationships with several commercial banks to launch and expand microfinance operations. It has used an approach known as the “service company model” in an attempt to overcome the obstacles to commercial bank entry and to establish long-term microfinance operations through a commercial bank.
The paper highlights four distinct advantages that it believes well-established commercial banks offer the field of microfinance:
- Physical and human infrastructure
- Market presence and brand recognition
- Access to plentiful and low-cost funds
- Low cost structure
Yet it also acknowledges several factors that tend to keep banks from significant entry into microenterprise lending.
- Market knowledge
- Credit methodology
- Trend towards automation
- Conservative corporate culture
- Human resources
This paper describes the service company model and how it aims to address the key issues in commercial bank entry into microfinance and aims to identify success factors for a well-functioning microfinance service company. In addition, it presents results from two microfinance service companies:
- SOGEBANK/SOGESOL in Haiti
- Banco del Pichincha in Ecuador
- Resource type Paper
- Author ACCION
- OrganisationAccion
- Year of Publication2003
- RegionGlobal
- LanguageEnglish
- Number of pages14 pp.
- EditionACCION Insight
- Keywords Commercial Bank, Downscaling, Agricultural Microfinance