Bankable Frontier Weblog

There has been a spate of recent publications on the topic of commercial banks and microfinance. These provide case studies of banks which have, in the language of this blog, pushed the ‘Bankable Frontier’. Together, the three publications highlighted in this post provide some sense of how the frontier is changing in different parts of the world.

CGAP has recently published Focus Note 28 on “Commercial Banks in Microfinance: Evolving Models of Success”. This one follows a 1998 Focus Note which dubbed commercial banks ‘new actors in the microfinance world’. As an indication of how far commercial bank penetration has come in the seven years intervening, the 2005 Focus Note outlines 6 ways, direct and indirect, in which commercial banks have become involved in microfinance. The Note argues on the basis of demonstrated profitability of certain microfinance entities that there is opportunity for commercial banks in microfinance: a figure in the Note shows that the return on equity of five microfinance banks exceeds the median ROE of their country bank peer group. However, it cautions against a ‘quick buck’ mentality on the part of entering banks.

In April 2005, DFID published a Policy Division Working Paper, written by DAI, entitled “Banking the Underserved: New Opportunities for Commercial Banks, Exploring the Business Case”. This paper outlines the experiences of six banks in different countries (Sogebank, Haiti; Banco Wiese Sudameris, Peru; Hatton National Bank, Sri Lanka; Stanbic Bank, Uganda; Khan Bank, Mongolia; Capitec Bank, South Africa). Each of these ‘opted to expand into microfinance as a new way of doing business’. In each case, the microfinance product is reported to cover marginal costs and make at least a contribution to fixed costs. The paper focuses particularly on the various reasons for a commercial bank to bring out a microfinance program.

Also this year, IDTG Books has published Small Customers, Big Market: Commercial Banks in Microfinance, edited by Malcolm Harper and Sukhwinder Singh Arora. This book contains case studies of 18 banks in 15 countries, the majority in Asia. They have been written either by senior managers of the banks or by consultants with close acquaintance of the microfinance program in question. Only two of the 18 cases overlap with the DFID paper (Khan Bank and Sogesol). The book goes much wider to cover one of the grandfathers of modern microfinance, BRI in Indonesia, with 30 million micro savers and 3 million micro borrowers; as well as newer icons such as ICICI Bank in India and Equity Building Society (now Bank) in Kenya. The book is particularly useful in providing a standardized profile of each bank, including a background on the local market. There are also perceptive discussion questions after each case which will help the student reader sift through the particular angles of each. Interestingly, most of the programs are recent, having started in last 10 years. Also, of the 18, half are mainly privately owned.

Old and new icons of microfinance 

Together, these three publications demonstrate that commercial banks have entered microfinance successfully and profitably. The breadth of national environments and range of approaches suggests that these are not isolated or exceptional examples. Some of the publications go further, to suggest that commercial banks are the natural leaders of microfinance, because of their advantages in areas like robust systems and brand recognition. However, because the ‘Market is Big’, the examples suggest that there is opportunity for other banks to enter too.

Will other banks in fact follow in the footstep of these ‘evolving models of success’? Surely, they will: competitive pressures alone will compel it. Because even retail banking markets are increasingly globalized through the presence of major multinational banks, the demonstration effect may propagate much faster than before. However, even as success is rightly held up, the limits to commercial bank ‘downscaling’ must be again recognized: even if priced on a strategic basis of future revenue flow, commercial bank account acquisition rests on a calculus of future revenue against cost, much of it upfront. Absolute disposable incomes in many markets create a floor below which private commercial banking at least cannot penetrate. The case for smart subsidies, both to lower the floor on an ongoing basis, and to raise the inhabitants through a range of other poverty elimination and income creation strategies, remains strong. Hence the importance, for example, of the payment mechanisms for social transfers covered last week in this blog.

A final thought after reading these three useful pieces: for the sake of the increasing numbers of people interested in watching models evolve, it would be valuable indeed if the publishers of books like Small Customers or global resource centres like CGAP or DFID maintained an ongoing, regularly updated portal to access the main cases which are highlighted in these publications. That way, we could watch the bankable frontier move in real time: even if it moves slowly, at least the information would be fresh.