Lessons in Microfinance Downscaling:
Commercial Banks in the Microfinance Market

The Banco de la Empresa experience in Latin America- a commercial bank providing microfinance services to low-income entrepreneurs - provides many valuable lessons. The most far-reaching relate to design and targeting of bilateral and multilateral development agency-sponsored interventions.

Lesson I:
Committed and effective leadership is essential to downscaling successfully. First and foremost, a few senior managers have to both believe in the commercial potential of microfinance and be committed to start such a program. This leadership must be willing to withstand setbacks and overcome opposition within and outside the institution for microfinance to succeed. Effective microfinance methodologies conflict with the existing culture and operating procedure of typical corporate banks. Microfinance supporters within commercial banks must wield enough budget and hiring authority to invest in and support the experiment. Alternatively, they should have the political acumen to influence others to make this long term commitment. Training loan officers and middle managers, flaunting the financial success of other microfinance operators and appealing to the social conscience of senior managers or the board will not suffice. This innovative way of doing business requires different procedures and staff with a non-traditional background.
Lesson II:
Profit Motive
Banco de la Empresa showed that to be successful in microfinance, the principal motivation should be profits, not social image nor access to stable, but temporary lines of credit. Once a number of motivated institutions are identified, technical assistance, tailored to each participant, can be an effective tool. The principal barriers to commercial banks entering the microfinance market segment are attitude and technology, not lack of funds. Attractive lines of credit, guarantee schemes and subsidized technical assistance may be insufficient. Such donor-backed initiatives promise to have the greatest impact by consolidating and expanding microfinance in countries where a few financial institutions are successfully active. In short, the "commitment" of banks to microfinance cannot be easily fabricated or bought because microfinance is difficult and risky. Donors can only assist "microfinance leaders" after they emerge.
Lesson III:
Strategic Fit
Fully dedicated retail banks or banks pushed by market forces to look for new niches are more likely to participate in downscaling programs than solid, corporate banks. If a commercial bank is doing well in its traditional market segment, the impetus to commit the necessary resources and energy to a new market may not be forthcoming. Dilatory dabbling in micro lending is not likely to result in success. The clash of "cultures" that effective microfinance implies may not be easily reconciled in a strong, traditional corporate bank. Microenterprise divisions within corporate banks experience recurrent tension with other divisions, because they need to allow for deviations in operating, remuneration, and reporting procedures, to recruit a different type of staff and to train them in a different ways, to use of computer resources more intensively. Retail banks and finance companies which have mastered handling numerous small transactions in consumer lending are more likely to migrate to small and micro businesses lending. They simply need to learn how to assess risk in these sectors. This argument, however, is double edged. Careful analysis is needed in each case. It is quite conceivable that some of the same management, technological and product weaknesses which contributed to a loss of competitiveness by locally-owned banks in traditional corporate or retail markets could also impede success in the microfinance niche.
Lesson IV:
Development institutions which promote microfinance through downscaling must tailor support to make it effective. Infrastructure, information technology and human resources are crucial to downscaling successfully.

First, the commercial bank must have branches or mobile services where microentrepreneurs are concentrated. The lender must be conveniently located or actively reach out to clients.

Second, the role of computer technology in lowering operational costs is obvious, but it cannot be a panacea. More important than the purchase and installation of sophisticated hardware is a well designed management information system, commitment to its consistent use and adequate staff training. Using computer technology ineffectively can raise costs instead of dramatically lower them.

Third, staff must be properly recruited, well trained, highly motivated and given appropriate incentives. Staff should be socially comfortable with and knowledgeable about small and micro business owners and their environment. They should be trained in constructing simple financial statements, using computer software for loan analysis, verifying potential clients' reputations assessing clients' managerial ability as well as the outlook for the sector in which the client operates.

Most importantly, the bank should provide attractive bonuses or commissions for high productivity and maintenance of portfolio quality. This will counter a tendency to disburse without regard to loan collection, which can occur when an employee is on a fixed salary.

Fourth, development agencies that wish to promote microfinance must be patient and willing to budget adequate resources for technical assistance as well as for effective supervision and monitoring. Downscaling exercises are more about institutional transformation and less about loan disbursement.

Lesson V:
Appropriate Regulatory Framework
To create an enabling environment for microfinance, development agencies need to promote appropriate regulatory reform which enables profitable micro lending. Development agencies can play a key role promoting supervisory and regulatory frameworks (including appropriate standards for loan classification and provisioning) which are not biased against microlending. Appropriate regulatory reform should precede attempts at "downscaling." The main concerns of financial regulations include minimum capital requirements, capital adequacy, loan risk classification, portfolio auditing techniques, usury restrictions, loan documentation and operational restrictions. The latter either impede the creation of regulated institutions dedicated to microfinance or prevent established regulated entities from engaging in profitable microfinance.
Source: Wenner, Mark, "Lessons in Microfinance Downscaling: The Case of Banco de la Empresa, S.A." Inter-American Development Bank
Hari Srinivas - hsrinivas@gdrc.org
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