Leading Microfinance into Microbanking

In the recent years we have witnessed the flourishing of microfinance around the globe after the United Nation launching the International Year of Microcredit 2005 and the latest momentous was when Professor Muhammad Yunus, the founder of Grameen Bank and the pioneer of microcredit for women is awarded a Peace Nobel Prize. Microfinance has been a proven proof as an effective tool to support the Millennium Development Goals campaign in reducing the half number of poor people.

Microfinance has come a long way from its beginnings as a non-profit program to combat chronic poverty in developing countries. The best practice in the past were the government created state owned banks to channel subsidized loans to farmers to produce food crops and many international NGOs gave charity to poor inhabitants in order to help them lift out from chronic poverty trap. Furthermore, microfinance gradually evolves from social intermediation to become financial intermediation which adopts market mechanism and commercial practices. Surprisingly, this approach has worked well in the bottom of the pyramid (BOP) economy mainstream and it has generated good impact to the prosperity of low income households and the poor.

The presence of microfinance institutions in local community has successfully opened financial access to microentrepreneurs and under banked clients who need loans for working capital and investment. The spectrum of commercial microfinance also broadens through providing saving products, remittance and payment system to the entire society in efficient way and profitably. A key feature of this approach is double bottom lines that are to seek profits and also creates social values. One of the best examples and also the pioneer of commercial microfinance is BRI-Unit microbanking system which developed over two decades ago, after BRI struggling with massive losses during the Bimas program.

Global Industry

Today, for profit microfinance is becoming an emerging business. Banks of all sizes, from global institutions such as Citibank, HSBC, Standard Chartered Bank, Deutche Bank, ANZ Bank, Credit Suisse, ABN Amro and many more including leading investment companies are actively entering this sector and developing different business model of microfinance. Based data published by Consultative Group To Assist the Poor (CGAP), a unit of World Bank that dedicated to microfinance, shows that the amount of global funds invested to microfinance in 2004 reach approximately US$ 1.1 billion and nearly half are come from private sector.

Regionally, there is a long list of commercial bank that have microfinance portfolio. In the Central and Latin America, there are Bancosol Bolivia, Banco Solidario Ecaudor, Compartamos Mexico, Mibanco Peru, Sogesol Haiti and so forth. Moreover, in Africa region, commercial microfinance is practiced by K-Rep Bank, Equity Bank and Coop Bank which operate in Kenya, Centenary Rural Development Bank Uganda, the Commercial Bank of Zimbabwe and Teba Bank South Africa. In Asia continent, ICICI Bank from India, Alceda Bank of Cambodia, Hatton Bank Sri Lanka, Planter Bank Philippine, BRAC Bank Bangladesh, XacBank Mongolia including several major banks in Indonesia such as BRI, Danamon Simpan Pinjam, Bank Mandiri, Bank NISP are noted as banks that owned commercial microfinance business. Indeed, this mainstream has driven more commercial banks and venture capitalists are taking notice of the commercial viability of microfinance.

There are several incentives lead commercial banks quite aggressive in entering microfinance market. The findings of a study by Hatice Jenkins from HIID Harvard University suggest that a leading driver of commercial banks having microfinance business is profit motive. Most of commercial microcredit scheme can generate double digit profit margin which substantially above the returns of SME loans and corporate lending. Another trigger is changing market conditions and increasing competition in consumer finance, lending to medium and large enterprises. Other factors such as regulations imposed by the government, innovations in banking technology and awareness of poverty alleviation and social values have influenced the appetite of commercial banks to penetrate unbanked segment. In addition, commercial banks have a number of competitive advantages, for instance management expertise, systems and physical infrastructure in place, ability to mobilize deposits and have access to other sources of funds.

Microfinance, however, does not mean a simple business. The business of microenterprise lending is complex and requires significant technical capabilities although its basic principle from conventional banking practices. Some experiences show that many commercial banks were unsuccessful in tapping the microfinance customers. The most common cause is lack of knowledge and information on informal sector which is the core of the target market of a microfinance institution. Generally, the costumers are limited lower educational background, enterprise ownership under family based, multiple sources of income and lack of marketable collateral. Moreover the typical of business very dynamic, fast turn over and high returns are also important to be put into account. Clearly, a good understanding on BOP segment will help banks to design products, term and conditions, operational framework etc. The second issue is high operational cost and initial investment. The big challenge in doing microfinance is how to control cost of each unit lending that relatively high due to “a to z” processes should be personally handled by credit officer. In other words, employment payroll is a critical issue in microfinance operations. Oftentimes, limited infrastructures particularly in remote areas also contribute to the overhead cost and network developments.

Developing Business Model

Lesson learned of succeed and failure in commercial microfinance ventures be successful in microfinance there are several issues must be pondered by commercial banks. The center of consideration is how to build a cost-effective business model and to achieve economic of scale. Indeed, all the usual requirements of a successful business also need to be in place such as vision, commitment and strong management, HRM, robust SOP, IT system, good marketing and services etc

Melbourne, 08/01/09

M.Iwan Nazirwan

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