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Microfinance Institution - Bank Linkages

Effective linkages between microfinance institutions (MFIs) and commercial banks have been of interest to donors and practitioners for some time. Examples of highly formalized strategic alliances between banks and MFIs include Sogesol with Sogebank in Haiti and Credife with Banco del Pichincha in Ecuador. These alliances are between banks and service companies specifically established to commercialize microfinance. However, far more MFI-bank linkages are created out of necessity by the non-bank MFI, typically because of legal restrictions they face or because the MFI lacks the capacity to perform a service.

These latter types of linkages often evolve as the MFI requires additional services to support growing, day-to-day operations. The MFI may seek to link to a commercial bank in order to provide its clients with access to some bank services it is unable to offer (such as safe savings) and may also need some services itself (such as safe tellers and deposit management).

However, it is unlikely that the MFI management undertook an extensive quantitative and qualitative cost/benefit analysis as part of its decision-making process before entering an agreement. Also, the MFI probably does not utilize its leverage with the bank—as generator of significant deposit and new customer relationships—to negotiate better terms and service levels. If an MFI could present a comprehensive analysis of the potential customer relationship it is offering to a bank, it could negotiate from a position of greater strength, gaining important benefits for itself and its clients.

USAID’s Microenterprise Development office (MD) aims to understand the types of relationships that exist between MFIs and commercial banks. Key questions include:

  1. What is the best typology for the broad array of linkages, and what will lead MFIs and commercial banks to seek and develop more effective partnerships?
  2. Have donor subsidies designed to encourage banks to enter the microfinance market been effective? How can they be improved?
  3. How profitable are commercial banks as direct microfinance retailers?
  4. How can the range of strategic and operational options for commercial banks launching microfinance services be presented in a pragmatic, user-friendly format that will stimulate additional interest?
  5. What are the most interesting and useful demonstration models?

Knowledge Generation
The starting point of MD’s research in this area was to document a range of bank-MFI linkages, including lending and deposit relationships, loan windows, service company relationships and purchase of operational services such as loan processing and treasury functions. This has resulted in the publication of a series of papers on Opening Markets through Strategic Partnerships, including:

  • An Analysis of the Alliance Between FIE and Pro Mujer (a savings-motivated collaboration)
  • The Alliance Between ICICI Bank and Cashpor (a partnership for financing and loan origination)
  • The Alliance Between Ameen Sal and Three Lebanese Commercial Banks (an alliance for operational processing)

More recently, MD in partnership with MicroSave India undertook a study of savings options and practices in northeast India and explored the options and challenges for formal financial institutions to serve “unbanked” microentrepreneurs and poor households in this region—either on their own or through linkage arrangements.

Finally, drawing on the cases documented, MD is working to create a guide that MFIs can use to form alliances with commercial bank partners. Specifically, the guide (to be published summer 2008) will include: a generic checklist of common issues (financial, strategic, documentation and other) for MFIs and bank partners, and an annotated agreement template that can be used as a boiler plate for entering into strategic alliances. The guide will look also at the issue of forming alliances in the context of new, structured forms of financing such as securitization of microfinance portfolios.

Influencing Practice
There has been a lot of interest and discussion of this topic in the last few years. To name a few initiatives, CGAP published its own Focus Note entitled Commercial Banks and Microfinance: Evolving Models of Success in 2005. The United Nation’s Food and Agriculture Organization and the Ford Foundation conducted a review of innovative linkages between formal and informal rural financial intermediaries, and whether those linkages resulted in greater access to financial services beyond credit. Network organizations such as SEEP, the Microfinance Center for Central and Eastern Europe and the NIS and the Russian Microfinance Center have all hosted panel discussions on the topic, as a way to demonstrate new models for service delivery, cost effective solutions for cash-strapped microfinance institutions, and other ways of getting needed services to the end client. Finally, following SEEP’s Annual General Meeting panel in 2005, the organization launched a Practitioner Learning Program focused on strategic alliances for financial services and market linkages in rural areas and has produced other research specifically focused on strategic linkages in financial services.