Why are Microfinance Institutions Acting as Service Agents for Commercial Banks?

When microfinance institutions (“MFIs”) act as “service companies” to commercial banks (“Partner Banks”), they build a strategic alliance that can offer a means of delivering microcredit services more efficiently and effectively than if either party were to operate on its own. A “servicing arrangement” (or contract) between an MFI and Partner Bank allows these two stakeholders to differentiate the various roles and functions necessary in the making and managing of microcredits, and to allocate among the MFI or its Partner Bank responsibility for these roles to draw on the comparative advantages of each. In other words, a servicing arrangement allows MFIs and their Partner Banks to “disintermediate” or separate into various components the credit function to ensure that access to credit is distributed most efficiently to the unbanked. This microNOTE examines how servicing arrangements can be structured to benefit all stakeholders in the arrangement—the MFI, it’s Partner Bank, and, most importantly, the microcredit borrower who should share in the efficiencies gained from such an arrangement.