Commercial Banks as
Microlenders
Summary of the Last Lecture
• As can be seen from the findings of last
lecture, the advantages commercial banks can
capitalize on arise from their market position,
while most of the obstacles involve the need
to change internal ways of thinking and
operating.
Summary of the Last Lecture
• Successful strategies provide a structure that
uses the positional advantages of banks while
preventing the attitudes and processes of
traditional banking from hobbling
microfinance.
Incredulity, Ignorance, and
Indifference
• I can summarize the reasons banks have not
served the poor in three words: incredulity,
ignorance, and indifference.
—Michael Chu, Harvard Business School
Incredulity, Ignorance, and
Indifference
• I can summarize the reasons banks have not
served the poor in three words: incredulity,
ignorance, and indifference.
—Michael Chu, Harvard Business School
Incredulity, Ignorance, and
Indifference
• It is not a unique criticism to say that many
people inside banks regard BOP clients with
incredulity, ignorance, and indifference. Such
attitudes have long been widely held and
deeply entrenched, not just among banks, but
in almost all formal
Incredulity, Ignorance, and
Indifference
• institutions—in fact they often characterize
societal attitudes at large. It is important to
acknowledge these attitudes openly because
they pose real obstacles that banks must
overcome before they can carry off
microenterprise lending successfully.
Incredulity, Ignorance, and
Indifference
• Incredulity that low-income people can be
good customers can be addressed with
firsthand examples, such as Mibanco in Peru,
a microfinance institution that has become a
commercial bank. Mibanco’s strong
profitability and resilience helps explain why
banks have entered microlending in Latin
America.
Incredulity, Ignorance, and
Indifference
• Ignorance of how to serve the market requires
learning from experienced practitioners, such
as ACCION, or from staff hired away from
competitors. Most important, overcoming
indifference requires leadership and wellstructured incentives.
Incredulity, Ignorance, and
Indifference
• As we look now at some of the practical
challenges involved in launching microfinance
operations in a bank, note how the practical
solutions also address these “softer”
obstacles.
Microlending Needs Its Own Room
• The core challenge for banks that want to
downscale is that lending to microenterprise
clients requires a credit evaluation process
fundamentally different from standard
banking procedures.
Microlending Needs Its Own Room
• The people who operate small income-earning
activities lack the handles banks normally rely
on—formal identification, business records,
credit history, and an easy way to protect
against loss. They don’t have the salary pay
stubs (from respectable formal employers)
that underpin most consumer finance.
Microlending Needs Its Own Room
• To compensate, microfinance methodologies
center on a specific relationship between the
loan officer and the client. The replication of
this relationship millions of times is one of the
key factors making microfinance a significant
global force today.
Microlending Needs Its Own Room
• Take Jesse Cabacheco, a loan officer of
Mibanco in Peru. He spends each day walking
through the markets or knocking on doors to
visit his existing clients and meet new ones.
Microlending Needs Its Own Room
• He can eyeball a fish seller’s business and
assess its inventory and turnover while
carrying out a friendly conversation with the
client. He probes to determine whether a
customer is telling a cogent and credible story,
Microlending Needs Its Own Room
• and he has developed a sixth sense about the
client’s willingness to repay. He can do this in
part because he grew up in a neighborhood
very similar to the one he works in now.
Microlending Needs Its Own Room
• Mibanco has trained him to turn his streetbased observations into a cash flow and ratio
analysis of microenterprise creditworthiness
that will result in solid lending decisions.
Microlending Needs Its Own Room
• Cabacheco is responsible for all aspects of the
clients in his portfolio, from first promotion
through collections and renewal. Only if the
client is very late in repaying will another staff
member step in.
Microlending Needs Its Own Room
• Microlending operations are structured
around making this relationship work.
Cabacheco’s take-home pay depends on how
energetically he develops new clients and
retains existing clients, and on the quality of
the resulting loan portfolio.
Microlending Needs Its Own Room
• He was recruited for his rapport with
microentrepreneurs, willingness to spend his
days outdoors, and ability to think with
numbers. In most consumer finance, by
contrast, the credit process follows an
assembly line of discrete steps, each carried
out by a different
Microlending Needs Its Own Room
• specialist—sales, applications, approvals,
verification, and collections. The credit factory
approach, while efficient, does not work well
with microenterprise lending.
Microlending Needs Its Own Room
• The lending methodology differences have
many practical dimensions. Informationtechnology systems support the loan officer’s
daily routine and allow supervisors to track his
performance.
Microlending Needs Its Own Room
• Salary scales and incentive systems may be
incompatible with mainstream operations. For
example, many skilled loan officers in
microfinance operations make salaries
equivalent to tellers in mainstream branches.
Microlending Needs Its Own Room
• And there are cultural dimensions, too. Loan
officers with Cabacheco’s profile may not be
respected by bank staff who come from higher
social levels. Because their clients come from
the lowest social stratum, microfinance
operations may be treated as second-class
within the bank. The result?
Microlending Needs Its Own Room
• The bank’s IT people are too busy to work on
getting the microloan systems right. The
human resources department does not know
where to recruit the right kind of staff. Senior
managers do not regard supporting
microlending as the route to career
advancement.
Microlending Needs Its Own Room
• It is not hard to see the solution to this
challenge, and ACCION’s experience has
repeatedly borne this out. The solution is to
create a distinct organizational space for
microlending operations,
Microlending Needs Its Own Room
• a space in which it can be supported by the
bigger bank, but allowed to differ in the key
dimensions that make it work. Microlending
needs room to be itself.
Models of Downscaling
• Banks can create the space for microlending
through a variety of structures, ranging from
internal divisions to separate financial
subsidiaries.
Models of Downscaling
• The choice of structure depends in part on the
operational and cultural considerations just
described, but is often dictated by factors like
regulatory environment, involvement of other
investors, risk appetite, image/branding, and
infrastructure.
Models of Downscaling
• The most frequent model of bank
downscaling, although not always the most
successful, is internal. In this model, a bank
establishes a division of microfinance within
its normal operations. Banco Wiese Sudameris
(BWS) of Peru (now Scotiabank Peru) pursued
several strategies to engage with the lowincome market before settling on its current
path.
Models of Downscaling
• First, it began financing small microfinance
nongovernmental organizations, and then it
made a brief, unsuccessful foray into
microenterprise and agricultural credit on its
own.
Models of Downscaling
• In 1997, BWS became a minority shareholder
in the microfinance bank Mibanco, which
allowed it an inside look at microfinance
operations.
Models of Downscaling
• Managers decided not to develop
microlending using the special techniques
described above and instead treated
microloans as a standard part of branch
operations.
Models of Downscaling
• Managers decided not to develop
microlending using the special techniques
described above and instead treated
microloans as a standard part of branch
operations.
Models of Downscaling
• For one thing, the bank did not send loan
officers into the field to attract borrowers.
Consequently, its microlending portfolio was
limited to walk-ins. Since its branches were
located in higher-income neighborhoods,
these clients tended to be at the surface of
the BOP market.
Models of Downscaling
• Microlending was merged into normal retail
branch operations (the bank has a strong
consumer line of business), which lowered
cost.
Models of Downscaling
• BWS’s microfinance lending broke even within
six months, and, on a moderate scale, the
bank quickly developed a profitable
portfolio—of $40 million in 2005—which has
grown since then at a modest rate.
Models of Downscaling
• This model has worked well for a bank that
chose a no-fuss approach to microlending, but
it has not allowed the bank to go significantly
deeper or to capture a significant share of the
BOP market.
Summary
• Incredulity, Ignorance, and Indifference
• Microlending Needs Its Own Room
• Models of Downscaling