3.1 Links Between the Operations of MFIs and Banks, Donors and NGOs: Microfinance in Africa - Experience and Lessons from Selected African Countries
3.1 Links Between the Operations of MFIs and Banks, Donors and NGOs: Microfinance in Africa - Experience and Lessons from Selected African Countries
A. Developing Complementarities between MFIs and Banks
The African experience suggests that MFIs have built on pre-existing informal sector
mechanisms (among the many examples are susus and tontines) to create viable channels for
capital infusions from formal sector banks, donors, and governments.7 As a result, deposittaking
MFIs, informal microfinance institutions, and credit-only MFIs have all developed
increasingly close ties with full-fledged commercial banks and other non-bank financial
institutions in the formal sector (Box 4). Banks and MFIs complement each other well by
servicing substantially different client bases. Banks lend and collect deposits mostly from a
limited formal private sector and to the government, while MFIs service poor and rural
households, and small entrepreneurs often in the informal sector.
With the increasingly closer linkages between commercial banks and MFIs, the prospects for
enhancing financial deepening have improved. Both commercial banks and MFIs benefit
from a closer relationship. MFIs may increase their effectiveness in having access to
financial services that facilitate their liquidity management, while banks expand their client
base by working with MFIs. We review below the nature and implications of such
interactions, supported by evidence from the experience of our selected countries.
• MFIs reap benefits as clients—depositors and borrowers—of commercial banks.
First, as observed in Guinea and Benin, commercial banks typically manage MFIs’
deposit accounts, and sometimes, provide them with liquidity management services,
for example emergency credit lines to cover cash shortfalls, hence reducing the
risks associated with irregular cash flows. Second, extended credit facilities also
allow MFIs to expand their services. In Guinea, while MFIs are currently using
liquidity management services provided by commercial banks—including one of
them having access to an emergency credit line—banks have been cautious in
extending credit lines, given the risk that the failure of MFIs spills over to
commercial banks. Conversely, these risks are to some extent mitigated by the
additional benefits of interaction between MFIs and the banks, which include (a) the
opportunity given to banks to expand their portfolio of clients beyond a usually
highly concentrated clientele, and (b) the monitoring of MFI clients by commercial
banks. The experience of Guinea supports this conclusion, although the interactions
between MFIs and banks are in an early phase.
• MFIs and commercial banks work together in providing financial services. In a
number of African countries, banks and MFIs have successfully cooperated in
extending their outreach and achieving economies of scale. Branch network sharing
is seen as effective in servicing a larger client base while containing costs. In
Guinea, banks are looking at possibilities to use the network of MFIs to expand
credit to large rural clients. In Tanzania, the example of the CRDB developing
banking relationships with savings and credit cooperatives to channel funds for
micro-lending is illustrative. Cooperation also entails channeling credit from banks
and MFIs to clients with obvious business synergies. The NMB of Tanzania is
developing relations between credit to its large corporate clients and credit to
micro-enterprises that supply inputs and distribute the products of the former. The
NMB lends to micro-enterprises to finance their purchases and inventories, and
provides large corporate clients with collection and payment services to and from
micro-enterprises.
• The links between MFIs and banks provide a platform for strengthening the links
between the formal and informal sectors of the economy. While small entrepreneurs
with no credit history are usually excluded from commercial bank credit, they
constitute a profitable business segment for MFIs. Those entrepreneurs could
eventually graduate from micro-credit to conventional bank loans, either by
developing successfully into sizeable businesses or by building reputation through
repeated borrowing and establishing a strong record of loan repayment, even though
barriers to entry into the conventional banking sector for small entrepreneurs would
still limit the possibilities of graduation to the conventional banking sector.
With MFIs linking up with banks, the supply of loanable funds to previously underserved
areas of the economy and the number of small borrowers with access to credit are likely to
increase. Some might argue that this would lend to increased competition and better terms for
loans to small borrowers. Unfortunately, however, this may not necessarily happen. The
expansion of credit to new borrowers may entail increases in default risk, loan administration
and monitoring costs, strategic collusion among informal lenders (to avoid a costly price
war), and contamination of the pool of borrowers for lenders who are poor at screening out
the risky ones. All these potential risks suggest that the cost of borrowing may not fall, at
least in the early stages of growth in the microfinance sector. This being said, the cost of
credit provided by formal MFIs is generally much less than that provided by informal lenders
(such as money lenders).
31 Links Between the Operations of MFIs and Banks Donors and NGOs Microfinance in Africa Experience and Lessons from Selected African Countries - To learn more about this author, visit International Monetary Fund's Website.
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(IMF Working Paper, Prepared by Anupam Basu, Rodolphe Blavy, and Murat Yulek1, September 2004)
A. Developing Complementarities between MFIs and Banks
The African experience suggests that MFIs have built on pre-existing informal sector
mechanisms (among the many examples are susus and tontines) to create viable channels for
capital infusions from formal sector banks, donors, and governments.7 As a result, deposittaking
MFIs, informal microfinance institutions, and credit-only MFIs have all developed
increasingly close ties with full-fledged commercial banks and other non-bank financial
institutions in the formal sector (Box 4). Banks and MFIs complement each other well by
servicing substantially different client bases. Banks lend and collect deposits mostly from a
limited formal private sector and to the government, while MFIs service poor and rural
households, and small entrepreneurs often in the informal sector.
With the increasingly closer linkages between commercial banks and MFIs, the prospects for
enhancing financial deepening have improved. Both commercial banks and MFIs benefit
from a closer relationship. MFIs may increase their effectiveness in having access to
financial services that facilitate their liquidity management, while banks expand their client
base by working with MFIs. We review below the nature and implications of such
interactions, supported by evidence from the experience of our selected countries.
• MFIs reap benefits as clients—depositors and borrowers—of commercial banks.
First, as observed in Guinea and Benin, commercial banks typically manage MFIs’
deposit accounts, and sometimes, provide them with liquidity management services,
for example emergency credit lines to cover cash shortfalls, hence reducing the
risks associated with irregular cash flows. Second, extended credit facilities also
allow MFIs to expand their services. In Guinea, while MFIs are currently using
liquidity management services provided by commercial banks—including one of
them having access to an emergency credit line—banks have been cautious in
extending credit lines, given the risk that the failure of MFIs spills over to
commercial banks. Conversely, these risks are to some extent mitigated by the
additional benefits of interaction between MFIs and the banks, which include (a) the
opportunity given to banks to expand their portfolio of clients beyond a usually
highly concentrated clientele, and (b) the monitoring of MFI clients by commercial
banks. The experience of Guinea supports this conclusion, although the interactions
between MFIs and banks are in an early phase.
• MFIs and commercial banks work together in providing financial services. In a
number of African countries, banks and MFIs have successfully cooperated in
extending their outreach and achieving economies of scale. Branch network sharing
is seen as effective in servicing a larger client base while containing costs. In
Guinea, banks are looking at possibilities to use the network of MFIs to expand
credit to large rural clients. In Tanzania, the example of the CRDB developing
banking relationships with savings and credit cooperatives to channel funds for
micro-lending is illustrative. Cooperation also entails channeling credit from banks
and MFIs to clients with obvious business synergies. The NMB of Tanzania is
developing relations between credit to its large corporate clients and credit to
micro-enterprises that supply inputs and distribute the products of the former. The
NMB lends to micro-enterprises to finance their purchases and inventories, and
provides large corporate clients with collection and payment services to and from
micro-enterprises.
• The links between MFIs and banks provide a platform for strengthening the links
between the formal and informal sectors of the economy. While small entrepreneurs
with no credit history are usually excluded from commercial bank credit, they
constitute a profitable business segment for MFIs. Those entrepreneurs could
eventually graduate from micro-credit to conventional bank loans, either by
developing successfully into sizeable businesses or by building reputation through
repeated borrowing and establishing a strong record of loan repayment, even though
barriers to entry into the conventional banking sector for small entrepreneurs would
still limit the possibilities of graduation to the conventional banking sector.
With MFIs linking up with banks, the supply of loanable funds to previously underserved
areas of the economy and the number of small borrowers with access to credit are likely to
increase. Some might argue that this would lend to increased competition and better terms for
loans to small borrowers. Unfortunately, however, this may not necessarily happen. The
expansion of credit to new borrowers may entail increases in default risk, loan administration
and monitoring costs, strategic collusion among informal lenders (to avoid a costly price
war), and contamination of the pool of borrowers for lenders who are poor at screening out
the risky ones. All these potential risks suggest that the cost of borrowing may not fall, at
least in the early stages of growth in the microfinance sector. This being said, the cost of
credit provided by formal MFIs is generally much less than that provided by informal lenders
(such as money lenders).
31 Links Between the Operations of MFIs and Banks Donors and NGOs Microfinance in Africa Experience and Lessons from Selected African Countries - To learn more about this author, visit International Monetary Fund's Website.
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