1. CASE STUDY
MICROFINANCE : The role of
Commercial Banks.
ALI I. Shaker
Chairman
Principal Bank for Development
and Agricultural Credit
EGYPT
July 2009

2. 1. MICROFINANCE.
MICROFINANCE.
- DEFINITION
- CLIENTS.
- SIZE & POTENTIAL DEMAND.
- Financial Services & Poor People.
2. COMMERCIAL BANKS & MICROFINANCE
- Reluctance to Service Microfinance.
- Despite having the “ Twin Advantages ”.
- Obstacles for Commercial Banks in the Microfinance Business
- Other Advantages of Commercial Banks in Microfinance
3. RUNNING A SUCCESSFUL MICRO FINANCE PROGRAM WITHIN A
COMMERCIAL BANK
4. SUCCESSFUL FEATURES of a MICROFINANCE PROGRAM
5. Is Microfinance a Suitable Business Proposal for Commercial Banks?
6. Is It a Revenue Earner for Retail Banking ?
CONCLUSION :

3. 1/1 MICROFINANCE
DEFINITION :
q Microfinance is banking the low income households and
individuals who have uncertain and unstable income streams
that are unprotected.
q Worldwide, Microfinance has been recognized as a powerful tool
targeting the poor with the aim of alleviating poverty, raising
living standards, creating jobs and boosting economic growth.
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4. 1/2 MICROFINANCE
* CLIENTS:
CLIENTS:
q “ Destitute ”:
unable to participate in the mainstream of the economy.
q “ Entrepreneurial Poor “ :
active in income generation.
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5. 1/3 MICROFINANCE
* SIZE & POTENTIAL DEMAND :
- There is a large unmet demand for microfinance among the
entrepreneurial poor in the third world countries.
- A conservative estimate suggests that, for example, there are
at least 3 - 5 million microenterprises in Egypt for the time being.
While no formal estimates are available, it is believed that
only (excluding agriculture sector) 10% approx. of potential borrowers
are being served.
- This large unmet demand signals an important role for the commercial
banks to participate in the provision of such services.
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6. 1/4 MICROFINANCE
* Financial Services & Poor People :
- Need for a variety of financial services.
- Lack of access to banking services.
- Existence of informal systems.
- Lack of professionalism & sustainability of activities, programs and
institutions that channel funds in the form of microcredit.
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7. 2/1 COMMERCIAL BANKS &
MICROFINANCE
* Reluctance to Service Microfinance:
- The belief it is costly & unprofitable.
- The belief it is risky.
- The belief it is time consuming
- The belief it is labor intensive.
- Lack of appropriate banking methodologies.
- Socio-economic barriers.
- Highly political nature of MF.
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8. 2/2 COMMERCIAL BANKS
& MICROFINANCE
* Despite having the “ Twin Advantages ”:
”:
- Branch Network / Accessibility.
- Fund Raising Capacity.
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9. 2/3 COMMERCIAL BANKS
& MICROFINANCE
* Obstacles for Commercial Banks in the Microfinance Business :
q Bank Commitment
q Organization Structure
q Lack of Financial Methodology
q Human Resources
q Cost Effectiveness
q Prohibitive Environment.
q Inconsistent Policies.
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10. 2/4 COMMERCIAL BANKS
& MICROFINANCE
* Other Advantages of Commercial Banks
in Microfinance :
- Regulated institutions
- Physical infrastructure / Branch Network
- Effective internal control structure
- Sound governance structure
- Availability of funds
- Products diversification
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11. 3/1 RUNNING A SUCCESSFUL MICRO
FINANCE PROGRAM WITHIN A
COMMERCIAL BANK
Main critical factors responsible for the
success and durability of a commercial
microfinance program :
a) Commitment, Vision and Drive of senior management :
- Belief in the potential role of microfinance
- Dedicated staff
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12. 3/2 RUNNING A SUCCESSFUL MICRO
FINANCE PROGRAM WITHIN A
COMMERCIAL BANK
b) Public Policy Environment :
- Supportive public policy
- No restrictions related to pricing, incentives……
- No obstacles to using mobile branches
- No restrictions in dealing with informal enterprises
- Government incentives
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13. 3/3 RUNNING A SUCCESSFUL MICRO
FINANCE PROGRAM WITHIN A
COMMERCIAL BANK
c) Organizational Structure :
- Specialized microfinance dept.
- Independent microfinance units.
- Establishing semi independent units within
branches.
- Flexibility for clients to graduate.
- Flexibility of unit managers to develop products.
- Centralized support.
- Central performance monitoring system.
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14. 3/4 RUNNING A SUCCESSFUL MICRO
FINANCE PROGRAM WITHIN A
COMMERCIAL BANK
d) Financial Methodology :
- No collateral is formally required
- Commercial interest rates
- New and flexible lending techniques
- Sequential lending & simple procedures
- Prompt loan collection procedures
- Effective MIS system
- Contractual insurance
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15. 3/5 RUNNING A SUCCESSFUL MICRO
FINANCE PROGRAM WITHIN A
COMMERCIAL BANK
e) Human Resources :
- Staff recruited from local communities
- Adequate training
- Well defined incentives system
- Long term career perspective
f) Institutional Innovation :
- Mobile banking
- Well defined loan approval process
g) Cost Effectiveness :
- Independent cost & profit centers
- Centralized support & liquidity management.
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16. 4/1 SUCCESSFUL FEATURES
of a MICROFINANCE PROGRAM
The actual case of a “ Regional Development Bank” :
- Sustainability of the program of more than 20 years.
- Matching credit funds from its own resources after donors’ support
ended.
- Providing employment opportunities to 400 university graduates
working in its program.
- Program replicable to virtually all geographical areas within the
country.
- Strong reflows of principal and market interest rates that are
recycled into the credit fund.
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17. 4/2 SUCCESSFUL FEATURES
of a MICROFINANCE PROGRAM
- Interest rates and fees are set to cover all program expenses and
provide a return for reinvestment and expansion of services.
- Program operating throughout large of network of branches.
- The program attracted and increased savings awareness among its
clients.
- Program has provided a contractual life insurance cover to its
clients against unexpected adverse conditions.
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18. 5/1 Is Microfinance a Suitable Business
Proposal for Commercial Banks?
- It’s relatively new.
- It developed due to:
• Increasing cost of funding.
• Increasing competition.
• Increasing risks in institutional products.
• Decreasing profit margin in traditional products.
• Decreasing banking service revenues.
• Decreasing market share of banks with many branches.
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19. 5/2 Is Microfinance a Suitable Business
Proposal for Commercial Banks?
* How did microfinance develop?
§ It became crucial to decrease the cost of funding.
§ A new requirement: to reduce risk through diversification.
§ The banks began to search for selling opportunities with higher profit
margins.
§ It became a must to obtain new customers.
§ The speed increased and the transaction costs decreased by the
technology.
§ As a result, banks began to look for new sources of revenue other
than traditional institutional banking products.
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20. 5/3 Is Microfinance a Suitable Business
Proposal for Commercial Banks?
* We believe that Microfinance changed the world.
* A changed world changed the needs and the demand of the
customers.
ž Will the Banks respond & take up the challenge?
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21. 6/1 Is It a Revenue Earner for
Retail Banking ?
- Competition is forcing many banks to look at new markets.
- Microenterprises represent approx. 90% of the private sector and
account for approx. 50-55% of private employment.
- Diversify the banking services and products.
- Reach a wider customer base.
- Meet the tremendous demand for financial services, particularly loans
among low income households.
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22. 6/2 Is It a Revenue Earner
for Retail Banking ?
• Practices proved that microcredit borrowers are willing to pay
reasonable costs, in terms of both interest rates and fees, for
convenient and timely services.
• Microlending involves the development of long-term relationships.
• Use bank’s own deposit base to finance microfinance portfolios.
• Educate borrowers about important financial practices.
• The main direct sources of revenue are high credit interest rate, fees,
and the mandatory savings deposit.
• The main sources of indirect sources of revenue are a life insurance
fee, a penalty fee and prepayment fee.
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23. CONCLUSION :
ž Experience has proved that the poor can be served profitably
on a large scale and a long term basis.
ž Microfinance units can outperform mainstream commercial
banking business in return and portfolio quality.
ž Commercial banks have a major and instrumental role to play
in the microfinance field.
ž Microfinance has to be integrated in the country’s financial
system.
“ MICROFINANCE IS PROFITABLE “ …………
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