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"Private Banks Find Microfinance" by WWB President Mary Ellen Iskenderian Published in Premier Issue of The Americas Quarterly

A new era has opened for some of Latin America’s most promising entrepreneurs. Microfinance loans to low-income business owners, historically the province of socially-conscious, non-governmental organizations, are attracting commercial banks—and not just because they want to be socially responsible. With millions of small, often family-run enterprises appearing throughout the hemisphere, it has become a market too good for the banks to pass up. There are now over six million microfinance borrowers in the region—a threefold increase from 2001 to 2005—with a hemisphere-wide portfolio exceeding US$5.4 billion.

Colombia’s leading bank, Bancolombia, has been one of the pioneers, introducing a variety of innovative new products and services in the last two years. Major banks in Chile, Mexico, and Peru are also creating specialized business models aimed at the microfinance market. Commercial bank services to this growing client base extend far beyond loans. Low-income micro-entrepreneurs such as shop owners, building contractors and even street corner vendors can now access financial products ranging from savings accounts and insurance to housing and education loans.

Banks often enter the microfinance market by financing existing microfinance institutions (MFIs). Some then opt to offer financial services directly to the client. A few examples of banks that work through subsidiaries include Banco Pichincha of Ecuador with CREDIFÉ, Banorte of Mexico with Créditos Pronegocio, and Banco Santander of Chile with Santander-Banefe. Taking advantage of existing infrastructure, branding, and branch distribution networks, Bancolombia created a business line within the existing bank structure.

Microfinance lending now makes business sense. An estimated 67 million households in Latin America rely on microenterprise-related income, and that number is likely to increase. Some MFIs, according to the Inter-American Development Bank, report a return on equity of over 15 percent, with the most profitable ones enjoying a nearly 20 percent return. Beyond profitability, microfinance offers a stable, responsible client base with tremendous growth potential and high levels of client loyalty. Given their low market penetration in impoverished regions, banks can exploit existing technologies and infrastructure to increase their outreach.

MFIs laid the groundwork for the microfinance surge. Now big commercial banks are learning to adapt the methods developed by MFIs for gathering financial information and analyzing micro-enterprise and household data to their own practices. The process has also trickled up. Increasingly, banks have joined MFIs to work with regulators, supervisors, and policymakers in strengthening the overall rules and practices in the industry.

Substantial challenges remain. Commercial banks face a major readjustment in adapting to the informal economy in which micro-entrepreneurs operate and, in particular, to the need for non-traditional loan guarantees. To succeed in retail microfinance, management and loan officers must first understand this new client group and then adjust lending policies to the particular needs of microfinance borrowers. Banks are also faced with the difficult task of developing alternative, low-cost, and reliable channels to sell financial product packages, as well as creating repayment models that reduce borrower costs.

With commercial banks in the field, microfinance options are now reaching larger numbers of people more quickly and with greater efficiency—immeasurably improving the quality of life for millions. Better yet: even with the twists and turns of the region’s larger economy, there is still plenty of room to grow.

Published by the Americas Society/Council of the Americas

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