Micro-finance for BankersSession 3

Micro-finance for Bankers – an Introduction

SESSION THREE

How banks can engage directly in micro-finance

Objective:to enable participants to describe and identify the main features of the principal direct micro-finance delivery methodologies, and to appraise them in the context of their own or typical banks’ situations.

Time:One and a half to two hours

Materials:

Prepare copies of the handout “Micro-finance methods used by four commercial banks – direct to the clients”and the assignment sheet for each participant.

Advance Preparation:

Distribute the handout to each participant at the end of the previous session. Ask them to read it individually and to form a preliminary view as to the merits of each system.

Session Guide

  1. At the beginning of the session, divide the participants into groups of between four and six each and distribute copies of the assignment sheet. Ask them to discuss and complete the assignment. Allow up to thirty minutes for this task.
  1. Reconvene the participants and ask a spokesperson for each group to present and explain their conclusions. Summarise their ratings on a consolidated format on the board, as shown below, and discuss major differences.

Their opinions will differ but the following ratings represent a reasonable set of conclusions.

Reaches the poor / Low cost to bank / Simple for clients / High repayment rates / No special systems needed
Producers Bank of the Philippines,
Grameen group method / A / C / B / A / C
Canara Bank, India
Self-help group method / B / A / A / B / B
Basix LAB, India
Joint liability group method / C / B / A / B / A
Bank Rakhyat, Indonesia
Individual customer method / C / C / A / B / A

Stress that there is no perfect method, and that high bank transaction costs have to be paid for by high interest rates. Cross subsidy may be possible when micro-finance only involves a small part of a bank’s total business,

  1. Ask participants to suggest which of these systems involves the highest interest charges to the final borrowers.

The Grameen and Bank Rakhyat systems charge the highest rates out of these four systems, but the self-help groups add a margin to the rates they pay to the banks, which may bring the final rate to group members to a similarly high level. Poverty outreach and convenient access are expensive; this cannot be avoided.

  1. Ask participants to suggest which method would be most appropriate for their own banks, or for banks which are known to them.

Encourage discussion and clarify that any bank which goes into direct micro-finance has to decide what method to use in the light of their circumstances. All these four banks, like every other, have developed and modified their systems according to their own and their clients’ needs. They have not taken over these methods ‘ready-made’ and unchanged from other banks or micro-finance NGOs.

  1. Participants may be tempted to minimize the difficulties involved when a commercial bank enters the micro-finance market.

Ask them to recall the nature of ‘new paradigm’ micro-finance as revealed in the first session, and the many strong arguments against entering the market that were mentioned in the second session.

Ask them to suggest what has always been found to be the main constraint for commercial banks which wish to initiate entry into this market.

Stress that it is the bank staff, at all levels. They are usually socially and culturally averse to dealing with very poor people. Branch staff, who are often less socially secure than their superiors, have to get out of their offices and visit poor people in their own homes. They have probably never done this even for their well-off customers who are of the same socio-economic level as themselves. It is vital not to under-estimate the difficulty of motivating traditional bankers to act in what is, to them, so unfamiliar a way.

  1. Explain that the next session will examine in more detail how banks can get involved in micro-finance but indirectly through other organisations. Distribute the handout “Micro-Finance Methods Used by Four Commercial Banks – Indirect Involvement” for participants to read before the start of the next session if possible.

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