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Commercial Banks and Microfinance

Author

Listed:
  • Delfiner, Miguel
  • Peron, Silvana

Abstract

The term “microfinance” (MF) refers to the provision of banking services to lower-income people, especially the poor. In the history of MF, microfinance institutions (MFIs)1 have been the first to identify the large unserved demand for microcredit in developing countries, develop methodologies for delivering and recovering small loans, and begin credit programs for the poor. Given their nature, though, MFIs can normally meet only a fraction of the demand for microloans in their service areas. Commercial banks have begun to see MF as a potentially profitable business and are starting to venture into this field. This approach to MF (known as “downscaling") is different from that of “upgrading” or transforming MFIs into regulated institutions. Evidence is currently showing that financial institutions can profitably attend MF needs on a massive scale. This paper aims at exploring the main aspects and future outlook in connection with commercial banks provision of MF services. A review is made of the incentives and disincentives for financial institutions to venture into the MF sector, and their specific advantages and disadvantages when competing in this market. A classification of the main operating models currently adopted by banks for entering the MF market is established as well as an analysis of the local regulations that could potentially apply to each of these models.

Suggested Citation

  • Delfiner, Miguel & Peron, Silvana, 2007. "Commercial Banks and Microfinance," MPRA Paper 10229, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:10229
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    File URL: https://mpra.ub.uni-muenchen.de/10229/1/MPRA_paper_10229.pdf
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    References listed on IDEAS

    as
    1. Ravicz, R. Marisol, 1998. "Searching for sustainable microfinance : a review of five Indonesian initiatives," Policy Research Working Paper Series 1878, The World Bank.
    2. Delfiner, Miguel & Pailhé, Cristina & Perón, Silvana, 2006. "Microfinanzas: Un análisis de experiencias y alternativas de regulacion," MPRA Paper 497, University Library of Munich, Germany, revised 02 Apr 2006.
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    Cited by:

    1. François Fall & Thanh Tam Nguyen-Huu, 2022. "Strategic Behavior between a Bank and A Microfinance Institution: The Role of Psychological Distance and Education Level," Post-Print hal-04248194, HAL.
    2. Challapalli Praseeda, 2018. "Socially Responsible Investment, Microfinance and Banking: Creating Value by Synergy," Indian Journal of Corporate Governance, , vol. 11(1), pages 69-87, June.
    3. Nargiza Maksudova, 2010. "Macroeconomics of Microfinance: How Do the Channels Work?," CERGE-EI Working Papers wp423, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    4. JJ. Cao-Alvira & LG Deidda, 2013. "Financial liberalization and the development of microcredit," Working Paper CRENoS 201324, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.

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    More about this item

    Keywords

    Microfinance; Downscaling; Commercial banks;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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