Commercial Banks and Microfinance: Evolving Models of Success

01 June 2005

There is a vast potential market for retail financial services among low-income clients, and a growing number of commercial banks have successfully entered this market. These are the findings of recent research undertaken by CGAP, the global resource center for microfinance supported by a syndicate of 30 multilateral, bilateral, and private donors.

Microfinance is the category of financial services offered to lower income people, where the unit size of the transaction is usually small (“micro”), typically lower than the average GDP per capita, although the exact definition varies by country. Starting in the 1970s, well-known pioneers, such as Grameen Bank in Bangladesh and ACCIÓN in Latin America, demonstrated that poor people can be creditworthy. Today, microfinance covers the full range of financial services—credit, savings, remittances, insurance, and leasing, among others—which are increasingly provided by a diverse set of financial service providers. In 1998, CGAP described commercial banks as “new actors in the microfinance world.”

Seven years later, it is not surprising that commercial banks are playing an increasingly important role in many financial services markets across the world. Compared with many existing providers of microfinance, commercial banks have potential competitive advantages in a number of areas, such as recognizable consumer brand names, existing infrastructure and systems, and access to capital.