Role of Commercial Banks in Microfinance

Commercial banks help others through small investments.

Microfinance, or lending a small loan, goes beyond the pawn shop or wealthy family member. Commercial banks have observed the potential profit and growth that can result from participating in microfinance in addition to serving a social need.

Benefits

With intense competition in the retail banking markets, commercial banks have found profitable growth by tapping into microfinance markets, which remain comparatively fresh according to a 2005 report by the United Nations Capital Defense Fund (UCDF). According to 2005 estimates, 3 billion potential clients existed in microfinance.

Considerations

Success in the microfinance market depends on adapting to its specific nature. The UCDF recommends a stronger patience with this market as well as choosing an approach most compatible with a commercial bank's particular structure and goals. Such an approach could include setting up an internal microfinance unit or providing funds through an external agency.

Necessity

Although some banks may merely have financial motivations, the UCDF asserts that personal interest and commitment must accompany any investment strategy. Therefore, banking leaders with progressive and visionary mindsets make the best candidates for successful microfinance investing.

References

• "Making Microfinance Work"; Craig Churchill, Cheryl Frankiewicz; 2006
• UNCDF: Microfinance Matters