Best Practices for Banks in Small Business Finance World Bank Workshop SME Financing – Reaching Scale Dar es Salaam, Tanzania June 26-27, 2007. Glenn Westley Inter-American Development Bank. Contents of the Presentation. Intro to Microlending in Latin America
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Best Practices for Banks in Small Business FinanceWorld Bank WorkshopSME Financing – Reaching Scale Dar es Salaam, Tanzania June 26-27, 2007
Inter-American Development Bank
Compounded Annual % Growth Rates
30-Day Portfolio at Risk
Source: Marulanda and Otero (2005), The Profile of Microfinance in Latin America in
10 Years: Vision and Characteristics.
1. Internal unit: microlending done in house
2-4. External organizations: normally corporations with own board of directors, management, & staff all focused on microfinance; may be either fully or partially owned by the parent bank. There are examples of all 6 cases in LAC.
2. Heavily regulated subsidiary: for example, a financiera or banco de desarrollo that is directly regulated by the banking superintendency
3 and 4 are “auxiliary providers of financial services,” which many countries allow. They engage in 1 or more of the bank’s permitted operations. Common examples: leasing or factoring companies set up as bank subsidiaries. Many auxiliary providers have been created in LAC to do microlending. Little or no direct regulation: generally consolidated with parent.
3. Service Company: doesn’t own the microloan portfolio (the bank does). Bank pays service company a fee for loan origination and collection services.
4. Lightly regulated subsidiary: owns the microloan portfolio and therefore receives its income from the interest on this portfolio.
… antidotes to the revolving door syndrome (entry and exit) include…
There are many important pros and cons associated with each of the microlending structures, and so the choice of structure will often have a major impact on the success of the bank in this new venture ....
…. especially since the best structure for microlending depends on many individual bank and country characteristics.
There is no single microlending structure that is best for all banks!
Note: An asterisk (*) indicates those factors where the effect is (or may be) different depending on whether the comparison is made to a heavily regulated subsidiary or a lightly regulated subsidiary.