When assessed on the basis of achieving both high portfolio quality and significant scale of outreach to the poor, most of the commercial bank microfinance programs that were mandated by governments can only be considered as failures. The exceptions were those programs that charged a commercial rate of interest. They had a higher portfolio quality than other programs but they were still not profitable. This almost universal failure is not explained by the different policy contexts across the region
Further, because microfinance has not been a profitable business, government mandates have been unsuccessful in encouraging commercial banks to become involved in microfinance. The banks must have the incentive to design better products for microentrepreneurs, which can be profitable
In stark contrast to this majority, BRI's Unit Desa system (its microfinance arm) has the best financial results of any microfinance institution in the world. In 1996-97 it earned a profit of $170 million on loans of $1.7 billion to 2.5 million clients, with no subsidies. This is an approximate return on performing assets of 10 per cent ? a very competitive rate by commercial standards. The success of BRI?s Unit Desa systems can be attributed primarily to the fact that the system has adhered to the fundamentals of banking and finance for the rural microentrepreneurs, including the provision of competitive savings services. The microfinance savings and loans of the Unit Desa system perform consistently for BRI and continue to grow quickly. BRI?s microfinance business may not compete with the most spectacular returns, but it does achieve these strategic goals:
* Consistently performing products for microentrepreneurs,
* Diversification of the bank?s portfolio to diversify its risk,
* The performance of its branch network maximised,
* Provision of financial services to a broad cross-section of the population.
BRI's achievements demonstrate that financial services to microentrepreneurs (that are provided in an appropriate policy context) can generate a commercially competitive rate of return and fulfil important strategic goals for commercial banks
Commercial bankers distrust the poor and NGOs.The large majority of commercial bankers interviewed had little positive experience of banking with the poor. They experience non-payment by the poor, look at the high costs, and assume the problem is with the poor rather than with the design or delivery of their bank?s products. They also distrust NGOs that provide financial services to microentrepreneurs, because they are not-for-profit institutions and not subject to regulation. As a result, the majority of commercial bankers perceive microfinance as risky, unprofitable and not fitting with their core business. By contrast, commercial bankers with a positive perception of microfinance had seen successful microfinance in practice, undertaken a comprehensive analysis of the size and performance of the microfinance market, and designed lending and savings products that were profitable and could reach significant scale
Sound macroeconomic policy and a non-restrictive regulatory environment are criticalThe most effective way for governments to encourage commercial banks to become involved in microfinance is to ensure an appropriate regulatory and prudential framework. The elements of an optimal policy context are:
* Sound macroeconomic policies and basic infrastructure to ensure a growing economy (especially increasing complexity in the financial sector,
* Minimal restrictions to profitable lending, particularly no interest rate caps,
* Enhanced ability to establish a small commercial bank which can focus on this sector (such as a low minimum capital requirement),
* Appropriate prudential regulations for this market including capital adequacy ratios, asset quality indicators and unsecured,
* Loan limits,
Having all these elements in place will not guarantee that commercial banks will start microfinance lending. However, there certainly would not be external constraints
Key success factors for commercial bank involvement in microfinance: Based on this research, and corroborated by other studies, the following were found to be key success factors for microfinance in commercial banks:
* Create a small specialised bank or a separate microfinance unit within a large commercial bank,
* treat savings as equally important to lending
* Charge interest rates to cover all the costs of the lending products,
* Ensure excellent MIS and portfolio management,
* Recruit staff from outside the bank and/or give staff specialist training,
* Find a champion or visionary who will see the program through to success.
