Case Study on Profitability of Microfinance in Commercial Banks: Hatton National Bank

This case study aims to measure the profitability of a microfinance unit related to a private commercial bank. It studies the Hatton National Bank (HNB) in Sri Lanka, an Asian commercial bank with microcredit as an integrated product line.

The case study analyzes the profitability of HNB and finds that the bank's microfinance operations are barely profitable because of the relatively low interest rates. The case study outlines the following challenges that HNB faces:

• Achieving long-term sustainability, including cost recovery as well as profitability;
• Improving net interest margin to sustain significant returns;
• Creating a competitive pricing strategy for its microfinance loans;
• Increasing staff productivity.

The case study states that the program's outreach will expand when the bank's management information system can segregate and properly allocate costs and contribution of its microcredit clients, and the bank can prove and sustain the profitability of its microfinance program. The bank will have to ensure that the program contributes to its bottom line, and decide whether additional profitability should be attributed to the microfinance program for activities such as cross-selling.