Case study

Profitability of Microfinance in Commercial Banks: Case Studies of CREDIFE and Hatton National Bank

Are commercial banks attracted by the profit potential of microfinance?
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This presentation explores the profitability of microfinance in commercial banks, based on the case studies of CREDIFE, a service company in Ecuador, and an integrated product from Hatton National Bank, Sri Lanka. It identifies the specific goal of this research as follows:

  • To advise bankers and advisors on microfinance programs to understand the cost and revenue derivers and the potential profitability of microfinance in a commercial bank.

An initial comparison of the two cases reveals that:

  • Neither bank had performed detailed profitability analyses;
  • Both banks had considered the elimination of the microfinance program.

The presentation goes on to compare the following features of the banks:

  • Loan portfolio;
  • General cost allocation;
  • Revenue;
  • Interest revenue;
  • Investment income;
  • Expenses;
  • Cost of funds;
  • Provision expense;
  • Direct and indirect operating expenses.

It finds the following challenges to the profitability of microfinance in these banks:

  • Savings mobilization;
  • Cross-selling;
  • Graduating clients;
  • Management information system (MIS).

The presentation concludes that:

  • Commercial banks introduce microfinance for social reasons;
  • Determining the profitability of small microfinance programs has not been a priority for large commercial banks;
  • Leaders are beginning to realize the business and profit potential of micro-enterprise clients.