Banks and Micro-lending: Support, Cooperation and Learning

Can banks effectively team up with micro-lending organizations?
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This report aims to demonstrate the main forms of cooperation between banks and microlenders, and to help banks determine what is most suitable for them and their clients. It identifies the following types of people who seek help from micro-lending organizations (MLOs):

  • Socially excluded people;
  • People who need micro-credit to start businesses;
  • People who need development capital to manage existing micro-enterprises.

The paper identifies differences between micro-lenders and banks that include, loan size, speed of access and methods of assessing credit worthiness and collateral requirements. It identifies the following important lessons that banks can learn from microlenders:

  • Tailoring loans to the needs of the borrower;
  • Providing business support to entrepreneurs;
  • Using sophisticated methods to assess and manage risk.

The paper suggests the following three ways that a bank can work with a  microlending organization to support and develop lending facilities to micro-entrepreneurs:

  • Set up a separate MLO subsidized by the bank;
  • Cooperate with MLOs to increase their capacity and effectiveness;
  • Develop the ability to lend directly to micro-entrepreneurs.

The paper concludes by presenting the following four key insights into the issue of working with micro-lenders:

  • A clearer picture of client needs;
  • A realization that access is more important than price when it comes to micro-credit;
  • An understanding of the wider, non-financial benefits of working with MLOs;
  • A confirmation of the importance of strategic working relationships.