Breaking Down the Value Chain (Outsourcing Micro-Credit Operations)

Partnership model: Overcoming constraints for banks and institutions engaged in microfinance
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This paper discusses the partnership model between microfinance institutions (MFIs) and banks.The paper elucidates two models engaged in microfinance:

  • Self help group (SHG) model - bank directly lends to the SHG;
  • MFI model - bank does wholesale lending to the MFIs.

It also presents the:

  • Constraints faced by both the MFI and the bank engaged in microfinance;
  • Bottlenecks in wholesale lending.

The paper explains the partnership model consisting of specific responsibilities of MFI and bank. It then explicates the methodology of partnership model adopted by ICICI.

Highlighting the business model of the partnership model, the paper states that:

  • MFI collects 20-30% interest rate from its clients;
  • Bank's share is 10-15% and MFI keeps the remainder;
  • MFI shares the credit risk.

As per the paper, the adoption of this model is beneficial since it:

  • Combines the comparative strengths of each institution;
  • Solves donor dependency and limitations of capital adequacy for MFIs;
  • Avoids expensive and lengthy transformation for MFIs;
  • Allows MFIs to focus on operation side of business.

The paper highlights the results for ICICI bank that include:

  • Partnerships with 50 MFIs;
  • Building of US $100 million microfinance portfolio, of which 50% is through partnership model.

It concludes with constraints solved through adoption of the partnership model.

About this Publication

By Ivatury, G.