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Do you think commercial banks should be involved in microfinance?

Microfinance practitioners often regard commercial bankers with suspicion, believing that they only wish to exploit or ignore poorer people.

Commercial banks often consider that providing financial services for poor people is something best left for the government or non-profit organisations.

Let us look at the reasons for these attitudes and consider when and how a bank might choose to become involved in microfinance.

This is Michael. He is the Chief Executive of the Traditional Commercial Bank (TCB) in Povertia.

TCB is the country’s oldest and largest commercial bank. It was founded 100 years ago by the colonialists and had been taken over by the government soon after independence. The bank had made serious losses as a result of government poverty alleviation programmes and large loans to politician’s families and loss-making public enterprises, but five years ago it was restructured and privatised which was a painful process but one that has turned it into a profitable institution.

The latest annual report showed that:

  • The bank has over 100 branches in rural and urban areas.
  • The rural branches mobilise far more money in savings than they lend out.
  • The most profitable business is with large trading companies involved in importing and exporting but they are facing competition from foreign banks for this market now.
  • The bank invests significantly in treasury bills.
  • In rural areas they lend only to established traders and large scale farmers.
  • Most small loans given out under rural poverty alleviation programmes have been written off and the credit culture has been badly damaged.