Research Topics: Wholesale Lending

Impact of Wholesale lending to the Growth of Microfinance Institutions

The defining characteristic of microfinance is that it applied to low value and innovative financial products for people not being served by the mainstream financial services industry. Microfinance is widely regarded as a way to reduce poverty in both developed and developing economies.   Financial Products             A main distinction in product focus can be made between financial and non-financial products offered to the microfinance sector in general and to end users in particular. Banks that provide financial products offer financing, savings facilities, insurance or money transfer services. By far the most important financial product offered by large international banks is financing especially wholesale business loans and related products such as guarantees to the MFIs. Banks may also provide consumer loans, housing loans, or securitizations. Non-financial products offered refer mainly to technical assistance. This may cover anything from bookkeeping advice to a small entrepreneur to providing large microfinance institutions with complete credit systems.   Retail Microfinance             Microfinance products from international banks benefit the end users either directly or indirectly. Commercial banks involved in retail typically target small businesses. These are usually single-person or family businesses in the informal sector. The microfinance enterprises targeted include small shops, street vendors, small traders and small farmers. International banks engaged in retail microfinance tend to focus on urban rather than rural customers. Retail microfinance can be aimed at either groups or individuals. The former approach is an established microfinance strategy for dealing with the absence of collateral, or with high transactions costs. In group lending, the group members are jointly responsible for each member’s loan repayment. The group members’ ‘social capita’ – their social standing – drawn on to limit the non-repayment risk: group pressure ensures that individual members keep up their repayment obligations. Wholesale Microfinance             Most international banks are active in wholesale rather than retail microfinance. They provide products to microfinance institutions, which use these to service end users. Typically, they concentrate on larger, more established MFIs, which have a better track record and can absorb more money than weaker or smaller MFIs. In comparison to retail microfinance, activities at the wholesale level are organizationally more feasible, and probably easier to integrate into a single corporate strategy. Banks may also enter into arrangements with MFIs whereby the latter act as the bank’s agent in offering financial products. This is sometimes referred to as a type of outsourcing of retail activities. Savings facilities make large scale lending operations possible. On the other hand, studies also show that the poor operating in the informal sector do save, although not in financial assets, and hence value access to client-friendly savings service at least as much access to credit. Savings mobilization also makes financial institutions accontable to local shareholders. Therefore, adequate savings facilities both serve the demand for financial services by the customers and fulfil an important requirement of financial sustainability to the lenders. Microfinance institutions can either provide savings services directly through deposit taking or make arrangements with other financial institutions to provide savings facilities to tap small savings in a flexible manner. Once microfinance institutions are engaged in deposit taking in order to mobilize household savings, they become financial intermediaries. Consequently, prudential financial regulations become necessary to ensure the solvency and financial soundness of the institution and to protect the depositors. However, excessive regulations that do not consider the nature of microfinance institution and their operation can hamper their viability. In view of small loan size, microfinance institutions should be subjected to a minimum capital requirement which is lower than that applicable to commercial banks. On the other hand, a more stringent capital adequacy rate (the ratio between capital and risk assets) should be maintained because microfinance institutions provide uncollateralized loans.     Credit:ivythesis.typepad.com

Impact of Wholesale lending to the Growth of Microfinance Institutions

The defining characteristic of microfinance is that it applied to low value and innovative financial products for people not being ...