Commercial Microfinance: A Strategy to Reach the Poor?

Abstract

The microfinance sector in Sri Lanka suffers from the core problem of poor quality of microfinance services offered, indicated by insufficient outreach, poor repayment rates, low cost efficiency, recurring losses, financial products which are not client driven and significant deficiencies in regulation and supervision. This seriously threatens the sustainability of the offered financial services and their outreach to poorer households, micro and small entrepreneurs. In early days, financial exclusion; the provision of financial services to those excluded from the formal financial system was a hint of potential breadth of micro financial services which was an expanding focus for microfinance institutions. However, “Commercial Microfinance,” where microfinance services are provided by commercial organizations that are part of the formal financial system has received increasing attention in today’s financial market. Therefore, this study explores “downscaling” by banks as a model of microfinance commercialization that has used as a strategy to reach the poor. In order to answer the main research question, an explorative case study methodology was chosen, based by a microfinance programme of a well established commercial bank in Sri Lanka, the “Hatton National Bank.” This study was based on commercialization debate areas; trade-off between sustainability and outreach, financial performances and impact on clients. The findings reveal that commercialization of microfinance gives rise to a trade-off between sustainability and outreach. However, protection against regulations, physical infrastructure, better know-how, greater access to funds, and enhanced capacity, make commercial banks the most qualified to meet the untapped demand of micro entrepreneurs.