Handout

Handout Session 4

MICRO-FINANCE METHODS USED BY FOUR COMMERCIAL BANKS

Indirect Involvement
The material in this handout is taken from Small customers, big market
commercial banks in Micro-finance, Harper, M. and Sukhwinder, S.A., 2005, ITDG
Publications, London
The following commercial banks are all profitably involved in micro-finance:
Sonali Bank in Bangladesh
State Bank of India
ICICI Bank in India
Sogebank in Haiti
The table below briefly summarises some critical features of the banks and the
following paragraphs describe the indirect micro-finance delivery systems that each
bank uses.
Features of
Bank

Sonali Bank,
Bangladesh

State Bank of
India

ICICI Bank,
India

Sogebank,
Haiti

Ownership

Government

Government

Private

Private

Bank started

1972

1809

1990

1986

Bank entered
micro-finance

2000

1993

2001

2000

Total assets

$ 4 billion

$ 65 billion

$25 billion

$ 333 million

% of assets in
micro-finance

0.2 %

0.15%

0.25%

1.5%

Number of
branches

1184

9033

450

Micro-finance Delivery Systems

1. Sonali Bank in Bangladesh
Sonali Bank provides money for microfinance by wholesale lending to NGOs and MFIs.
It is the largest bank in Bangladesh. The Bank has acted as a major channel for
government poverty alleviation programmes in the past, which created large
non-performing assets for the Bank but had little impact on poverty. The Banks
management observed the rapid growth of new paradigm micro-finance
programmes, such as the Grameen Bank, BRAC and their many imitators.

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So they decided in 2001 to enter the market by offering wholesale commercial funds
to the Shakti Foundation, an MFI working mainly in urban areas. The Banks funds were
more expensive than donor funds but Shaktis Director realised that it would not be
possible to depend on donor money for ever; it was necessary to open up sources of
domestic funds, even at some cost. The Swiss Development agency facilitated the
transaction with a part guarantee and with support for Sonalis staff to learn more
about micro-finance. Later loans have not been guaranteed.
By 2004 Sonali Bank was lending $7.6 million to 47 NGO/MFIs, ranging from $3.4
million to BRAC, Bangladeshs largest MFI, to advances of $1000 or even less to some
small institutions. One major MFI was in default for over $100,000 because of a
political dispute which had led to the freezing of all its assets, and there was another
$30,000 overdue because of a legal disagreement as to the terms of the loan. There
were no other repayment problems.
Around half the Banks microfinance portfolio was financed from the Banks own
resources and this money was lent at the normal commercial rate of 10%. The balance
was financed with a $3.4 million concessionary loan from the international agency
IFAD, which cost 1.5% and was lent at 7.5%.
2. State Bank of India
The State Bank of India (SBI) gives wholesale loans to NGOs and MFIs, in addition to its
direct self-help group business. So it is involved in both direct and indirect
microfinance delivery methods.
SBI is the worlds largest bank by numbers employed and numbers of branches. In
March 2004 its total advances were $30 billion, of which $7.8 billion was lent for
farming and small-scale industry, the so-called priority sectors for which all
commercial banks in India are required to lend a fixed proportion of their portfolio.
SBI has been involved in Indias poverty alleviation programmes and has suffered heavy
losses as a result but the Bank has also entered the rapidly growing self-help group
(SHG) market. In 2004, SBI was lending to 175,000 SHGs, with over two million women
members; approximately another 175,000 groups have savings accounts with the Bank
and are likely to take loans in the near future. The interest rate is about 10% and
recoveries are almost perfect. Only about 25% of SBIs branches are involved in direct
business with SHGs, however. The others are not involved, either because of
competition from other banks or MFIs, or because there are no local NGOs to promote
groups, or because local management are unenthusiastic.
In areas where MFIs dominate the market, however, SBI has become involved in bulk
lending to a number of strong MFIs. One such MFI is SKDRDP, which is based on a very
wealthy Hindu temple which also has a social outreach programme. The MFI needed
$3.15 million and asked 21 banks to tender for the loan. Twelve banks submitted
tenders and the manager of the local SBI branch was particularly keen because his
bank had thus far not secured any other business from SKDRDP. He submitted a bid at
8.15% and it was accepted. The loan counts towards SBIs priority sector target and is
informally secured by the temples assets. This form of indirect micro-finance business

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is growing faster than SBIs direct SHG business and some SBI management believe that
this is the best way for the Bank to reach the poor.
3. ICICI Bank in India
ICICI Bank is involved in a mix of indirect methods of microfinance.
The present ICICI Bank is the second largest bank in India in financial terms. It was
formed in 2002 by a merger between its original parent, a development finance
institution, and its subsidiary bank. ICICI Banks shares are widely held and are quoted
on the New York stock exchange. The newly enlarged bank had to increase its priority
sector portfolio as a matter of urgency, since this obligation had not applied to the
original parent. Management took this as an opportunity and they devised a range of
models for engaging with microfinance. By 2004 their microfinance portfolio had
reached a total of $40 million.
Over 90% of this portfolio is under the partnership model, whereby the Bank carries
the micro-finance loans in its own books but it sub-contracts the origination,
management and recovery of the loans to an NGO or MFI. Under its other model, the
Bank buys the micro-finance portfolio from the MFI, either on a package basis or by
buying the complete loan book of a branch or area at one time, or on an on-tap basis,
continuously taking over the loans as they are made.
In either case, the Bank reduces its risk by some form of first loss guarantee. A third
party may guarantee an agreed percentage of the amount outstanding, or the Bank
may extend an overdraft limit to the MFI for an agreed percentage of the amount,
which is only drawn down in case of default, or the MFI may lodge its share of the
transaction margin with the Bank until such time as the loans are repaid. ICICI Bank
has also made a small equity investment in BASIX Finance, one of the MFI from which
it has purchased a part of its portfolio.
The Bank also has a modest but growing direct micro-finance portfolio through its own
branches. It plans in due course to securitise and sell on its micro-finance portfolio,
and thus to create a secondary market in this form of debt. ICICI Bank believes that
its micro-finance portfolio will reach $4 billion within a few years and such a
secondary market would, of course, be of great value to other financial institutions
and thus to other MFI and their clients.
4. Sogebank in Haiti
Sogebank has become involved in microfinance by setting up a subsidiary service
company, Sogesol to manage its microfinance portfolio.
Sogebank is the largest bank in Haiti, with 24% of the market. Both MFIs and some
other banks were active in the micro-finance market in Haiti and the management of
Sogebank realised that they too should become involved, particularly since continuing
political unrest meant that their mainstream business was unlikely to expand. They did
not wish to disturb the smooth working of the Bank in what is a very difficult working
environment, however, so they set up a separate service company, called Sogesol,
which manages the micro-finance portfolio although the loans are on the books of

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Sogebank. Sogesol is owned by Sogebank, together with Accion and Profund, two USA
based social investors, and by some of the private individuals who own Sogebank and
also wished to invest in this new venture.
Sogesol has its own staff, including loan officers who spend most of their time in the
field with clients, and counter staff at its branches, which are always located in or
adjacent to Sogebank branches. The Sogesol branches are clearly separate from the
Bank, however, and they do not handle cash. Sogesol customers complete all the loan
formalities at their branch, but they then have to step over to the Sogebank tellers for
the actual cash transactions.
All principal repayments go straight to Sogebank. Sogesol retains the interest
payments, which are at an effective annual rate of 87%; inflation in Haiti is about 35%.
Sogesol then pays Sogebank for the cost of funds and the Banks transaction services,
plus a half share of the loan loss provisions. Sogesol had seven branches by 2004 and
was running at a profit.

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ASSIGNMENT
The four case studies presented in the handout for this session describe banks which
are involved primarily in indirect methods of engaging in microfinance although some
also are involved in direct methods.
Discuss the case studies in your group and between you come up with a rating for each
bank in relation to the following important criteria for their microfinance activities:
1

Risk for the bank

Rank the four examples in the order of their likely level of risk for the bank:
A = least risky, B = less risky, C = more risky, D = most risky.

Transaction costs for the bank

Rank the four examples in the order of their likely transaction costs to the
Bank:
A = most expensive, B = quite expensive, C = less expensive, D = least
expensive.

Transaction costs for the MFIs (or in the case of Sogesol, the actual clients)
Rank the four examples in the order of their likely transaction costs to the
recipients:
A = most expensive, B = quite expensive, C = less expensive, D = least
expensive.

Summarise your views in the following table:

Sonali Bank,
Bangladesh

State Bank of
India

ICICI Bank, India

Sogebank, Haiti

Risk rating
Bank transaction
cost rating
MFI/Client
transaction cost
rating

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