Role of commercial banks in microfinance

Micro entrepreneurs (the self-employed poor) have little access to the formal financial system in developing economies. At best, formal financial institutions reach the top 25 per cent of the economically active population, which leaves the bottom 75 per cent without access to formal financial services. In 1997, it was estimated that 200 million poor households needed access to microfinance services in the Asia-Pacific region.

Microfinance institutions have grown rapidly to try to meet this demand. However, their outreach remains very small compared with the demand less than 5 per cent of those 2 million poor households had access to microfinance services. Similarly, very few institutions involved in microfinance are profitable. It was estimated that less than 10 per cent of all MFIs in the region were financially self-sufficient. Our research findings came from in-depth interviews with over 40 bankers in 22 banks in India.

A great deal of microfinance undertaken by commercial banks was found, but it was undertaken because of government mandates to lend to this sector rather than for business reasons.