PROFITABILITY OF MICROFINANCE IN COMMERCIAL BANKS by wuxiangyu

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									Profitability of Microfinance in
Commercial Banks
       Case Studies of CREDIFE and
       Hatton National Bank


Lynne Curran
October 28, 2005
SEEP Annual General Meeting
Case Studies on Profitability of Microfinance in
Commercial Banks – Research Objective

     To assist bankers and those advising
      banks on microfinance programs to
      understand the cost and revenue drivers
      and potential profitability of microfinance
      in a commercial bank.
       Focus on lessons learned rather than on
                    methodology

      (Under AMAP Financial Services Knowledge Generation Project )
Case Studies on Profitability of Microfinance in
Commercial Banks – Challenges

   Few banks offering microfinance on a
    commercial basis
   Proprietary information


      Challenge to accurately cost and measure
       profitability of microfinance within large
                        institution
Case Studies on Profitability of Microfinance in
Commercial Banks

                                CREDIFE              Hatton National
                                                          Bank
  Country                  Ecuador                  Sri Lanka
  Model                    Service                  Integrated
                           Company                  Product (Gami
                                                    Pubuduwa
                                                    program)
  Year Initiated           1999                     1989
  Active Clients*          24,000                   10,697
  Outstanding              28 million               7 million
  Portfolio (US$)*

 *Figures for CREDIFE as of 12/03. Figures for HNB as of 6/04.
Case Studies on Profitability of Microfinance in
Commercial Banks - Background

  Neither bank had performed detailed profitability
   analysis
  Timeliness of studies:
        CREDIFE began paying parent bank in 2003
        Organizational changes led HNB to prepare initial
         profitability analyses of GP in 2003
    Both banks had considered elimination of
     microfinance program:
             CREDIFE: focused on profitability of service company
             HNB: long-term profitability of customers
Case Studies on Profitability of Microfinance in
Commercial Banks



           BP Loan Portfolio                     HNB Loan Portfolio
                                                                        GP Loan
                                                                      Portfolio 0.9%
                                 CREDIFE
                               Loan Portfolio,
                                   3.6%
Case Studies on Profitability of Microfinance in
Commercial Banks - Methodology

     General cost allocation
     Considerations:
         Credife:
              Standalone operations
              Paying parent company for operational expenses
              Reclassification effect on bottom line was nil (two options)
         GP:
              No dedicated staff or facilities
              Allocations based on time and portfolio
Case Studies on Profitability of Microfinance in
Commercial Banks – Income Statements
                                   CREDIFE                             GP

   Revenue
   Interest Revenue     Actual                           Actual
   Investment Income    Actual                           N/A
   Expenses
   Cost of Funds        Weighted Average Cost of         Average Deposit Rate
                        Funds BP + Cost of Funds for
                        international loans designated
                        for CREDIFE portfolio
   Provision Expense    Estimated based on portfolio     Estimated based on portfolio
                        quality and provisioning         quality and provisioning
                        standards                        standards


   Direct Operating     Actual                           Estimates based on time and
   Expenses                                              portfolio allocations
   Indirect Operating   BP Residual profit from          Estimates based on time and
   Expenses             CREDIFE loan portfolio           portfolio allocations
Case Studies on Profitability of Microfinance in
Commercial Banks – Results

                        CREDIFE                 CREDIFE           Banco del
                  Option 1: 100% Admin    Option 2: 20% Admin     Pichincha
                  Fee & Residual Profit   Fee & Residual Profit
                   as Indirect Expense     as Indirect Expense

    ROA (before           3.2%                    7.6%              1.2%
    tax)




                           GP                            HNB


    Return on            0.14%                           1.44%
    Portfolio
Case Studies on Profitability of Microfinance in
Commercial Banks – Challenges



   Savings mobilization
   Cross-selling
   Graduating clients
   MIS
Case Studies on Profitability of Microfinance in
Commercial Banks – Conclusions

     Microfinance introduced at commercial banks
      for social reasons
         Focus on social responsibility and community
          development requires strong commitment from
          senior bank management
   Determining profitability of small microfinance
    programs has not been priority for large
    commercial banks
   Leaders now recognizing business and profit
    potential of microenterprise clients
         Move toward measuring profitability and
          contribution of microfinance programs

								
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