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

This presentation explores the profitability of microfinance in commercial banks, based on the case studies of CREDIFE, a service company in Ecuador, and an integrated product from Hatton National Bank, Sri Lanka. It identifies the specific goal of this research as follows:

• To advise bankers and advisors on microfinance programs to understand the cost and revenue derivers and the potential profitability of microfinance in a commercial bank.

An initial comparison of the two cases reveals that:

• Neither bank had performed detailed profitability analyses;
• Both banks had considered the elimination of the microfinance program.

The presentation goes on to compare the following features of the banks:

• Loan portfolio;
• General cost allocation;
• Revenue;
• Interest revenue;
• Investment income;
• Expenses;
• Cost of funds;
• Provision expense;
• Direct and indirect operating expenses.

It finds the following challenges to the profitability of microfinance in these banks:

• Savings mobilization;
• Cross-selling;
• Graduating clients;
• Management information system (MIS).

The presentation concludes that:

• Commercial banks introduce microfinance for social reasons;
• Determining the profitability of small microfinance programs has not been a priority for large commercial banks;
• Leaders are beginning to realize the business and profit potential of micro-enterprise clients.