Findings and Recommendations: Supply-Side Scan of Microenterprise Financing

This document summarizes findings and conclusions about microcredit providers in the for-profit sector, and its implications for non-profit microcredit providers. The for-profit microcredit sector has been fragmented over the last decade, with banks as the primary suppliers.

Providers of small business loans primarily use credit scoring to predict repayment probability. Small commercial loan providers are aggressively tapping the market using credit cards as the primary product vehicle. There are gaps in credit availability for small businesses, which non-profit microlenders can fill.

The paper states that banks and the other for-profit providers of commercial microcredit will continue reaching downwards to service riskier borrowers. They are pushing non-profit portfolios further to the margin by aggressively tapping the borrower segment served by non-profit lenders. Partnerships between nonprofit and for-profit microcredit providers will need to be based on a thorough understanding of the credit scoring model employed by the for-profit sector. The paper recommends:

• Educating borrowers about hazards of unsecured, high-priced credit;
• Forging partnerships focused on the front-end of a relationship;
• Counseling potential borrowers on banking products.