An Evaluation Of Commercial Banks Lending Methodologies In The Provision Of Microfinance Services To The Informal Sector A Case Study Of Access Bank (Liberia) Limited (2008 2009)

8962 words - 36 pages

CHAPTER ONEINTRODUCTIONConcerns have been raised as to whether commercial banks lending methodologies are adequate to provide microfinance service to the informal sector. These concerns stand from the fact that there has been little to tell because commercial banks have been so notably absent from this field. In their absence, micro enterprise lending has developed on an alternative track through a large number of nongovernmental organizations (NGOs) and other specialized financial institutions dedicated to improving the lives of the poor (Namada ,1997).In Liberia, Lending NGOs began serving micro enterprises after the fourteen years civil crisis, responding to the critical income and employment opportunities of their urban and rural clientele.Today some leading NGOs have created financial methodologies that serve increasing numbers of the poor and generate repayment rates that compare favorably with the loan performance of many traditional commercial banks. By using these methodologies, NGOs have achieved increasing levels of sustainability, even to the point of outright profits without subsidies.Nevertheless, most NGOs have encountered serious problems of sustainability, suggesting there may be serious flaws in the NGO approach that need to be acknowledged. These flaws appear to emerge from organizational design that is, property rights and governance structures, features that are generally strengths in commercial banks. At the same time, NGOs usually are not responding to the widespread demand for deposit services from their clients, demand effectively serviced by banks. Stiff banking competition in many countries has forced some to diversify into new markets (Namada, 1997).Others have heard about the profits of successful micro enterprise banks in financial NGOs-turned-banks in other countries. During the last five years, exploration of this new market has been facilitated by donor-funded loan guarantees, Central-bank rediscount lines, and specialized technical assistance. Although the initial resources for loans frequently came from donor-funded credit programs, commercial banks in time began to draw on their own deposit sources for a growing share of their total funds for micro loans.While traditional commercial banks and finance companies are beginning to look at ways to service the large number of potential clients for small loans, many micro enterprise lending NGOs with heavy case loads have begun to scale-up operations by transforming themselves into regulated banks or specialized financial institutions offering micro deposit facilities as well as micro loans. The new NGOs-turned-banks and the traditional banks are beginning to converge on a single potentially profitable market but from two sharply contrasting financial worlds (Namada, 1997).BACKGROUND OF THE STUDYLiberia is a small country with a land area of 11,370 km2 and a population of about 3.5 million. The vast majority of the population is rural (70%). The conflict and civil war...


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