Differences in Bank and Microfinance Business Models an Analysis of the Loan Monitoring Systems and Funding Sources

Microfinance institutions (MFIs) use an alternative financial intermediation system (business model) to offer banking services for the marginal people where collateral-based conventional banking has not been effective. They facilitate collateral-free lending through close loan monitoring and possess a distinct capability to collect savings via donations (besides deposits). We assert that the unique intermediation model presents MFIs with a lower credit risk; however, that comes at the cost of higher business risk. We provide empirical support for our argument by analyzing a broad cross-country dataset comprising banks and MFIs from 68 countries. We show that MFIs maintain a lower non-performing loan ratio but retain higher cash and capital ratios and a smaller deposit ratio than banks. We provide insights into the areas of variation between two dissimilar models for financial intermediation, associated risks, and prospects for integrating them within a common regulatory framework