Differences in bank and microfinance business models: An analysis of the loan monitoring systems and funding sources

Md Hamid Uddin, Shabiha Akter, Sabur Mollah and Masnun Al Mahi

Journal of International Financial Markets, Institutions and Money, 2022, vol. 80, issue C

Abstract: 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.

Keywords: Microfinance institutions; Banks; Business models; Financial intermediation; Core functions; Comparative analysis (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:80:y:2022:i:c:s1042443122001160

DOI: 10.1016/j.intfin.2022.101644

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