Microfinance business models : comparing and contrasting Grameen Bank and Compartamos Banco

Abstract

This thesis compares two microfinance business models, the non-profit Grameen Bank model and the commercial for-profit Compartamos Banco so as to identify industry best practices. Although there are many differences between these two models, the author concludes that the fundamental distinction between them is in their funding methods. Grameen Bank funds microloans primarily through local funds usually from savings deposits, while Compartamos Banco takes a funding approach that is similar to that of traditional commercial banks, including engaging in an IPO to fundraise. Based upon an analysis of respective business models, both institutions, in aiming to reduce poverty, believe that reaching scale and financial sustainability is important. Qualitative analysis and secondary research are used to gather the data that provides this analysis. The author concludes that in order for Grameen Bank to effectively reach its objectives, it should manage savings deposits to generate more microcredit rather than the large amount of interbank lending that is being generated as fixed deposit investments. Compartamos Banco's commercial model is effective in reaching aggressive financial growth. However, as it endeavors to scale for higher social impact, without industry-wide support (which identifies borrower's overall indebtedness), pure expansion could lead to disastrous consequences (Andhra Pradesh crisis). Risk can be better managed by smaller scale peer pressure in case there is no system to identify over-indebtedness. The analysis also highlights how microfinance institutions find it difficult to balance social impact and financial returns.