1. The banks need resources to grow. What competitive strategy does microfinance appear to use, and what options do the banks have for dealing with life cycle issues?
2. What are some of the challenges faced by the leadership of both Grameen and Banco?
3. What corporate governance mechanisms may be involved in the case of microfinance?

More than 2.5 billion people live on less than $2.50 a day. Traditional banking does not provide an adequate means for serving this “bottom of the pyramid.” Microfinance is a non-traditional banking system designed to help the extremely poor. Dr. Muhammad Yunus’s training at Vanderbilt did not prepare him for the destitution he observed outside Chittagong University in Bangladesh, where he taught economics. The theories of developmental economics and the traditional banking institutions, he concluded, were completely ineffectual for lessening the hunger and homelessness among the very poor of that region. He began the microfinance trend in 1976 by wondering whether he could directly help in some way. He started by giving $27 to a group of 42 men and women in the village of Jobra, Bangladesh. This simple act of generosity was the beginning of a global revolution in microfinance.

Microfinance involves small loans ($20 – 750) with high interest rates (up to 200 percent), with short payback periods (1 day to 2 months), and without physical collateral. However, many microfinance lenders give loans to groups, creating a very effective type of “social collateral”—when one person is unable to pay back the loan, the group is held accountable. Interest rates are high for several reasons:

1.  Cost of administering the loan (transaction costs) 
2.  Uncertainty in lending money to the poor and homeless, and 
3.  The need to make some margin on each loan for bank growth and returns on deposits.

When a bank is public, however, the bank margins are split among bank growth, returns on deposits for bank members, and (typically foreign) investors.There are two general models for modern microfinance banks. There are three major differences between these models:

1. how the margins are split
2. how the bank funds growth and lending, and 
3. whose interests are paramount for the bank’s decisions. The first model is the Grameen Bank, which relies only on member deposits for all loans. 

Margins are divided among bank growth and bank member returns on deposits, and the bank continues to promote the welfare of its members (the very poor). The second model is Banco Compartamos (Banco), which relies on the combination of member deposits and external investors. For this reason, Banco is able to aggressively pursue growth opportunities and increase available loans for bank members. However, Banco is also responsible for cultivating shareholder value (for foreign investors), and has a lower return on deposits for bank members (for the poor).

One of the unanticipated pressures on Banco and other public microfinance banks is non-governmental organizations (NGOs) pushing for lower interest rates. Banco has successfully lowered many of its interest rates by improving the efficiency of the loan process (reducing transaction costs). However, these pressures create a falling interest rate that will cut into the (currently) large profit margins. The broad question then becomes: how do public microfinance banks balance growth, returns on deposits (for the poor members), and returns on investment (for the foreign investors) without undermining its fiduciary duties to stockholders?