UNDP survey reveals banks' approach to microfinance

18 Mar 2006

UNDP held a one-day workshop, at which the findings of its survey on Commercial Banks and micro finance were debated, with the cooperation of The Banks Association of Turkey in Istanbul on March 17th 2006.

At the workshop the appropriated micro finance models applicable to the Turkish banks were discussed as well as the key findings of the survey, which are as follows:

Turkish commercial banks have already started to address Small and Medium scale Enterprises (SMEs) to diversify their businesses in response to increasing competitive pressure created by the post crisis environment. Furthermore, some of the banks are starting to discover the markets below SMEs characterized by micro-enterprises.

At present the banks are at the stage of further exploiting the SME market which they find profitable. The findings of the survey revealed that the banks are likely to make efforts to penetrate microfinance market as the SMEs market become saturated or exhausted and competition reduces the profit margins significantly.

However it has also been noticed through the interviews that it is possible to speed up this process through some conducive policies and schemes. Tax incentives on services offered in microfinance, grant schemes designed for micro credit can encourage the commercial banks to engage in microfinance at a shorter period than expected.

The study revealed that some banks need to see the sustainability of micro-lending through some models before they decide to engage in microcredit. This finding clearly indicates the need to design technical assistance programs for raising awareness on the issue.

It has been observed that some state banks although being very suitable for delivering microfinance services due to their extensive branch network and expertise in lending small loans to small businesses, these banks can not plan for any new activity such as microfinance due to the political and managerial changes and the privatization process they are going through.


Strengths and opportunities for Turkish commercial banks in microfinance identified at the workshop:

  • Existence of well diversified financial system in Turkey
  • High loan recovery rates in Microfinance implementations in Turkey
  • Increasing number of banks gaining experience on SMEs and some extending their services to micro-enterprises.
  • Increasing number of banks developing low cost evaluation methods such as scoring
  • Cost reflective pricing has developed within the past few years as dealing in government securities was no longer enough for generating sufficient and sustainable income
  • Although the banks are strict on classical collaterals, some banks are open to innovative models for non bankable clients i.e cash flow based collateral
  • Opportunities for cross-selling
  • Increased donor interest in initiating microfinance programs in Turkey
  • Budget discipline imposed by economic stabilization programs has reduced irresponsible lending by state banks to cooperatives, creating the opportunity to establish more effective programs and improve the credit culture


Weaknesses and Threats for Turkish banks in micro finance identified at the workshop:

  • No banks addressing the non- bankable segments
  • Financial methodology and organizational structure not suitable to handle small scale transactions efficiently in many banks
  • Banks are not sufficiently informed on world-wide applied price modeling of microfinance
  • Investment for infrastructure needed
  • Capital adequacy issues might raise concern under Basel II

It has been agreed that successful implementation of microfinance by commercial banks in Turkey will both enhance and diversify the customer base of commercial banks and contribute to a great extent, to the development of microfinance market and the reduction of serious income disparities in Turkey.

According to 2001 data, while the share of the segment, which gets the biggest slice from the national income is 46 %, the share of the group that receives the lowest remains at 6 %. Therefore, provision of banking services to the segment which has no access to financial services will help increasing their incomes and allow them to be economically stronger activity, will have a serious role in reducing the imbalances in incomes.