Drawing on examples from West Africa, the authors underline the two very separate courses that traditional banks and microfinance institutions (MFIs) follow: often in competition with each other, and often simply ignoring and working around each other. Inset boxes give small case studies. In some cases, which are the main focus of this paper, partnerships develop between banks and MFIs. These can take different forms. The first is a financial partnership, in which a bank lends to an MFI, with loans often underwritten by a guarantee fund. The MFI often invests in the bank’s insurance funds or other products. This form of partnership is not extremely close, in that it does not require or build a strong confidence relationship between the two members. A closer relationship can develop, in which the bank functions as the central bank for the MFI.

A second type of partnership is the technical partnership, in which the bank provides services for the MFI in the form of training, transfer of funds, audit, and control. A third type of partnership is the institutional partnership, a much closer form of association in which the bank can play a determining role in setting up the MFI, the bank helping to define the institutional model of the MFI chosen by the operator. This association can be long-term and can include the bank directing or influencing a wide range of choices for the MFI. The paper then considers what benefits accrue to both banks and MFIs when they enter into partnerships. For banks, a partnership with an MFI can mean increased bank access in remote areas otherwise unreachable by the banks, which are constrained by their centralised structure. MFIs can provide external channels of credit otherwise inaccessible by the banks. MFIs, meanwhile, can benefit from a bank’s centralised structure, and can derive extra financial credibility from such an association. Banks can also help make MFIs more professional. Sponsors, like international agencies, are often very interested to promote these partnerships.

So what obstacles impede partnerships between banks and MFIs? First, MFIs are still fragile institutions, and the sector is still undergoing its own internal development, learning to improve its services, training, and efficiency. Moreover, an MFI’s success often depends on its understanding and responsiveness to specific local conditions, whereas banks tend to be less specifically focused on local issues and less responsive to poor clients. Bank loans to MFIs can be quite expensive, which is also an impediment to financial partnership. A, is another barrier. Finally, banks’ confidence in MFIs can be very fragile, which, given the power imbalance between the two types of institution, with banks exercising far more authority than MFIs, can be fatal to a partnership. The paper concludes with a brief consideration of methods to strengthen the possibility of such partnerships, pointing out that the emergence of professional associations that could act as mediators is a very positive sign. Banks want to see that MFIs are solvent and viable before they will enter into a partnership.