Articulation of Banks and Microfinance Institutions: Monetary Policy Implications

Abstract

The objective of this paper is to reappraise the channels of monetary transmission when the financial system is dualistic: banks and Microfinance institutions (MFIs). We consider for this purpose, two mechanisms of articulation process between the institutions: macro-deposits and micro-refinancing. We show that the sensitivity of the bank loan interest rate to the monetary policy instrument depends on three elasticities: that of the refinancing to the instrument and those of both credit demand and credit supply to the loan interest rate. Else, the sensitivity of the MFI loan interest rate to the micro-refinancing interest rate depends on three elasticities: that of micro-refinancing to the bank interest rate and those of both MFI credit demand and supply to the loan interest rate. We conclude that the monetary transmission mechanism can work not only through the channel of rates on bank loans but also through the channel of micro-refinancing of the MFI that the bank can exercise. The MFI sector constitutes a monetary transmission channel when the financial intermediation of the MFIs is such that the demand for micro-refinancing of the MFI is sensitive to the interest rate applied by the bank.