The partnership model evolved through MFSIG'/ICICI Bank’s initial experiences with  studying the microfinance sector on the ground, three years ago. One of the challenges faced by the  microfinance sector at the time was an access to funds. The partnership   model sought to remove this vital constraint.

Within this model, the loan contract takes place directly between the bank and the borrower although the MFI continues to service the loan until maturity. However, the bank relies on the MFI for field operations and local knowledge for day to day monitoring of its activities.

However, in order to preserve MFI incentives in the interest of maintaining a good portfolio, the model requires the MFI to provide a guarantee (typically a First Loss Default Guarantee (FLDG ) through which it take the first risk up to a defined limit. An FLDG makes the MFI liable to bear losses up to a specified limit-usually the first 10 per cent-of loss on the portfolio.

The MFIs collect a service charge from the borrowers to cover transaction and margin costs and the bank receives a fixed amount as interest on its loans. This approach removes the constraints of growth, which includes the constant search for lending capital. An MFI under this model can therefore focus on maintaining a stable and growing field operation. The adoption and implementation of this model within ICICI Bank as well as other players in the sector has contributed to the rapid scaling up of such institutions in the last three years.