2014 Microfinance Banana Skins

Microfinance Banana Skins 2014 The CSFI survey of microfinance risk Facing reality Sponsored by CSFI Centre for the Study of Financial Innovation C S F I / New York CSFI The Centre for the Study of Financial Innovation is a non-profit think-tank, established in 1993 to look at future developments in the international financial field – particularly from the point of view of practitioners. Its goals include identifying new areas of business, flagging areas of danger and provoking a debate about key financial issues. The Centre has no ideological brief, beyond a belief in open markets. Trustees Sir Brian Pearse (Chairman) David Lascelles Sir David Bell Robin Monro-Davies Sir Malcolm Williamson Staff Director – Andrew Hilton Co-Director – Jane Fuller Senior Fellow – David Lascelles Programme Coordinator – Lisa Moyle Governing Council Sir Malcolm Williamson (Chairman) Sir David Bell Geoffrey Bell Rudi Bogni Philip Brown Abdullah El-Kuwaiz Prof Charles Goodhart John Hitchins Rene Karsenti Sir Andrew Large David Lascelles Robin Monro-Davies John Plender David Potter Belinda Richards Mark Robson David Rule Carol Sergeant Sir Brian Williamson Peter Wilson-Smith CSFI publications can be purchased through our website www.csfi.org or by calling the Centre on +44 (0) 20 7621 1056 Published by Centre for the Study of Financial Innovation (CSFI) Email: info@csfi.org Web: www.csfi.org ISBN: 978-0-9926329-1-5 Printed in the United Kingdom by Heron Dawson & Sawyer CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org C S F I / New York CSFI C S F I / New York CSFI NUMBER ONE HUNDRED AND FOURTEEN JULY 2014 Preface Microfinance is not what it was. When the CSFI began this series of Banana Skins reports, we pretty much knew what we were dealing with. Microfinance was almost exclusively microcredit, delivered through microfinance institutions, primarily to village groups. It was (relatively) straightforward, and unequivocally a good thing – epitomised by Grameen’s Nobel prize-winner, Muhammad Yunus. Now – as this year’s survey makes clear – things are very different, and more complicated. First, microfinance is now a lot more than just microcredit; indeed, micro insurance may be the fastest growing segment of the market. Second, it is not just provided by MFIs; established banks are muscling into what they clearly see as a good long-term growth business. And, third, the clients themselves are changing; they are (for the most part) more sophisticated, more worldly-wise and much more similar to mainstream financial services clients. That’s not a bad thing. Indeed, it is, in large measure, testament to the success of the microfinance movement – which remains one of the few developmental initiatives that has clearly been on balance positive. But it does pose some interesting challenges. This year’s MBS survey is a snapshot. It is not an attempt to pick ‘winners’ or ‘losers’, in terms of policies or institutions. It is not even designed to identify the ‘challenges’ that must be overcome if microfinance is to thrive (though it is not difficult to figure out what those challenges are). What it offers is a non-judgemental tour d’horizon of the main concerns that a range of players in the microfinance industry have about their business in the middle of 2014. Those players include microfinance providers, donors, regulators and observers; what they have to say may make uncomfortable reading, but it cannot be ignored. It may be that microfinance is at or close to an inflection point. What was, a decade ago, little more than a laboratoryscale experiment in bottom-up development has gone mainstream – and with that transition have come mainstream problems, notably client over-indebtedness. No doubt, these problems can be (and are being) tackled, but the important thing to realise is that they signify success, not failure. Microfinance is becoming normal. May I thank, once again, Citi (including the Citi Foundation) and the Center for Financial Inclusion at Accion for their continuing support for the survey. We are grateful to Bob Annibale, Philip Brown, Deborah Drake, Marjolaine Chaintreau and many others who helped to fund the work and evaluate the results. I am also very grateful to my colleague David Lascelles for overseeing the study, and for leading a team that now includes Sam Mendelson and Daniel Rozas, as well as our web master, Zach Grafe. Andrew Hilton Director CSFI This report was written by David Lascelles, Sam Mendelson and Daniel Rozas CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org 1 C S F I / New York CSFI Sponsor’s foreword The past four Microfinance Banana Skins surveys stand as time capsules of risk perceptions and reflect the increasing complexity of a maturing industry. This year’s report is no exception. The title of the report, “Facing reality” refers to the fundamental structural changes that are taking place in the industry. It recognises the increasing diversity of microfinance service providers as well as the possibility that insufficient focus is being placed on the strategic development required to realise the sector’s financial inclusion potential. Achieving sustainable growth, whilst addressing the concerns of overindebtedness raised in this report, will require reaching out to new client segments with appropriate products. Business models and credit methodologies will have to evolve accordingly. Microfinance Information Exchange (MIX) data show that the microfinance sector globally continues to grow, and the 2014 Microfinance Banana Skins survey affirms that microfinance services are both core to financial inclusion and are increasingly integrated into the formal provision of financial services. As Andrew Hilton states in the preface to this report, “microfinance is becoming normal.” The reality of this “new normal” is requiring new business models and technologies. There is growing recognition that client centricity and managing external risks are as important as institutional risks. Three risk baskets – Client, Service Provider, and Market Environment – were introduced for the first time in this year’s survey to highlight, beyond institutional risks, the context in which the institutions operate and the clients they want to serve. “Facing reality” highlights the importance of some of these market forces such as competition, and client-driven risks such as financial capability and client relationships. This year’s survey, like its predecessors, has been designed to contribute to a constructive debate around and serve as an educational tool about some of the salient risks the sector faces in its quest for sustainable growth. We are grateful to the 306 respondents from 70 countries who took their time to fill in the survey and share their thoughts and concerns about the sector, and to David Lascelles, Sam Mendelson, and Daniel Rozas for their efforts in managing the survey and interpreting and presenting this year’s tapestry of results. Citi Foundation Center for Financial Inclusion 2 CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org C S F I / New York CSFI Contents About this survey ............................................................................................................................................................4 Summary .........................................................................................................................................................................6 Risk is interlinked .........................................................................................................................................................11 What keeps you up at night? .........................................................................................................................................14 Who said what...............................................................................................................................................................16 The Banana Skins .........................................................................................................................................................30 Appendix: The questionnaire ........................................................................................................................................55 Microfinance: an evolving industry .........................................................................................................................Insert Abbreviations BoP: CGAP: CWPF: DFI: DFS: HR: KYC: MF: MFI: MIV: MIX: MNO: NBFC: NGO: PaR: RCT: SHG: SME: SPM: Base of the Pyramid Consultative Group to Assist the Poor Community Welfare Projects Foundation Direct foreign investment Digital financial services Human resources Know your customer Microfinance Microfinance institution Microfinance investment vehicle Microfinance Information eXchange Mobile network operator Non-banking financial company Non-governmental organisation Portfolio at risk Randomised control trial Self-help group Small and medium sized enterprises Social performance management CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org 3 C S F I / New York CSFI About this survey Microfinance Banana Skins 2014 describes the risks facing the microfinance industry as seen by an international sample of practitioners, investors, regulators and observers. This survey was conducted in January and February 2014 and is based on 306 responses from 70 countries. It updates previous surveys carried out in 2008, 2009, 2011 and 2012. The questionnaire (reproduced in the Appendix) was in three parts. In the first, respondents were asked to describe, in their own words, their main concerns about the microfinance sector over the next 2-3 years. In the second, they were asked to rate a list of potential risks – or ‘Banana Skins’ – by severity on a scale of 1 to 10. In the third, they were asked to say what really keeps them awake at night. Replies were confidential, but respondents could choose to be quoted by name. The breakdown by type of respondent is as follows: Regulators 4% Other 7% Observers 13% Raters 3% Investors 19% Service providers 35% Support providers 19% The breakdown by geography is as follows: Eastern Europe Central Asia 5% Middle East North Africa 4% East Asia Pacific 4% North America 22% South Asia 13% Western Europe 21% Africa 15% Latin America 16% 4 CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org C S F I / New York CSFI The breakdown by countries is as follows Algeria 1 Germany 5 Palestinian Terrs. Australia 2 Austria 1 Azerbaijan 2 Ghana 6 Paraguay 4 Guatemala 2 Peru 8 3 Honduras 1 Philippines 5 Bahamas 1 India 26 Poland 1 Bangladesh 2 Iraq 1 Romania 3 Belgium 4 Italy 4 Rwanda 1 Benin 4 Jordan 1 Senegal 4 Bolivia 2 Kazakhstan 2 South Africa 1 Bosnia & Herz. 5 Kenya 4 Spain 1 Brazil 2 Kosovo 1 Sri Lanka 1 Cameroon 4 Laos 2 Switzerland 8 Canada 6 Lebanon 2 Tajikistan 1 Chile 2 Luxembourg 4 Tanzania 2 Colombia 8 Madagascar 1 Togo 1 Congo, Rep. of 1 Mali 2 Côte d'Ivoire 1 Mexico Dominican Rep. 1 Ecuador 1 Egypt 3 Ethiopia 2 France Gabon Georgia Uganda 4 15 UAE 1 Morocco 1 UK 24 Mozambique 1 USA 61 Nepal 3 Uruguay 2 Netherlands 8 Venezuela 1 4 Niger 1 Vietnam 2 1 Nigeria 6 1 Pakistan 7 CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org 5 C S F I / New York CSFI Summary Summary Microfinance MicrofinanceBanana BananaSkins Skins2014: 2014:Facing Facingreality realitydescribes describesthe therisks riskstotothe the microfinance microfinanceindustry industryininthe theearly earlypart partofof2014, 2014,a atime timewhen whenthe theglobal globaleconomy economy was wasrecovering recoveringfrom fromthe theeconomic economiccrisis, crisis,and andthe theindustry industryitself itselfwas wasstriving strivingtoto shake shakeoffoffcontroversy controversyand andaddress addressthe thedemands demandsofofananevolving evolvingmarket. market. The Theindustry industry faces faceshard hard realities realities The Thesurvey, survey,the thefifth fifthinina aseries series Microfinance MicrofinanceBanana BananaSkins Skins dating datingback backtoto2008, 2008,is isdesigned designed totoassess assesstwo twoclasses classesofofrisk: risk: 2014 2014 those those that that microfinance microfinance has has (2012 (2012position positionininbrackets) brackets) faced facedforforsome someyears years(i.e. (i.e.quality quality Score Score ofof management, management, governance, governance, out outofof funding, funding,credit) credit)and andnewer newerrisks risks Rank Risk Risk 1010 associated associated with with itsits evolution: evolution: Rank structure, structure, strategy, strategy, product product Overindebtedness(1) (1) 7.5 1 1 Overindebtedness 7.5 design design and and technological technological Creditrisk risk(4) (4) 6.9 2 2 Credit 6.9 innovation. innovation.InIna achange changefrom from previous previoussurveys, surveys,it itrecognises recognises Competition(8) (8) 6.9 3 3 Competition 6.9 that thatmicrofinance microfinanceis isnonolonger longer Riskmanagement management(6) (6) 6.8 4 4 Risk 6.8 the the preserve preserve ofof purpose-built purpose-built institutions, institutions,but butalso alsoofofother other Governance(2) (2) 6.7 5 5 Governance 6.7 types types ofof provider provider such such asas Strategy(-)(-) 6.7 6 6 Strategy 6.7 commercial commercial banks, banks, and and insurance, insurance,payment paymentservice serviceand and Politicalinterference interference(5) (5) 6.5 7 7 Political 6.5 technology technologysuppliers. suppliers. The Thesurvey surveyasked askedexperts expertsonon microfinance microfinance (practitioners, (practitioners, analysts, analysts, regulators, regulators, investors investors etc.) etc.)totoidentify identifyand andcomment commentonon the thebiggest biggestrisks, risks,oror“Banana “Banana Skins”, Skins”,which whichthey theysaw sawfacing facing the themicrofinance microfinancesector sectorover overthe the next nexttwo twototothree threeyears. years.AAtotal total ofof 306 306 ofof them them from from 7070 countries countries took took part. part. The The accompanying accompanyingtable tableshows showshow how they theyranked rankedthe themain mainrisks, risks,and and subsequent subsequent pages pages give give a a breakdown breakdown ofof responses responses byby region regionand andtype, type,and andanalyse analyse 1 1 . . their theircomments comments Management(3) (3) 8 8 Management 6.5 6.5 Regulation(9) (9) 9 9 Regulation 6.4 6.4 Staffing(14) (14) 1010 Staffing 6.3 6.3 Financialcapability capability(-)(-) 1111 Financial 6.2 6.2 Productrisk risk(-)(-) 1212 Product 6.2 6.2 Macro-economicrisk risk(13) (13) 1313 Macro-economic 6.1 6.1 Clientrelationships relationships(7) (7) 1414 Client 6.1 6.1 Technologymanagement management(16) (16) 1515 Technology 6.0 6.0 Incomevolatility volatility(-)(-) 1616 Income 6.0 6.0 Transparencyofofobjectives objectives(11) (11) 1717 Transparency 5.9 5.9 Funding(17,19) (17,19) 1818 Funding 5.8 5.8 Liquidity(10) (10) 1919 Liquidity 5.8 5.8 We Wehave havesub-titled sub-titledthis thisreport report Facing Facingreality realitybecause becausewewebelieve believeit itpaints paintsa arisk risklandscape landscapethat thatcontains containsmajor major challenges challengeswhich whichthe theindustry industrywill willhave havetotoaddress addressininthe thenear nearterm termif ifit itis istotosurvive survive inina adistinct distinctform. form.InInparticular, particular,it itshows showsthat thatmicrofinance microfinancecontinues continuestotobebeseriously seriously dogged doggedbybythe theproblem problemofofoverindebtedness, overindebtedness,and andis isnot notgiving givingadequate adequatestrategic strategic thought thoughttotoitsitsevolution evolutionatata critical a criticaltime. time. 1 1 The The format format of of thethe survey survey hashas been been substantially substantially revised revised this this year year to to take take account account of of thethe changes changes coursing coursing through through microfinance. microfinance. For For this this reason, reason, like-for-like like-for-like comparisons comparisons with with past past surveys surveys may may notnot always always bebe possible. possible. 6 CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org C S F I / New York CSFI The Theresults results The Theoverall overallmessage messagefrom fromMicrofinance MicrofinanceBanana BananaSkins Skins2014 2014isisthat thatthe themost mostpressing pressing risks risksfacing facingthe theindustry industryare arethose thoseofofthe theday-to-day day-to-dayrunning runningofofthe thebusiness, business,i.e. i.e. control controlofofcredit, credit,the thequality qualityofofmanagement managementand andgovernance, governance,and anddealing dealingwith with competition. competition.Longer Longerterm termrisks risksassociated associatedwith withthe thesurvival survivaland andevolution evolutionofofthe the industry industry such such asas technological technological change, change, product product development development and and funding funding are are considered consideredtotobebeless lessurgent urgent––and andare areless lesswell welldefined. defined. The Therisk riskof of overindebtedness overindebtedness dominates dominatesthe the responses responses While Whilethis thismay maynot notbebesurprising, surprising,ititdoes doessuggest suggestthat thatthe thelong-term long-termprospects prospectsfor forthe the industry industryare arereceiving receivingless lessattention attentionthan thanthey theyperhaps perhapsshould shouldatatwhat whatcould couldbebea a crucial crucialjuncture junctureininitsitsdevelopment, development,which whichmay mayitself itselfbebea arisk. risk. The Thekey keyfinding findingisisthat thatthe theoverindebtedness overindebtednessofofmicrofinance microfinanceclients clientsisisperceived perceivedtoto bebemuch muchthe thelargest largestrisk riskfacing facingthe theindustry, industry,standing standinghead headand andshoulders shouldersabove abovethe the rest. rest.Overindebtedness Overindebtednessisisranked rankedasasthe thetop toprisk riskby by15 15ofofthe the18 18groups groupsinto intowhich which we wesegmented segmentedrespondents respondents(i.e. (i.e.by bygeography, geography,type, type,income incomelevel). level).Even Evenwhere where overindebtedness overindebtednessisisseen seenasasa alower lowerrisk, risk,itithas hasananindirect indirectimpact impactthrough throughthe the reputational reputationaldamage damageititdoes doestotothe theindustry industryasasa awhole. whole. AAUS USinvestor investorininmicrofinance microfinancesaid: said:“In “Inmany manycountries countrieswe weoperate operatein, in,we wesee seethat that financial financialinclusion inclusionisisno nolonger longerthe theissue issueititwas; was;on onthe thecontrary, contrary,we weare areseeing seeingrising rising overindebtedness overindebtednessamong amongborrowers.” borrowers.” 22 However Howeverthe thefinding findingofofthis this The Theexistence existenceofofclient clientoverindebtedness overindebtednessisisnot notnew. new. survey surveycontradicts contradictsa aview viewsometimes sometimesexpressed expressedinindevelopment developmentcircles circlesthat thatititisisa a past pastproblem problemthat thatisismanageable manageableand andeven evendeclining. declining. High Highdebt debtlevels levels may maypoint pointto to wider widerproblems problems ItItisispossible possiblethat thatthe theactual actualincidence incidenceofofoverindebtedness overindebtednessisissmaller smallerthan thanthis this ranking rankingsuggests suggestsbecause becausethe thesurvey surveymeasures measuresperceptions perceptionsrather ratherthan thannumbers numbers (though, (though,asasjust justcited, cited,several severalrespondents respondentssaid saidititwas wasgrowing). growing).However Howeverthis thisresult result does doesshow showthat thatoverindebtedness overindebtednessremains remainsthe thedominant dominantconcern, concern,and andasassuch suchhas hasanan influence influenceon onthe thesector sectorasasa awhole. whole.For Forinstance, instance,political politicalinterference, interference,one oneofofthe the manifestations manifestationsofofpublic publicconcern concernabout aboutoverindebtedness, overindebtedness,occupies occupiesa aprominent prominent position positionatatNo. No.7,7,even eventhough thoughthe thepolitical politicaltemperature temperaturearound aroundmicrofinance microfinancehas has cooled, cooled,particularly particularlyininIndia. India.The Thequality qualityofofregulation regulation(No. (No.9)9)remains remainsa aproblem, problem, with withrespondents respondentsdescribing describingititvariously variouslyasasinadequate, inadequate,overbearing overbearingororinappropriate, inappropriate, and andseldom seldomasashelpful. helpful.Nor Norisisit,it,plainly, plainly,a abarrier barriertotooverlending. overlending. Overindebtedness Overindebtedness isis widely widely seen seen toto bebe symptomatic symptomatic ofof wider wider problems problems inin the the industry: industry:surplus surpluslending lendingcapacity, capacity,a alack lackofofprofessionalism professionalismwithin withinMFIs, MFIs,and andanan emphasis emphasison ongrowth growthand andprofit profitatatthe theexpense expenseofofprudence. prudence.ItItisisalso alsolinked linkedtotothe the risk riskininNo. No.22position, position,credit creditrisk, risk,which whichraises raiseswider widerquestions questionsabout aboutthe theability abilityofof microfinance microfinanceproviders providerstotomanage managethe thelending lendingprocess, process,including includingissues issuessuch suchasas client clientevaluation, evaluation,arrears arrearsand andrecovery recoverypractices practicesand andrisk riskmanagement managementsystems. systems. The Theleading leadingcause causeofofoverindebtedness overindebtednessisisseen seentotobebethe therisk riskininNo. No.33position, position, competition, competition,ininparticular particularthe therapid rapidgrowth growthininlending lendingcapacity capacitycreated createdby byabundant abundant funding fundingand andnew newentrants entrantsfor forwhom whommicrofinance microfinanceisisa aproduct productrather ratherthan thana amission. mission. Market Market“saturation” “saturation”was wasreported reportedininmany manycountries. countries.This Thisisisdriving drivingmicrofinance microfinance 22 For Forexample: example:Too TooMuch MuchMicrocredit? Microcredit?AASurvey Surveyofofthe theEvidence EvidenceononOver-Indebtedness Over-IndebtednessbybyJessica Jessica Schicks Schicksand andRichard RichardRosenberg. Rosenberg.CGAP CGAP2011 2011 CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org 7 C S F I / New York CSFI providers to cut their prices and lending standards to hold on to market share. In some places, MFIs are abandoning their traditional low-income business clientele and branching out into consumer and small business finance, where lending is easier but also riskier. According to one US-based observer, “Competitive pressures to grow portfolios and institutions have forced some MFIs to go overboard with their lending activities.” An important reason for the decline in business standards is the risk in No. 4 position, risk management, an area of microfinance which respondents said remains weak despite the emphasis put on it in recent years. This is closely linked to risk No. 5, governance, where the quality of boards is still seen to be insufficiently high to provide the leadership that MFIs need. However governance risk, and associated management risk (No. 8), have both come down the rankings from previous years, suggesting that improvement has been recognised. Broadly, microfinance practitioners attributed the overindebtedness problem to external factors, particularly the growth of competition, while non-practitioners showed a greater concern with internal issues such as the strength of governance and risk management. Future risks 'Many MFIs are running without strategies' In No. 6 position is the first of the new risks we introduced this year to test forward thinking in the industry: strategy. This showed a strong level of concern about the lack of thought given to strategic planning. One respondent said: “Many MFIs are running without strategies. They respond as events unfold.” Two linked risks in this area are product risk (No. 12) and client relationships (No. 14). These Banana Skins were added to the questionnaire to measure the risk of failure by institutions to connect with customers and address their changing needs. The fact that both of them ranked quite low suggests that people see little urgency in them. In general non-practitioners (i.e. investors, observers, analysts) ranked them higher than practitioners; indeed, practitioners ranked product risk at No. 18, one from the bottom. Significantly, the issue of transparency of objectives¸ seen by many as an essential attribute of a responsible MFI, ranked very low: No. 17. There was a similar lack of interest in technology management (No. 15) even though many respondents said that technological innovation was crucial to the future of microfinance. For MFIs, this was the lowest risk of all. These low rankings could mean that these risks are being well managed and are not therefore a source of concern. It could also mean that they are being under-rated in the context of the industry’s need to evolve, a point made by a number of respondents in their comments. Among the lower ranking risks, a number are noteworthy. Macro-economic risk at No. 13 reflected growing optimism about the global economic outlook, and funding and liquidity at No. 18 and No. 19 respectively showed that these are not in short supply. Indeed, the concern was overabundance. A breakdown of responses by type showed a strong consensus about the risk of overindebtedness. Of the six categories (practitioners, investors, support providers, observers, raters and regulators), all ranked it No. 1 except regulators who placed it No. 5. Broadly, practitioners gave a high ranking to immediate business issues such as credit, competition, risk and regulation, a middle ranking to institutional risks such as strategy, management and governance, and a low ranking to technical issues 8 CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org C S F I / New York CSFI such suchasasproduct productand andtechnology technologyrisk. risk.Non-practitioners Non-practitionersattached attachedgreater greaterimportance importance totoinstitutional institutionalissues issues(strategy, (strategy,governance governanceand andmanagement), management),and andregulators regulatorsgave gave top toppositions positionstotocredit creditrisk, risk,governance governanceand andrisk riskmanagement. management. Concern Concernabout about debt debtis is widespread widespread AA breakdown breakdown ofof responses responses by by geography geography also also showed showed aa strong strong focus focus on on overindebtedness. overindebtedness. Of Of the the seven seven regions regions covered covered by by the the survey survey (Africa, (Africa, East East Asia Asia Pacific, Pacific, Eastern Eastern Europe Europe and and Central Central Asia, Asia, Middle Middle East East and and North North Africa, Africa, North North America, America, South South Asia Asia and and Western Western Europe) Europe) all all but but two two placed placed itit No. No. 1.1. The The exceptions exceptionswere wereAfrica, Africa,where whereititcame cameNo. No.33after aftercredit creditrisk riskand andgovernance, governance,and and South South Asia Asia where where itit came came No. No. 22 after after political politicalinterference. interference. InIn general, general, responses responses from from investor investor countries countries (i.e. (i.e. North North America America and and Western Western Europe) Europe) focused focused on on institutional institutionalrisks risks(governance, (governance,management) management)while whilepractitioner practitionerregions regionsfocused focusedon on the theoperating operatingenvironment environment(competition, (competition,political politicalrisk). risk). Key Keypoints points The Theconcerns concernsraised raisedby bythis thisreport reportare aremany manyand andcomplex. complex.Two, Two,ininour ourview, view, stand standout, out,and andrepresent representthe therealities realitieswhich whichneed needtotobe befaced. faced. 1.1. Contrary Contrarytotoassertions assertionsby byaanumber numberofofindustry industrycommentators, commentators,the the problem problemofofoverindebtedness overindebtednessremains remainsaadominant dominantconcern concernfor forthe the industry, industry,and andmay mayeven evenbe begrowing. growing.ItItisistrue truethat thatthis thissurvey survey measures measuresperceptions perceptionsrather ratherthan thannumbers, numbers,but butperceptions perceptionson onthis this scale scaleare arehard hardtotodismiss dismisssince sincethey theyinfluence influencevital vitalaspects aspectsofofthe the business businesssuch suchas asmanagement, management,clients, clients,products, products,regulation regulationand and reputation. reputation. 2.2. At Atwhat whatisiswidely widelyseen seenas asaacritical criticaljuncture junctureininthe theevolution evolutionofofthe the microfinance microfinanceindustry, industry,insufficient insufficientthought thoughtisisbeing beinggiven giventotoits its strategic strategicdevelopment. development.Strategic Strategicrisk riskranks rankshigh highininthis thissurvey survey because becausepeople peoplesee seethe theindustry industrypaying payingtoo toolittle littleattention attentiontotoits its future. future.Key Keylong longterm termdevelopment developmentissues issuessuch suchas astechnology, technology,new new products productsand andclient clientmanagement managementare areseen seenas aslow loworder, order,particularly particularly by bythe theindustry industryitself. itself. CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org 9 C S F I / New York CSFI ‘Anxiety level’ The Microfinance Banana Skins Index provides a picture of changing “anxiety levels” in the microfinance business. The top line shows the average score given to the top risk over the five surveys since 2008, and the bottom line the average of all the risks. After rising strongly up to 2011, both lines showed a small downturn in 2012. But they resumed their upward trend this year, largely because of the high risk attached to overindebtedness33 which is seen by many of the respondents to this survey as a growing problem. 4.5 4 Management quality Credit risk Credit risk Overindebtedness 3.5 Score 3 ‘Anxiety levels' are still high 2.5 2 2008 2009 Top risk 2011 2012 2014 Average score Health warning A number of points should be borne in mind when drawing conclusions from this report. One is that the results reflect the perceptions of respondents and are not forecasts or measures of likelihood. There is also a tendency, in surveys of this kind, to focus on the negative and overlook the positive. Linked to this is the risk of generalisation: microfinance is a varied business, and its condition differs greatly from one market to another. If reading the report makes you feel depressed, here is a response to cheer you up. “Overall I see that the microfinance industry is improving at a solid pace. We see that in countries where there had been previously a tumultuous regulator-industry relationship things are beginning to pick up. There remain some risks in certain markets regarding issues like regulatory overreach, volatile market conditions, overeager competition, lack of credit-bureau information. Many of these issues are being dealt with by institutions and regulators finding common ground, in part due to the role played by national and sometimes international networks.” Sergio Guzman Lead specialist, The Smart Campaign, US 33 In previous surveys, scores were on a scale of 1 to 5. This year, in order to introduce greater refinement, they are on a scale of 1-10. The results have been converted to a 1-5 scale for the purposes of the chart. 10 CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org C S F I / New York CSFI Risk Riskisisinterlinked interlinked TheThe risks risks identified identified in in thisthis survey survey do do notnot stand stand in in isolation. isolation. TheThe responses responses showed showed thatthat many many of of them them belong belong to clusters to clusters (institutional, (institutional, market, market, strategic strategic etc.) etc.) which which cancan be be analysed analysed more more closely. closely. ForFor thethe first first time time thisthis year, year, wewe calculated calculated correlations correlations between between thethe risks risks on on ourour list.list.WeWe also also divided divided thethe risks risks intointo baskets baskets based based on on thethe direction direction they they emanated emanated from, from, i.e.i.e. thethe institution institution itself, itself, thethe client client or or thethe market market environment. environment. Correlation. Correlation. Correlation Correlation measures measures thethe strength strength of of relationships relationships between between different different risks. risks. Some Some risks risks areare inherently inherently inter-related: inter-related: forfor example, example, respondents respondents who who found found funding funding to be to be a high a high riskrisk also also tended tended to score to score liquidity liquidity as as a high a high riskrisk as as well. well. Based Based on on these these relationships, relationships, wewe prepared prepared thethe accompanying accompanying map map of of risks, risks, grouping grouping them them by by thethe number number of of relationships relationships andand by by subject subject matter. matter. Thus, Thus, thethe three three risks risks under underthetheumbrella umbrellaof of“institutional “institutionalstructure” structure”(governance, (governance,management, management,andand staffing) staffing) were were closely closely related related to to risks risks grouped grouped under under “effectiveness “effectiveness of of execution,” execution,” which which encompasses encompasses risks risks thatthat come come with with running running an an institution, institution, such such as as strategy, strategy, technology technology management, management, andand similar. similar. TheThe map map helps helps provide provide a mental a mental framework framework forfor how how different different risks risks areare related related to each to each other. other. Correlations Correlations reveal revealclusters clusters ofofrisks risks A Afewfewobservations observationsemerge emergefrom fromusing usingthisthisperspective. perspective.First, First,it'sit'sclear clearthatthat respondents respondents seesee a strong a strong linklink across across thethe organisational organisational structure: structure: most most of of those those who who scored scored governance governance as as a high a high riskrisk also also ranked ranked management management andand staffing staffing as as high high risks. risks. And And these these three three in turn in turn all all have have a strong a strong correlation correlation with with riskrisk management. management. Closer Closer to to borrowers, borrowers, over over halfhalf of of respondents respondents who who sawsaw overindebtedness overindebtedness as as a a problem problemtended tendedto toputputcompetition competitionandandclient clientincome incomevolatility volatilityhigh highas aswell. well. However, However, overindebtedness overindebtedness is less is less strongly strongly related related to to credit credit risk, risk, perhaps perhaps reflecting reflecting thethe factfact thatthat thisthis is ais longer-term a longer-term risk, risk, while while credit credit riskrisk is associated is associated with with greater greater anticipation anticipation of of near-term near-term repayment repayment problems. problems. TheThe clusters clusters also also show show a connection a connection between between strategic strategic riskrisk andand riskrisk management management more more widely. widely. There There areare also also connections connections in in thisthis cluster cluster to to longer longer term term strategic strategic issues issues such such as as product product riskrisk andand technology technology management. management. A technical A technical note: note: while while all all risks risks areare correlated correlated to some to some degree degree (mainly (mainly because because some some respondents respondents areare more more comfortable comfortable employing employing higher higher scores, scores, while while others others tend tend to to limit limit scores scores to lower to lower overall overall levels), levels), wewe have have only only highlighted highlighted those those correlations correlations thatthat areare well well outside outside thethe spectrum spectrum of of most most riskrisk pairs. pairs. CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org 11 12 Financial capability 6.2 6.0 Political interference Regulation 5.8 Liquidity 5.8 Funding Finance 6.5 6.4 6.2 Product risk Governance Institutional structure Staffing 6.3 Effectiveness of execution 6.0 Strategy 6.7 6.8 Risk management 6.5 5.9 Transparency of objectives Interaction with client Technology management 6.7 Credit risk 6.9 Competition 6.9 Bubble size= risk rating Management Client relationships 6.1 Overindebtedness 7.5 Client capacity Income volatility Government 6.1 Macroeconomy >55% 50-55% 45-50% 40-45% % correlated: C S F I / New York CSFI CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org C S F I / New York CSFI Risk baskets. Risk baskets. Risks Risks with common with common characteristics characteristics may may also also be be grouped grouped into into baskets baskets whosewhose Risk riskiness riskiness can, can, in turn, in turn, be be rank measured. measured. For the For purposes the purposes of of this survey this survey we grouped we grouped risks into risks into three three baskets, baskets, as shown as shown in thein the1 11 accompanying accompanying table. table. TheseThese are are 14 basedbased on theondirection the direction from which from which 16 risks risks emanate, emanate, i.e. the i.e. service the service provider provider itself, itself, the provider’s the provider’s clients, clients, or the or environment the environment in in 2 whichwhich the provider the provider operates. operates. 4 Client-related Client-related risks risks are are the the most most serious serious The The resultsresults showed showed that that the the5 biggest biggest groupgroup risk was risk the wasclient, the client,6 mainly mainly because because of theofvery the high very high8 10 score score attached attached to the to risk the risk of of 12 overindebtedness. overindebtedness. This This was was 15 followed followed by risks by risks from from the the 17 provider provider itself itself (principally (principally weak weak 19 management management and and governance). governance). Risks Risksfrom fromthe themarket market environment environment came came lowest, lowest, mainly mainly because because funding funding risk was risk seen was to seen to3 be very be very low, low, though though this basket this basket7 also contained also contained high risks high risks such as such as9 13 competition competitionand andpolitical political 18 interference. interference. Risk Risk baskets baskets Risk rank BasketBasket ClientClient Overindebtedness 1 Overindebtedness Financial capability 11 Financial capability Client 14 relationships Client relationships Income volatility 16 Income volatility Risk Risk BasketBasket score score avg avg 7.5 6.2 6.1 6.0 6.45 6.45 7.5 6.2 6.1 6.0 Service provider Service provider Credit risk risk 6.9 2 Credit Risk 6.8 4 management Risk management Governance 6.7 5 Governance Strategy 6.7 6 Strategy Management 6.5 8 Management Staffing 6.3 10 Staffing Product risk risk 6.2 12 Product Technology management 6.0 15 Technology management Transparency of objectives 5.9 17 Transparency of objectives Liquidity 5.8 19 Liquidity 6.38 6.38 6.9 6.8 6.7 6.7 6.5 6.3 6.2 6.0 5.9 5.8 Market environment Market environment Competition 6.9 3 Competition Political interference 6.5 7 Political interference Regulation 6.4 9 Regulation Macro-economic risk risk 6.1 13 Macro-economic 18 Funding Funding 5.8 6.34 6.34 6.9 6.5 6.4 6.1 5.8 TheseThese resultsresults emphasise emphasise the importance the importance of client of client relationships relationships in theinmanagement the management of of risk. risk. They They also show also show that providers that providers can docan much do much to mitigate to mitigate risk by risk strengthening by strengthening their own their internal own internal processes processes and controls. and controls. However However it is also it iscomforting also comforting to seetothat see that risks risks over which over which service service providers providers have have least least control, control, those those emanating emanating from from the the market market environment, environment, are also arecollectively also collectively seen to seen be the to be smallest. the smallest. CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org 13 C S F I / New York CSFI What keeps you up at night? To gain a deeper insight into people’s concerns about microfinance, we asked respondents to tell us what really kept them up at night. Here is a selection of answers. We offer them without comment because they all speak for themselves. We are a mid-size MFI focussing on empowerment and poverty reduction. We have invested a substantial amount in building their capacity to become entrepreneurs. We are following the self-help group model where some women have joined the group for savings/solidarity etc. We are being compelled to be aggressive and I don't want our clients to be over-indebted. I am not sure whether I will able to withstand the pressure of the stakeholders who fail to understand how I feel about the issue. Kalpana Sankar, Chair, Hand in Hand, India More bad regulations coming in. Associate director, MFI, Bangladesh The risk that good organizations with good services, well-designed for a poor, vulnerable or hard-to-reach population, will be pushed out of business because they can't compete with the big boys in the more lucrative markets and can't cross-subsidize their work with the poorest. Independent consultant, USA Low profitability caused by increasing expenses. Each year, the same loan portfolio growth gives a lower profit. Managing director, MFI, Kazakhstan Some MFIs are not concerned enough about efficiency and internal controls; they appear to be more concerned about doing “good”. When we try to explain that they will not do “good” long-term if today they are not running an extremely efficient and well-managed mass scale lending operation, we frequently get negative reactions. There is clearly a confusion between sustainability and profit maximisation, and social impact can be used as a poor excuse to avoid the topics/actions. Portfolio manager, Development bank My main concern would be another Nicaragua, Bosnia or Andhra Pradesh, which could be a tipping point for investors’ confidence. Mark van Doesburgh, managing director, Triple Jump, Netherlands In the Indian context, the SPM Report of 2013 by Access has come up with a finding that in about 24% of MFIs, the remuneration of CEOs was in the range of 40-60 times that of a loan officer… This not responsible financing. It is irresponsible financing by MFIs…This is going to be one of the grave risks for the MF sector in India. Dr. S. Santhanam, Consultant, Development Finance, India 14 CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org C S F I / New York CSFI I never want to have to look back and fret as to how microfinance ended up in the junk pile of seemingly good ideas that turned out to be bad ones. We can avoid this if we proactively professionalize, strategize, use best practice governance and risk management, show how microfinance is a proof-ofconcept of impact investing, and always be improving and evolving the microfinance concept. Julie Abrams consultant, Microfinance Analytics USA Liquidity - for a socially driven organisation that is running an operation in Malawi where the economy is on the edge. CEO, microfinance foundation I am concerned that the brand of microfinance is deeply damaged. For many traditional and committed supporters of microfinance, the industry no longer appears committed to working with, and improving the lives of, poor and food insecure populations. The balance has shifted too far to focus almost exclusively on profitability. We need to refocus on the core mission; creating sustainable approaches that impact the lives of poor clients. Steve Hollingworth, president, Freedom from Hunger, USA My main concern for our institution at the moment is to continue to work in providing microfinance outreach in the war conditions of Syria to ensure the institution survives and it is still able to provide the required services of clients and their households as they face the terror of war, economic devastation and absolute insecurity. Alex Pollock, director, UNRWA Microfinance, Palestinian Territories The risk that the opportunities gained by women will be lost as growth and expansion become more and more gender blind and neutral. We are not yet at a stage where there is equal opportunity for all. Gil Lacson, manager, Women's World Banking, USA The risk that too many clients are given loans for business which will never prosper because of the loan providers’ eagerness to push a loan over the desk. Counsellor, Ethiopia That so many MFIs in the world are still so far away from looking like a true financial institution - from low skill levels of staff, to overall strategic vision and lack of 'service' orientation towards clients. Independent consultant, USA Political uncertainty in many countries leads to a slowdown in MF operations and MF regulation, whereas there is an increasing need to support populations in a context of challenging economic situations. Microfinance investment officer, United Arab Emirates The rapid growth in numbers of MFIs, which could exceed supervisory capacity, and the possible collapse of a number of them with consequences for the safety of small savers' deposits, as well as overall confidence in the financial system are the key risks that I see. Banking supervisor, Africa CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org 15 C S F I / New York CSFI Who Who said said what what Service Serviceproviders: providers:People Peoplewho whorun runororwork workininmicrofinance microfinanceservice service providers providers The The top top risks risks identified identified by by microfinance microfinance service serviceproviders providerswere wereall allclosely closelylinked linkedtotothe the day-to-day day-to-day running running ofof the the business: business: overindebtedness overindebtednessand andcredit creditrisk riskwere weremuch muchthe the biggest biggest concerns. concerns. InIn Mexico, Mexico, the the general general director directorofofananMFI MFIsaid saidthat thathis hisbiggest biggestworry worry was was“the “thedebt debtoverhang overhangthat thatexists existsininMexico. Mexico. There There isis more more credit credit on on offer offer than than there there isis financial financialliteracy.” literacy.” Service Serviceproviders providers worry worrymost mostabout about debt debtand andcredit credit For For these these respondents, respondents, the the major major cause cause ofof indebtedness indebtednessisisthe therise riseinincompetition competitionfrom from powerful powerfulnew newentrants entrantswhom whomthey theysee seedriving driving down down prices prices and and credit credit standards. standards. Idowu Idowu Oshokoya, Oshokoya, managing managing director/CEO director/CEO Echo Echo Microfinance MicrofinanceBank BankininNigeria, Nigeria,said saidthat that“the “the main mainrisks…include risks…includecompetition competitionrisk, risk,due duetoto new new entrants entrants into into the the industry, industry, like like the the commercial commercial banks, banks, the the mortgage mortgage banks banks and and other other non-registered non-registered deposit deposit and and loan loan institutions.” institutions.” 1 1 Overindebtedness Overindebtedness 7.8 7.8 2 2 Credit Creditrisk risk 7.3 7.3 3 3 Competition Competition 7.0 7.0 4 4 Risk Riskmanagement management 6.8 6.8 5 5 Political Politicalinterference interference 6.7 6.7 6 6 Strategy Strategy 6.5 6.5 7 7 Regulation Regulation 6.5 6.5 8 8 Client Clientrelationships relationships 6.5 6.5 9 9 Staffing Staffing 6.5 6.5 1010 Management Management 6.4 6.4 1111 Financial Financialcapability capability 6.3 6.3 1212 Income Incomevolatility volatility 6.2 6.2 1313 Governance Governance 6.1 6.1 1414 Liquidity Liquidity 6.1 6.1 1515 Macro-economic Macro-economicrisk risk 6.1 6.1 1616 Funding Funding 6.1 6.1 1717 Transparency Transparencyofofobjectives objectives 6.0 6.0 1818 Product Productrisk risk 6.0 6.0 Another Another major major cause cause was was the the absence absence oror Technologymanagement management 6.0 6.0 ineffectiveness ineffectivenessofofcredit creditbureaux. bureaux.Where Wherethese these 1919 Technology did didnot notexist existthere therewas waslittle littleway waytotocheck checkthe the borrowing borrowingcommitments commitmentsofofa aloan loanapplicant, applicant,and andwhere wherethey theydid, did,they theywere wereoften often ignored ignoredby byless lessscrupulous scrupulouslenders. lenders.Luis LuisMiguel MiguelDiaz-Llaneza, Diaz-Llaneza,chief chieffinancial financialofficer officer ofofFinanciera FinancieraIndependencia IndependenciaininMexico, Mexico,said saidthat that“many “manysmall smalland andnew newentrant entrant participants participantsare areeager eagertotocarve carvea amarket marketshare sharefor forthemselves, themselves,and andare areunfortunately unfortunately willing willingtotoforego foregobasic basicrisk riskreduction reductionpractices, practices,affecting affectingnot notonly onlytheir theirrisk riskprofile, profile, but but that that for for the the entire entire industry. industry. For For example, example, many many small small companies companies forego forego participating participatinginincredit creditbureaus bureausororlimiting limitingcredit creditamounts amountstotoa afeasible feasibleportion portionofof clients' clients'disposable disposableincome.” income.” As Asthese thesecomments commentsimply, imply,the thequality qualityofofrisk riskmanagement managementisisseen seenasasanother anotherpoint pointofof weakness weaknessininMFIs. MFIs.One Onerespondent respondentsaid saidthat thatrisk riskmanagement managementteams teamswere were“very “very stretched”. stretched”. Although Although other other respondent respondent groups groups expressed expressed concern concern about about management management and and governance governanceininMFIs, MFIs,the theMFIs MFIsthemselves themselvestended tendedtotoplay playthese theserisks risksdown. down.They They were werethe theonly onlygroup groupwhich whichdid didnot notrank rankgovernance governancerisk riskininitsitstop topten ten(placing (placingititNo. No. 13). 13).Similarly Similarlywith withproduct productrisk: risk:whereas whereasother othergroups groupssaid saidthat thatMFIs MFIsrisked riskedlosing losing their theirmarket marketposition positionififthey theydid didnot notdevelop developproducts productsthat thatsuited suitedtheir theirclients, clients,the the MFIs MFIsthemselves themselvessaw sawthis thisasaslow lowrisk, risk,placing placingititNo. No.18 18out outofof19. 19.AAthird thirdlow low ranking ranking risk risk was was technology technology management. management. Other Other groups groups made made much much ofof the the challenges challengesfacing facingMFIs MFIsfrom fromnew newtechnology technologyand anddelivery deliverysystems systemssuch suchasasmobile mobile banking. banking.For ForMFIs, MFIs,this thiswas wasthe thelowest lowestrisk riskofofall. all. 16 CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org C S F I / New York CSFI Investors: Investors:People Peoplewho whoinvest investininmicrofinance microfinance The Thegrowth growthofofoverindebtedness overindebtednessisisthe thetop top concern concern for for people people who who invest invest inin microfinance. microfinance. The The causes causes they they mention mention include include rising rising competitive competitive pressures pressures combined combined with with MFI MFI governance governance that that isis insufficiently insufficientlystrong strongtotoconfront confrontit.it. An Ananalyst analystatata alarge largeinvestment investmentgroup groupinin Switzerland Switzerlandsaid saidthat that“in “insome somemarkets marketsthat that constitute constitutethe thetraditional traditionalinvestment investmenttargets targets ofofMIVs MIVsand andDFIs, DFIs,the therisk riskexists existsofofoverovercrowding crowding the the sector sector and and contributing contributing toto overindebtedness. overindebtedness. This This isis especially especially true true where where regulation regulation isis not not strong strong and and the the economy economydoes doesnot nothave havesolid solidfoundations.” foundations.” Investors Investorsare are not notabout aboutto to pull pullout out 1 1 Overindebtedness Overindebtedness 7.6 7.6 Competition 2 2 Competition 7.3 7.3 Governance 3 3 Governance 6.9 6.9 4 4 Political Politicalinterference interference 6.9 6.9 5 5 Regulation Regulation 6.8 6.8 6 6 Credit Creditrisk risk 6.6 6.6 7 7 Strategy Strategy 6.3 6.3 8 8 Risk Riskmanagement management 6.2 6.2 9 9 Financial Financialcapability capability 6.2 6.2 1010 Macro-economic Macro-economicrisk risk 6.1 6.1 1111 Management Management 6.1 6.1 1212 Staffing Staffing 5.9 5.9 1313 Income Incomevolatility volatility 5.9 5.9 Although Although the the incidence incidence ofof political political 1414 Product 5.8 Productrisk risk 5.8 interference interference inin the the microfinance microfinance industry industry 5.7 Technologymanagement management 5.7 seems seems toto have have diminished, diminished, this this group group 1515 Technology 5.5 Funding 5.5 continued continuedtotosee seeititasasa ahigh highrisk. risk. Christian Christian 1616 Funding Etzensperger Etzensperger Senior Senior Research Research Analyst Analyst 1717 Transparency Transparencyofofobjectives objectives 5.5 5.5 responsAbility responsAbility Investments Investments inin Switzerland Switzerland 1818 Client 5.4 Clientrelationships relationships 5.4 said saidthat that“politicians' “politicians'short shortterm terminterest interestcan can 5.2 Liquidity 5.2 do do enormous enormous harm harm toto the the industry industry and and toto 1919 Liquidity financial financial inclusion. inclusion. The The current current macroeconomic macroeconomic troubles troubles inin developing developing countries countries (e.g. (e.g. capital capital flight, flight, currency currency volatility, volatility,inflation) inflation)can canbebemanaged managedon onthe thelevel levelofofthe theinvestee investeeand/or and/orthe thefund fund level, level,but butgovernment governmentreaction reaction(sometimes (sometimesvia viathe theregulator) regulator)totothem themisisnotoriously notoriously unpredictable.” unpredictable.” Linked Linkedtotothis thiswas wasconcern concernabout aboutthe thequality qualityofofregulation. regulation.The Theexecutive executivedirector directorofof a aLuxembourg Luxembourgfund fundsaid saidthat that“many “manyless lessdeveloped developedmarkets marketscontinue continuetotostruggle struggletoto establish establish the the necessary necessary infrastructure infrastructure (regulation, (regulation, credit credit bureaus bureaus etc) etc) toto trigger trigger substantial substantialgrowth growthininfinancial financialinclusion”. inclusion”. Despite Despitetheir theirrole roleasassupporters supportersofofmicrofinance, microfinance,investors investorsseemed seemedless lessconcerned concerned than thanother othergroups groupswith withhow howeffectively effectivelyMF MFproviders providerswere werepursuing pursuingtheir theirsocial social missions. missions.Although Althougha anumber numberofofthem themsaid saidthey theywere wereworried worriedabout aboutmission missiondrift driftand and reputation reputationrisk, risk,these theseonly onlyappeared appearedlow lowon onthe thescale. scale.And Andwhile whilemany manyrespondents respondents said saidthey theyfeared fearedthat thatmicrofinance's microfinance'starnished tarnishedreputation reputationwould wouldfrighten frightenoff offinvestors, investors, this thiswas wasnot nota aconcern concernexpressed expressedby bythe theinvestors investorsthemselves. themselves.They Theyranked rankedfunding funding risk riskatatNo. No.16, 16,and andliquidity liquidityrisk riskatatNo. No.19. 19. IfIfinvestors investorshad hada aconcern concernininthis thisarea, area,itithad hadmore moretotodo dowith withexcessive excessiveinvestment, investment, and andthe thedifficulty difficultyofoffinding findinggood goodhomes homesfor fortheir theirmoney. money.Pierre PierreBerard, Berard,director, director, portfolio portfoliomanagement managementatatMicroCredit MicroCreditEnterprises Enterprisesininthe theUS, US,said saidthat that“the “theamount amountofof money moneyflowing flowingtotodeveloping developingcountries, countries,and andtotomicrofinance microfinanceinstitutions, institutions,keeps keeps growing, growing,notably notablyinincommodity-rich commodity-richcountries. countries.The Thequestion questionisiswhether whetherMIVs MIVsand and funders fundersare arenot notfuelling fuellinga abubble bubbleand andwhether whetherthe thefocus focuson onsocial socialimpact impactwill willbebe enough enoughtotocurb curbthe thequest questfor forgrowth.” growth.”However Howevera anumber numberofofrespondents respondentsnoted notedthat that the theinflow inflowofoffunds fundsinto intoemerging emergingmarkets marketscould couldquickly quicklybebereversed reversedwhen whenthe theUS US Federal FederalReserve Reservestarts startspushing pushingup upinterest interestrates. rates. CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org 17 C S F I / New York CSFI Observers: Observers:Consultants, Consultants,academics, academics,industry industryexperts experts Although Although concern concern about about overindebtedness overindebtedness dominated dominatedthe theresponse responsefrom fromobservers observers(i.e. (i.e. people people close close to, to, but but not not directly directly involved involved with, with, microfinance), microfinance), their their deeper deeper worries worries were were with with the the strategic strategic issues issues facing facing MF MF providers. providers. Many Manyfeared fearedthat thatMFIs MFIswere werelosing losingtheir theirway way inin anan increasing increasing complex complex and and competitive competitive world. world. Julie Julie Abrams, Abrams, a a consultant consultant with with Microfinance MicrofinanceAnalytics Analyticsininthe theUS, US,said saidher her main main concern concern was was that that “we “we won't won't plan plan strategically strategically and and will will neglect neglect toto accurately accurately analyze analyzeininorder ordertotoforesee foreseeand andplan planfor forthe the future future and and address address itit head head on on inin terms terms ofof understanding understanding the the changing changing market(s), market(s), understanding understanding and and meeting meeting our our clients' clients' changing changing needs, needs, practising practising excellent excellent governance governanceand andrisk riskmanagement, management,and andhaving having solid solidinternal internaloperations operationstotoimplement implementall allofof the theabove.” above.” Lack Lackof ofstrategic strategic planning planningisisaatop top concern concern 1 1 Overindebtedness Overindebtedness 7.4 7.4 2 2 Strategy Strategy 7.0 7.0 3 3 Governance Governance 7.0 7.0 4 4 Risk Riskmanagement management 6.9 6.9 5 5 Competition Competition 6.9 6.9 6 6 Credit Creditrisk risk 6.9 6.9 7 7 Political Politicalinterference interference 6.7 6.7 8 8 Management Management 6.6 6.6 9 9 Product Productrisk risk 6.6 6.6 1010 Regulation Regulation 6.5 6.5 1111 Staffing Staffing 6.3 6.3 1212 Client Clientrelationships relationships 6.1 6.1 1313 Financial Financialcapability capability 6.1 6.1 1414 Income Incomevolatility volatility 6.1 6.1 1515 Macro-economic Macro-economicrisk risk 6.1 6.1 1616 Transparency Transparencyofofobjectives objectives 6.1 6.1 1717 Technology Technologymanagement management 6.0 6.0 1818 Funding Funding 6.0 6.0 Some Somerespondents respondentslinked linkedthese theseweaknesses weaknesses 1919 Liquidity 5.9 Liquidity 5.9 directly directly toto inadequate inadequate governance governance and and management managementatatMFIs, MFIs,particularly particularlyon onthe therisk risk front. front. AA US US observer observer said said that that “Overindebtedness “Overindebtedness isis still still anan issue. issue. However, However, increasingly increasinglythe thelack lackofofgovernance governanceatatMFIs MFIsisisviewed viewedasasa ahindrance hindrancetotogrowth growthand and sustainability.” sustainability.” The The need need for for good good governance governance increases increases asas MFIs MFIs grow. grow. Getaneh Getaneh Gobezie, Gobezie, microfinance microfinanceexpert expertatatthe theWomen WomenEntrepreneurship EntrepreneurshipDevelopment DevelopmentProgramme Programmeinin Ethiopia, Ethiopia,said saidthat that“when “whenananoperation operationisissmall, small,ititmay maybebeeasy easytotoensure ensurea a'shared' 'shared' vision/mission vision/missionwith withall allthe thestaff staff(at (atboard, board,management, management,middle middlelevel, level,and andfront frontline), line), and andititmay mayalso alsobebeeasier easiertotomonitor monitorperformance performance......As Astheir theiroperations operationsexpand, expand,the the MFIs MFIsneed needa adifferent differentmanagement managementstyle”. style”. Inherent Inherentininthis thisrisk riskisisthe thedanger dangerthat thatmicrofinance microfinanceproviders providerswill willbebedrawn drawnaway away from fromtheir theirsocial socialmission. mission.One Onerespondent respondentsaid saidthat thatthe theindustry industryneeded neededtotoshow show “Results! “Results!To Todemonstrate demonstrateresults, results,totodemonstrate demonstrate'triple 'triplebottom bottomline' line'results: results:that that beyond beyondfinancial financialreturns returnsmicrofinance microfinancecan candeliver deliverthe thesocial, social,economic economicand andpoverty poverty reduction reductionoutcomes outcomesthey theyhave havepromised promisedfor forsosolong, long,and andthat thatthey theycan canachieve achieveititinina a sustainable sustainable manner, manner, atat scale scale and and without without harm harm such such asas overindebtedness overindebtedness oror misselling.” misselling.” 18 CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org C S F I / New York CSFI Support providers: People who support microfinance through networks, NGOs and support programmes Traditional suppliers 'could become uncompetitive' This group sees the threat of overindebtedness as the greatest risk facing the industry. One programme coordinator said that “the main risk is a repeat of a debt crisis in urban areas where the supply [of credit] is too large, and where there is no credit bureau or effective supervision by the authorities”. These respondents saw a number causes behind excessive lending including weak governance in MFIs and a failure to apply rigorous credit assessment. An investment officer in Costa Rica said that “markets are becoming more competitive, and there's need for better qualified key staff members and more solid governance structures.” Some respondents also traced the problem to excessive growth: markets that are so saturated that lenders are forced to soften their terms to hold on to market share. One said: “The pressure to make loans faster and cheaper to compete has led to a deterioration of quality in process as well as relationships with clients, resulting in a deterioration of portfolio quality.” 1 Overindebtedness 7.1 2 Governance 7.1 3 Strategy 7.1 4 Risk management 6.8 5 Management 6.5 6 Credit risk 6.5 7 Competition 6.5 8 Product risk 6.5 9 Regulation 10 Technology management 6.4 6.4 11 Staffing 6.4 12 Political interference 6.3 13 Financial capability 6.1 14 Macro-economic risk 5.9 15 Transparency of objectives 5.9 16 Client relationships 5.8 17 Income volatility 5.7 18 Liquidity 5.4 19 Funding 5.3 Strategically, there was also concern about the ability of the industry to take on change. A consultant said: “I see big developments in a wider financial inclusion agenda with many new players coming into the market. This creates a risk that traditional MFIs who are attempting to be broad-based financial service providers will become uncompetitive. So for me the biggest risk is that MFIs fail to capitalise on their core niche in an evolving financial inclusion agenda which is based on a direct personal relationship with clients and an ability to leverage this to create value for clients.” This group did not see funding as an important risk, ranking it at the bottom of the list. CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org 19 C S F I / New York CSFI Raters: Raters: People People whowho raterate microfinance microfinance service service providers providers New New MFMF companies companies starting starting upup 'day 'day byby day' day' For For raters, raters, overindebtedness overindebtedness is the is top the top risk risk for for reasons reasons which which werewere summed summed up by up by Sebastian Sebastianvon vonStauffenberg, Stauffenberg,chiefchief executive executive officer officer of MicroRate of MicroRate in the in the US.US. He He saidsaid that that “over-indebtedness “over-indebtedness coupled coupled withwith a slowdown a slowdown of economies of economies is straining is straining MFIs MFIs and and causing causing deteriorating deteriorating portfolio portfolio quality. quality. Boards Boards and and management management are are not not reacting reacting withwith a long-term a long-term viewview and and maymay be be underestimating underestimating the the impact. impact. Increasing Increasing credit credit risk risk is not is matched not matched withwith better better credit credit methodology methodology (to (to the the contrary, contrary, it often it often produces produces lax credit lax credit methodology).” methodology).” A rater A rater in Peru, in Peru, one one of the of the worst worst affected affected countries, countries, saidsaid that that saturated saturated markets markets werewere producing producing slowslow growth growth and and narrower narrower margins. margins. Credit Credit risk risk waswas rising rising because because MFIs MFIs werewere “increasing “increasing the the average average loanloan amount amount per customer per customer and and wanting wanting to move to move intointo a higher a higher market market niche niche serving serving SMEs.” SMEs.” 1 Overindebtedness 1 Overindebtedness 8.1 8.1 2 Competition 2 Competition 7.9 7.9 3 Risk management 3 Risk management 7.9 7.9 4 Credit risk risk 4 Credit 7.8 7.8 5 Governance 5 Governance 7.7 7.7 6 Strategy 6 Strategy 7.1 7.1 7 Staffing 7 Staffing 6.9 6.9 8 Macro-economic risk risk 8 Macro-economic 6.7 6.7 9 Management 9 Management 6.6 6.6 10 Financial capability 10 Financial capability 6.2 6.2 11 Income volatility 11 Income volatility 6.2 6.2 12 Transparency of objectives 12 Transparency of objectives 6.2 6.2 13 Client relationships 13 Client relationships 6.1 6.1 14 Liquidity 14 Liquidity 6.0 6.0 15 Product risk risk 15 Product 5.9 5.9 16 Technology management 16 Technology management 5.9 5.9 17 Funding 17 Funding 5.8 5.8 18 Regulation 18 Regulation 5.7 5.7 Competitive Competitive pressures pressures werewere noted noted in in interference 5.6 5.6 19 Political interference several several countries. countries. A UK A UK raterrater saidsaid that that 19 Political competition competition waswas “resulting “resulting in in margin margin pressure pressure and and potentially potentially leading leading to an to erosion an erosion of underwriting of underwriting standards”, standards”, and and a a respondent respondent fromfrom India India saidsaid that that microfinance microfinance companies companies werewere starting starting up “one up “one by by one,one, day day by day”. by day”. Management Management quality, quality, particularly particularly in the in area the area of risk, of risk, waswas a strong a strong concern concern for raters, for raters, but but issues issues of funding of funding and and liquidity liquidity ranked ranked low low on the on list. the list. Their Their lowest lowest concern concern waswas political political interference interference in the in microfinance the microfinance industry. industry. 20 CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org C S F I / New York CSFI Regulators: Regulators: Government Government officials officials andand those those whowho regulate regulate microfinance microfinance service service providers providers Regulators Regulators werewere the the onlyonly category category of of respondent respondent whowho did did not not put put overindebtedness overindebtedness at the at top the top of their of their list of list of concerns concerns (it came (it came No. No. 5). 5). Instead, Instead, theythey focused focused on the on wider the wider issues issues of credit of credit risk risk and and governance governance in MFIs. in MFIs. Many Many painted painted a a picture picture of MFIs of MFIs suffering suffering losses losses through through lending lending practices practices that that werewere not not backed backed by by strong strong governance governance and and internal internal control. control. A respondent A respondent fromfrom Kenya Kenya saidsaid that that “most “most MFIs MFIs are are faced faced withwith serious serious problems problems installing installing internal internal control control systems systems and and theythey havehave no no measures measures to assess to assess the the institutional institutional and and business business risksrisks that that are are inherent inherent in their in their operations.” operations.” Weak Weak governance governance leads leads to to losses losses 1 Credit 1 Credit risk risk 8.1 8.1 2 Governance 2 Governance 8.1 8.1 3 Risk management 3 Risk management 7.8 7.8 4 Management 4 Management 7.8 7.8 5 Overindebtedness 5 Overindebtedness 7.5 7.5 6 Competition 6 Competition 7.3 7.3 7 Funding 7 Funding 7.2 7.2 8 Financial capability 8 Financial capability 7.1 7.1 9 Macro-economic risk risk 9 Macro-economic 6.9 6.9 10 Strategy 10 Strategy 6.8 6.8 11 Staffing 11 Staffing 6.6 6.6 12 Client relationships 12 Client relationships 6.5 6.5 13 Liquidity 13 Liquidity 6.5 6.5 14 Product risk risk 14 Product 6.5 6.5 Philippe Philippe Nsenga, Nsenga, microfinance microfinance inspector inspector management 6.4 6.4 15 Technology management at at the the National National Bank Bank of of Rwanda, Rwanda, 15 Technology volatility 6.2 6.2 16 Income volatility reinforced reinforced this this message message by by saying saying that that 16 Income “institutions “institutions are are not not ableable to to afford afford 17 Political interference 6.2 6.2 17 Political interference competent competent staff,staff, and and the the boards boards of of 18 Regulation 6.0 6.0 18 Regulation directors directorsmostmostof ofthe thetimetimelacklack 19 Transparency of objectives 19 Transparency of objectives 5.6 5.6 governance governance and and financial financial skills. skills. As As consequence, consequence, institutions institutions are are exposed exposed to to governance governance and and operational operational risks. risks. TheThe sector sector is not is not ableable to stand to stand the the competition competition posed posed by bank by bank institutions.” institutions.” Competition Competition waswas a broad a broad issue. issue. Muhammad Muhammad Ali,Ali, deputy deputy director director of the of the banking banking inspection inspection department department of the of the StateState Bank Bank of Pakistan, of Pakistan, saidsaid that that moremore outsiders outsiders “are“are bringing bringing unfair unfair competition competition among among loaning loaning institutions institutions which which is not is not onlyonly exposing exposing the soundness the soundness of banks of banks but is butalso is also harmful harmful for genuine for genuine borrowers”. borrowers”. Regulators Regulators werewere moremore concerned concerned thanthan otherother groups groups withwith issues issues of funding, of funding, capital capital adequacy adequacy and and liquidity. liquidity. A West A West African African regulator regulator saidsaid he was he was worried worried that that “a “a number number of institutions of institutions could could fail fail because because of under of under capitalisation, capitalisation, inappropriate inappropriate business business models, models, lacklack of capacity of capacity in terms in terms of knowledge of knowledge and and skills skills to manage to manage the the business business and and greed greed and and fraud fraud on the on the partpart of some of some entrants entrants intointo the the microfinance microfinance space.” space.” Although Although (unlike (unlike a number a number of other of other groups) groups) regulators regulators werewere reluctant reluctant to say to say that that regulation regulation waswas a risk a risk issueissue for the for industry the industry (they (they ranked ranked regulatory regulatory risk risk No. No. 18 out 18 of out of 19),19), theythey recognised recognised that that it was it was still still inadequate. inadequate. OneOne respondent respondent saidsaid that that because because of of technology technology changes changes and and demand demand for for better better regulation regulation and and supervision, supervision, “the“the microfinance microfinance sector sector willwill faceface moremore and and tighter tighter regulations regulations in future.” in future.” CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org 21 C S F I / New York CSFI Africa Africa Risk Risk awareness awareness is low is low in in Africa Africa Africa Africa was was one one of the of the two two regions regions which which did did not not rankrank overindebtedness overindebtedness as their as their top top risk.risk. However However credit credit risk risk moremore widely widely was was the No. the No. 1 concern 1 concern due due to a tocombination a combination of of whatwhat respondents respondents saw saw as as weakweak credit credit management, management,poorpoorgovernance, governance,and and difficult difficult operating operating conditions. conditions. 1 Credit 1 Credit risk risk 7.5 7.5 2 Governance 2 Governance 7.2 7.2 3 Overindebtedness 3 Overindebtedness 7.0 7.0 4 Risk management 4 Risk management 6.9 6.9 5 Management 5 Management 6.9 6.9 6 Strategy 6 Strategy 6.7 6.7 Kevin KevinFryatt, Fryatt,director directorof oftechnical technical 7 assistance assistance at MFX at MFX Solutions Solutions in the in the US, US, 8 said:said: “The“The paramount paramount risk risk facing facing the the 9 microfinance microfinance sector sector in Sub-Saharan in Sub-Saharan Africa Africa is that is that of governance, of governance, and and moremore precisely precisely 10 risk risk governance. governance. Within Within governance, governance, therethere 11 is a is lack a lack of appreciation of appreciation and and understanding understanding 12 of the of the role role that that risk risk management management should should 13 playplay within within a financial a financial institution.” institution.” Staffing 7 Staffing 6.7 6.7 Competition 8 Competition 6.5 6.5 Liquidity 9 Liquidity 6.5 6.5 Technology management 10 Technology management 6.5 6.5 Transparency of objectives 11 Transparency of objectives 6.3 6.3 Client relationships 12 Client relationships 6.3 6.3 Income volatility 13 Income volatility 6.2 6.2 14 Product risk risk 14 Product JohnJohn Masha, Masha, general general manager manager of MESPT of MESPT in in 15 Kenya, Kenya, saidsaid that that “credit “credit risksrisks remain remain highhigh 16 in Africa in Africa due due to political to political and and economic economic 17 uncertainties uncertainties facing facing many many countries.” countries.” An An 18 MFIMFI branch branch manager manager in Benin in Benin saidsaid that that 30- 30day day PARPAR rulesrules werewere not not being being respected respected 19 “because “because clients clients are are overborrowed, overborrowed, and and therethere is aniseconomic an economic slump slump in most in most countries”. countries”. 6.2 6.2 Funding 15 Funding 6.2 6.2 Macro-economic risk risk 16 Macro-economic 6.0 6.0 Financial capability 17 Financial capability 6.0 6.0 Regulation 18 Regulation 5.8 5.8 Political interference 19 Political interference 5.7 5.7 A related A related concern concern was was the ability the ability of MF of MF providers providers to meet to meet stiffstiff competition competition fromfrom newnew entrants. entrants. Mounkaila Mounkaila Garba, Garba, director director of credit of credit at Taanadi at Taanadi S.A.S.A. in Niger, in Niger, saidsaid that that “rich“rich institutions, institutions, especially especially fromfrom northern northern countries, countries, are setting are setting up in updeveloping in developing countries, countries, putting putting at risk at risk the viability the viability of local of local institutions institutions withwith littlelittle means. means. Generally Generally thesethese northern northern structures structures havehave resources resources but not but an notunderstanding an understanding of the of business.” the business.” Concern Concern about about liquidity liquidity and and funding funding risk risk ranked ranked higher higher herehere thanthan elsewhere. elsewhere. Respondents Respondents saidsaid that that growing growing loanloan demand, demand, increased increased competition competition for for people’s people’s deposits deposits and and savings, savings, and and reluctance reluctance by investors by investors and and donors donors to fund to fund smaller smaller MFIs MFIs was was creating creating strains. strains. LoanLoan default default was was a further a further problem. problem. Alioune Alioune Diongue, Diongue, headhead of of internal internal control control at Microsen at Microsen in Senegal, in Senegal, saidsaid that that liquidity liquidity risk risk was was highhigh because because “the“the majority majority of institutions, of institutions, for lack for lack of alternatives, of alternatives, havehave to finance to finance themselves themselves through through the banks the banks in order in order to create to create loansloans for their for their clients. clients. These These oftenoften do not do pay not pay theirtheir loansloans back, back, which which makes makes it hard it hard for the for MFIs the MFIs to meet to meet theirtheir commitments commitments to the to bank”. the bank”. A low-ranking A low-ranking but but nonetheless nonetheless widely widely citedcited risk risk was was regulation, regulation, moremore specifically specifically the the lacklack of suitable of suitable regulation regulation to encourage to encourage the the growth growth of microfinance. of microfinance. The The executive executive director director of an of MFI an MFI in The in The Gambia Gambia saidsaid that that “regulators “regulators needneed to be to be innovative innovative in setting in setting up regulations up regulations in order in order to respond to respond to the to the dynamism dynamism of the of the industry industry and and encourage encourage genuine genuine and and quality quality microfinance microfinance services services providers.” providers.” 22 CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org C S F I / New York CSFI East East AsiaAsia Pacific Pacific Overindebtedness Overindebtedness was,was, by abylarge a large margin, margin, 1 the the top top concern concern in this in this region. region. ThisThis was was 2 attributed attributed to ato number a number of causes. of causes. RonRon Bevacqua, Bevacqua, director director of Access of Access Advisory Advisory in in 3 the thePhilippines, Philippines,saidsaidthat that“over“over- 4 indebtedness indebtedness is a isgrowing a growing problem, problem, related related 5 partly partly to lack to lack of financial of financial knowledge knowledge but but 6 moremore to to the the unwillingness unwillingness of of service service providers providers to step to step outside outside theirtheir comfort comfort 7 zones zones to target to target newnew markets markets and and develop develop 8 moremoreappropriate appropriateproducts”. products”.Others Others 9 attributed attributed it toit growing to growing competition competition fromfrom10 banks, banks, “unregulated “unregulated growth growth in portfolios”, in portfolios”, 11 and and weakweak MFIs. MFIs. Overindebtedness 1 Overindebtedness 8.0 8.0 2 Management Management 7.4 7.4 3 Governance Governance 7.4 7.4 Risk management 4 Risk management 7.0 7.0 Income volatility 5 Income volatility 7.0 7.0 Competition 6 Competition 6.7 6.7 Liquidity 7 Liquidity 6.6 6.6 Credit risk risk 8 Credit 6.5 6.5 Financial capability 9 Financial capability 6.5 6.5 Strategy 10 Strategy 6.3 6.3 Product risk risk 11 Product 6.1 6.1 12 Technology management 12 Technology management MFMF providers providers 'stuck 'stuck in in their their comfort comfort zone' zone' 5.9 5.9 The The institutional institutional risksrisks in in MFIs MFIs (i.e. (i.e.13 Client relationships 5.8 5.8 13 Client relationships governance, governance, management) management) ranked, ranked,14 Staffing 5.8 5.8 14 Staffing collectively, collectively, veryvery highhigh in this in this region, region, 15 Political interference 5.6 5.6 15 Political interference occupying occupying positions positions No. No. 2, 32, and 3 and 4. A4. A 5.5 5.5 16 Funding respondent respondent fromfrom a regional a regional investment investment bankbank16 Funding saidsaid that that “the“the mainmain challenge challenge is that is that mostmost17 Macro-economic risk risk 5.5 5.5 17 Macro-economic MFIs MFIs havehave laudable laudable social social objectives objectives but but18 Regulation 5.4 5.4 18 Regulation lacklack the the professionalism professionalism to grow to grow and and 19 Transparency of objectives 19 Transparency of objectives 5.0 5.0 manage manage risk risk properly. properly. FewFew institutions institutions and and networks networks havehave the the vision vision to carry to carry out out this this mandate mandate professionally.” professionally.” Lachlan Lachlan Fleming, Fleming, chairman/consultant chairman/consultant at M-Pay/BSA at M-Pay/BSA Consulting Consulting Group Group in Vietnam, in Vietnam, saidsaid that that confidence confidence in microfinance in microfinance governance governance was was “evaporating”, “evaporating”, partly partly because because of the of growing the growing incidence incidence of fraud. of fraud. Angus Angus Poston, Poston, founder founder of Bridge of Bridge in the in the Philippines, Philippines, saidsaid that that “the“the microfinance microfinance business business model model is entering is entering a period a period of significant of significant change. change. In some In some countries, countries, groupgroupbased based lending lending will will continue continue to experience to experience largelarge levels levels of bad of bad debt.debt. ThisThis could could create create a general a general perception perception that that the the objective objective of bringing of bringing inclusive inclusive financial financial services services to to thosethose otherwise otherwise unserved unserved is misguided.” is misguided.” The The growth growth of competition of competition was was a high a high concern, concern, not just not just fromfrom incoming incoming commercial commercial banks banks but also but also fromfrom statestate subsidised subsidised entities. entities. OneOne respondent respondent saw saw “growing “growing political political interference” interference” in some in some countries. countries. Liquidity Liquidity and and funding funding issues issues werewere alsoalso mentioned. mentioned. Betty Betty Wilkinson, Wilkinson, director, director, CWPF CWPF at the at the Asian Asian Development Development BankBank in the in the Philippines, Philippines, saw saw “inadequate “inadequate longer-term longer-term sources sources of funds of funds for MFIs for MFIs to balance to balance growth; growth; and and mismatch mismatch between between client client financial financial needs needs and and services services provided provided (insufficient (insufficient diversity diversity of services of services and and inadequate inadequate collaboration collaboration between between service service providers providers to benefit to benefit various various client client groups)”. groups)”. In Laos, In Laos, another another development development bankbank respondent respondent saidsaid that that “the“the highhigh costcost of funds of funds on one on one handhand makes makes the interest the interest rate rate high;high; government government regulation regulation on the on other the other hand, hand, makes makes the the institutions institutions lower lower the cost. the cost. ThisThis limits limits competitiveness.” competitiveness.” CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org 23 C S F I / New York CSFI Eastern Eastern Europe Europe and Central and Central Asia Asia The topThe concern top concern in the former in the former communist communist1 countries countries of Eastern of Eastern EuropeEurope and Central and Central 2 Asia is Asia the growth is the growth of overindebtedness. of overindebtedness. The The problem problem was reported was reported from many from places: many places:3 Romania, Romania,Azerbaijan, Azerbaijan,Tajikistan, Tajikistan,4 Kazakhstan, Kazakhstan, and Kosovo. and Kosovo. However However some some5 respondents respondents hoped hoped the situation the situation might might 6 improve. improve. In Kazakhstan, In Kazakhstan, one said onethat saidthethat the recent introduction recent introduction of credit ofbureaux credit bureaux should should7 ease the ease problem, the problem, and a and respondent a respondent from from8 Bosnia Bosnia & Herzegovina & Herzegovina said “We said have “We have9 largely largely overcome overcome the crisis theincrisis repayment”. in repayment”.10 11 The risk The was risk closely was closely linked linked with No. with 2 on No. 2 on 12 the list:thecompetition. list: competition. From Romania, From Romania, an an MFI chief MFI executive chief executive said that saidthe thatmain the main 13 issue facing issue MFIs facingwas MFIs “achieving was “achieving sufficient sufficient 14 scale toscale compete to compete with banks, with banks, who arewho once are once 15 again aggressive again aggressive in the in marketplace the marketplace with with 16 their limited their limited ethics, ethics, especially especially when when it it comes comes to micro to micro clients clients in bothin agri bothand agri and 17 non-agri non-agri sectors.” sectors.” 18 Overindebtedness 1 Overindebtedness 7.5 2 Competition Competition 6.7 6.7 3 Strategy Strategy 6.4 6.4 Macro-economic risk 4 Macro-economic risk 6.3 6.3 Income volatilityvolatility 5 Income 6.2 6.2 Risk management 6 Risk management 5.9 5.9 Client7relationships Client relationships 5.9 5.9 Financial capability 8 Financial capability 5.8 5.8 Political interference 9 Political interference 5.8 5.8 Management 10 Management 5.6 5.6 Regulation 11 Regulation 5.6 5.6 Funding 12 Funding 5.6 5.6 Liquidity 13 Liquidity 5.5 5.5 Staffing 14 Staffing 5.4 5.4 Technology management 5.4 15 Technology management 5.4 Transparency of objectives 5.3 16 Transparency of objectives 5.3 Product risk 17 Product risk 5.3 Governance 18 Governance 19 Credit 19 risk Credit risk BankBank competitors competitors show show 'limited 'limited ethics' ethics' 7.5 5.3 5.1 5.1 5.0 5.0 Samir Samir Jafarli, Jafarli, deputy deputy chief executive chief executive at at Vision Vision Fund AzerCredit Fund AzerCredit in Azerbaijan, in Azerbaijan, said said that “asthat a result “as a of result aggressive of aggressive competition competition the average the average disbursed disbursed loan amounts loan amounts will will increase, increase, which which will cause will cause greater greater overindebtedness overindebtedness issues. issues. In reaction In reaction to to overindebtedness, overindebtedness, regulation regulation will become will become stricter stricter and some and limitations some limitations might be might be introduced.” introduced.” Strategic Strategic risk occupied risk occupied a high aplace highbecause place because respondents respondents saw a lack saw of a lack initiative of initiative by by MFIs inMFIs getting in getting to gripstowith gripsanwith increasingly an increasingly uncertain uncertain future. future. An operations An operations officer officer for an for international an international financing financing agencyagency in Bosnia in Bosnia & Herzegovina & Herzegovina saw “ansaw important “an important need toneed thinktolong think term longand term how and to how continue to continue to buildtothe build basics the well basics in well organizations in organizations that have thatweathered have weathered the storm theand storm continue and continue to develop”. to develop”. The funding The funding of microfinance of microfinance activities activities in the in region the region is also isanalso issue, an though issue, though the the problemproblem lies in lies bothin overboth and over-under-funding. and under-funding. On theOnoverfunding the overfunding side, one side, one respondent respondent said that said “the that oversupply “the oversupply of funding of funding to MFIstoand MFIs banks and isbanks distorting is distorting the the market market and risking and risking wiping wiping out theout social the purpose social purpose entities.” entities.” However, However, a respondent a respondent from Romania from Romania said that saidbecause that because the country the country was a was member a member of the of EU,theit EU, got it got neglected neglected by funders by funders “because “because they think they there think is there no islonger no longer a needa for need for microfinance”. microfinance”. In Georgia, In Georgia, a respondent a respondent said that said MFIs that had MFIs to had borrow to borrow in foreign in foreign currency currency “because “because there isthere no possibility is no possibility to get local to getfunding local funding at an acceptable at an acceptable price price and long and term” longwhich term” meant which that meant they that faced theyforeign faced foreign exchange exchange risk. risk. 24 CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org C S F I / New York CSFI Latin America Latin America The problems The problems of overindebtedness of overindebtedness and and1 credit risk creditwere riskseen weretoseen be more to be acute more inacute in 2 Latin America Latin America than inthan any inother any region. other region. This was This attributed was attributed largely largely to the growth to the growth of of3 competition competition from new from entrants, new entrants, and anand an4 accompanying accompanying declinedecline in lending in lending standards standards5 and business and business ethics, ethics, as well as as wellto as to 6 inadequate inadequate risk management. risk management. In short, In the short, the 7 top fourtop risks fourare risks closely are closely interlinked. interlinked. 8.4 8.4 Credit risk Credit2 risk 8.3 8.3 3 Competition Competition 7.7 7.7 Risk management 4 Risk management 7.2 7.2 Strategy 5 Strategy 7.0 7.0 Staffing 6 Staffing 6.9 6.9 Client7relationships Client relationships 6.9 6.9 8 Financial capability 8 Financial capability 6.8 6.8 A respondent A respondent from Mexico from Mexico described described a a9 market market rife with rife “overindebtedness with “overindebtedness and and 10 sociallysocially irresponsible irresponsible practice”. practice”. SeveralSeveral 11 respondents respondents linked linked this risk this toriskpoorly to poorly 12 managed managed client relationships. client relationships. A respondent A respondent from Costa from Rica Costasaid Ricathat said “asthat the“as markets the markets 13 are becoming are becoming more competitive, more competitive, MFIs need MFIs need 14 to introduce to introduce new products new products to bettertoserve betterall serve all 15 the financial the financial needs of needs theirofclients, their clients, not justnot just 16 credit and credit savings. and savings. Some MFIs, Some instead MFIs, instead of of developing developing new products, new products, push their pushclients their clients 17 towardstowards higher loan higher amounts.” loan amounts.” 18 LoanLoan growth growth is is causing causing moremore delinquencies delinquencies Overindebtedness 1 Overindebtedness Transparency of objectives 6.6 9 Transparency of objectives 6.6 Management 10 Management 6.6 6.6 Product risk 11 Product risk 6.6 6.6 Political interference 12 Political interference 6.4 6.4 Governance 13 Governance 6.4 6.4 Regulation 14 Regulation 6.4 6.4 Income volatilityvolatility 15 Income 6.2 6.2 Macro-economic risk 16 Macro-economic risk 6.2 6.2 Technology management 6.2 17 Technology management 6.2 Funding 18 Funding 6.1 6.1 19 Liquidity 19 Liquidity 5.7 5.7 The regional The regional response response was overshadowed was overshadowed by the by problems the problems of Peruofwhere Peru the where growth the growth of microfinance of microfinance has gone hasinto gonereverse into reverse becausebecause of largeof loan largelosses. loan losses. Respondents Respondents there spoke thereof spoke “excessive of “excessive growthgrowth expectations” expectations” and “inadequate and “inadequate regulation”. regulation”. Whether Whether these trends these lead trendstolead a full-blown to a full-blown crisis iscrisis a matter is a matter of debate. of debate. Frederic Frederic de de Mariz, Mariz, directordirector of UBSofinUBS Brazil, in Brazil, said that said “overall, that “overall, I do notI do seenot a risk seeof a risk a crisis of aincrisis in asset delinquencies asset delinquencies (different (different from India). from India). But theBut natural the natural strategystrategy of MFIsoftoMFIs expand to expand into new into products/segments/geographies new products/segments/geographies is causing is causing a rise ina delinquencies.” rise in delinquencies.” Institutional Institutional risks (strategy, risks (strategy, management, management, staffing) staffing) also ranked also ranked high. “For high.authorised “For authorised institutions, institutions, one ofone the ofmain the risks main isrisks excessive is excessive growthgrowth which which could generate could generate problems problems of internal of internal controlcontrol and worsen and worsen financial financial indicators. indicators. Risks stemming Risks stemming from from deficiencies deficiencies in the governance in the governance of institutions of institutions also persist”, also persist”, said a respondent said a respondent from from Mexico.Mexico. FundingFunding concerns concerns were also werelow; alsoinlow; fact in liquidity fact liquidity in many in markets many markets was said wasto said be to be excessive, excessive, and a cause and aofcause “over-growth”. of “over-growth”. A respondent A respondent from Guatemala from Guatemala said: “There said: “There is availability is availability of fundsoffor funds the for sector the but sector thisbut could thisbe could affected be affected if indebtedness if indebtedness shows shows trends and trends indicators and indicators of highof risk.” high risk.” Concern Concern about political about political interference interference in the microfinance in the microfinance sector, sector, once a once top level a toprisk, level risk, has abated. has abated. Respondents Respondents seem toseem havetoaccepted have accepted that it has thatbecome it has become a fact ofa life. fact of life. CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org 25 C S F I / New York CSFI Middle Middle EastEast and and North North Africa Africa Concerns Concerns aboutabout overindebtedness overindebtedness headed headed the the 1 list inlistthein Middle the Middle East East and North and North AfricaAfrica 2 regions, regions, the result the result of growing of growing competition competition in in key key markets, markets, and and also also very very unstable unstable 3 4 economic economic and political and political conditions. conditions. Dealing Dealing withwith a a volatile volatile environment environment Overindebtedness 1 Overindebtedness 7.8 7.8 2 Macro-economic Macro-economic risk risk 7.3 7.3 3 Political interference Political interference 7.1 7.1 Regulation 4 Regulation 7.1 7.1 5 Credit risk risk 5 Credit 6.9 6.9 Financial capability 6 Financial capability 6.8 6.8 Management 7 Management 6.7 6.7 Competition 8 Competition 6.6 6.6 Strategy 9 Strategy 6.6 6.6 Income volatility 10 Income volatility 6.6 6.6 Product risk risk 11 Product A programme A programme co-ordinator co-ordinator in Egypt in Egypt said the said the 6 two two main main challenges challenges were:were: “dealing “dealing in a in a political politicalvolatile volatileenvironment environmentand and 7 overindebtedness overindebtedness in urban in urban areas”. areas”. Youssef Youssef 8 Fawaz, Fawaz, executive executive director director of AlofMajmoua Al Majmoua in in 9 the Lebanon, the Lebanon, said said that that “general “general political political10 volatility volatility and associated and associated security security fragility fragility are are compounding compounding the economic the economic downturn downturn and and11 creating creating conditions conditions of instability of instability for the forwork the work12 of microfinance. of microfinance. This This is further is further exacerbating exacerbating13 the increase the increase in PAR in PAR observed observed by many by many MFIsMFIs14 in theinregion.” the region.” 6.5 6.5 Technology management 12 Technology management 6.4 6.4 Staffing 13 Staffing 6.3 6.3 Liquidity 14 Liquidity 6.3 6.3 6.2 6.2 6.2 6.2 15 Risk 15 management Risk management 16 Governance unpopularity The unpopularity of microfinance of microfinance in some in some16 Governance The markets markets is also is also adding adding to political to political risk. risk.17 Funding 5.9 17 Funding Bidouj Bidouj Mustapha, Mustapha, chief chief executive executive officer officer of of18 Transparency of objectives 5.4 18 Transparency of objectives Attawfiq Attawfiq Microfinance Microfinance in Morocco in Morocco wherewhere 19 Client relationships 5.3 19 Client relationships microfinance microfinance has been has been through through a crisis, a crisis, said said there there were were “risks“risks that that microfinance microfinance will will become become a political a political issue issue for reasons for reasons of ideology of ideology or patronage”. or patronage”. 5.9 5.4 5.3 The problems The problems of microfinance of microfinance are compounded are compounded in some in some markets markets by institutional by institutional weakness. weakness. A respondent A respondent from from the United the United Arab Arab Emirates Emirates saw “a sawlack “a of lackcapacity of capacity strengthening, strengthening, especially especially in a incontext a context wherewhere MFIsMFIs are adding are adding more more services services (insurance, (insurance, greengreen products) products) and using and using new technologies new technologies to enhance to enhance their their capacity”. capacity”. In Algeria, In Algeria, a respondent a respondent said that saidthere that there “a lack “a of lack qualified of qualified human human resources”. resources”. Inadequate Inadequate – or –non-existent or non-existent – regulation – regulation is also is aalso problem a problem in some in some markets, markets, for for example example Iraq where Iraq where a respondent a respondent said that said “the that legal “the legal environment environment does does not support not support microfinance”. microfinance”. Alaa Alaa Abbassi, Abbassi, a consultant a consultant in Jordan, in Jordan, said that said “many that “many central central banksbanks are acknowledging are acknowledging the importance the importance of financial of financial inclusion inclusion and are and beginning are beginning to to consider consider regulating regulating and supervising and supervising the microfinance the microfinance sector, sector, so there so there is a risk is a of risk of beingbeing over-regulated over-regulated or of or prudential of prudential regulation regulation beingbeing forcedforced on non-deposit on non-deposit takingtaking MFIs.” MFIs.” 26 CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org C S F I / New York CSFI NorthNorth America America 'Lack'Lack of of sensitivity sensitivity to to client client needs' needs' The North The North American American response response consisted consisted1 mostly mostly of investors, of investors, donors,donors, networks networks and and 2 consultants consultants servingserving MFIs inMFIs otherinparts otherofparts the of the 3 world. world. Their top Their concern top concern was thewas problem the problem of of overindebtedness. overindebtedness. The comment The comment of oneof one4 investorinvestor was typical was typical of many. of many. She identified She identified5 “overindebtedness “overindebtedness due due to lack to lack of of 6 coordination, coordination, poor regulation poor regulation and lack and oflack of sensitivity sensitivity to client to needs; client needs; [also] predatory [also] predatory7 behaviour behaviour by competitors by competitors in moreinpenetrated more penetrated8 markets”. markets”. 9 Overindebtedness 1 Overindebtedness 7.7 7.7 2 Governance Governance 7.2 7.2 3 Strategy Strategy 7.1 7.1 Competition 4 Competition 6.9 6.9 Risk management 5 Risk management 6.9 6.9 Credit6 risk Credit risk 6.8 6.8 Regulation 7 Regulation 6.6 6.6 Political interference 8 Political interference 6.6 6.6 Management 9 Management 6.5 6.5 10 Technology management 6.4 10 Technology management 6.4 This concern This concern was closely was closely linked to linked reputation to reputation 11 risk. One risk. respondent One respondent said that said “the that industry “the industry is is runningrunning the riskthe of risk taking of taking yet another yet another hit in hit 12 in terms of terms credibility.” of credibility.” Many also Manymentioned also mentioned 13 the potential the potential risk torisk funding to funding as investors as investors 14 shied away shied from away an fromindustry an industry tainted tainted by by 15 controversy. controversy. Financial capability 11 Financial capability 6.3 6.3 Staffing 12 Staffing 6.3 6.3 Product risk 13 Product risk 6.2 6.2 Transparency of objectives 5.9 14 Transparency of objectives 5.9 Macro-economic risk 15 Macro-economic risk 16 Income volatilityvolatility 16 Income 5.7 5.7 5.6 5.6 Respondents’ Respondents’ concernconcern about about institutional institutional 17 Client 5.5 17relationships Client relationships 5.5 weakness weakness in MF inproviders MF providers was also washigh: also high: 18 Funding 5.4 18 Funding 5.4 ineffective ineffective governance governance was ranked was ranked the No.the 2 No. 2 19 Liquidity 5.2 19 Liquidity 5.2 risk. One risk.consultant One consultant said that said“the thatlack “theoflack of understanding understanding of the ofrole the ofrole the ofBoard, the Board, findingfinding suitablesuitable Board members, Board members, and poor andunderstanding poor understanding of the principles of the principles of goodof good Corporate Corporate Governance Governance continue continue to be issues to be for issues the for industry”. the industry”. The quality The quality of riskofmanagement risk management was another was another high level high concern, level concern, particularly particularly as as regardsregards the ability the ability of MF ofproviders MF providers to handle to handle increasingly increasingly difficultdifficult and complex and complex markets. markets. Brian Cox, Brian president Cox, president of MFX of Solutions MFX Solutions in the in US,thesaid: US, “Isaid: see “Irisksee risk management management as a bigaschallenge a big challenge both forboth MFIs forand MFIs MIVs. and MIVs. For MFIs, For growth MFIs, growth in size,in size, complexity complexity and breadth and breadth of product of product line is not linebeing is notmatched being matched with better withsystems, better systems, risk risk management management know-how know-how and processes.” and processes.” Many respondents Many respondents expressed expressed concernconcern about the about future the evolution future evolution of microfinance. of microfinance. This accounts This accounts for the for hightheposition high position (No. 3)(No. occupied 3) occupied by Strategy by Strategy in the rankings. in the rankings. A A US investor US investor said that saidMFIs that had MFIsto had facetoupface to how up tothey howwere they going were “to going remain “to remain relevantrelevant and key andplayers key players within within the larger the ‘financial larger ‘financial inclusion’ inclusion’ space, space, with more with more diversediverse and technologically and technologically savvy savvy playersplayers (MNOs,(MNOs, other other tech provider tech provider partnerships)”. partnerships)”. Increasingly, Increasingly, strategic strategic risk includes risk includes the successful the successful management management of of new technology, new technology, which this which group this of group respondents of respondents ranked ranked in theirintop their tentop risks, tenmost risks, most often because often because they feared, they feared, as one of as them one ofput them it, that put MFIs it, thatwould MFIs “miss wouldthe “miss train”. the train”. The risks Theofrisks political of political interference interference and excessive, and excessive, or inappropriate, or inappropriate, regulation regulation were were also high alsoforhigh thisfor group. this group. MFIs remain MFIs remain vulnerable vulnerable to “donor/politician to “donor/politician over-reaction over-reaction to crisestoand crises useand of inappropriate use of inappropriate policy measures policy measures which unnecessarily which unnecessarily damagedamage good good institutions institutions and services,” and services,” according according to MatttoGamser, Matt Gamser, head ofhead the of SME the Finance SME Finance Forum,Forum, International International FinanceFinance Corporation. Corporation. CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org 27 C S F I / New York CSFI SouthSouth Asia Asia The fall-out The fall-out from the from Andhra the Andhra PradeshPradesh crisis crisis resonates resonates in the response in the response from South from Asia, South Asia,1 where the where riskthe of risk political of political interference interference tops tops2 the ranking. the ranking. The The chairman chairman of a of 3a microfinance microfinance organisation organisation in Indiainsaid India that said that4 “the major “the risk major which risk the which industry the industry faces isfaces is 5 from the from decisions/interference the decisions/interference of elected of elected 6 government government and theand political the political class.” class.” Political Political interference interference still a still high a high risk risk in South in South AsiaAsia Political 1 Political interference interference 7.3 7.3 2 Overindebtedness Overindebtedness 6.9 6.9 Client3relationships Client relationships 6.6 6.6 Regulation 4 Regulation 6.5 6.5 Risk management 5 Risk management 6.4 6.4 Funding 6 Funding 6.4 6.4 7 Competition 7 Competition 6.4 6.4 One reason One reason is that isthethat trigger the trigger of the of APthe AP8 crisis, crisis, overindebtedness, overindebtedness, remainsremains a higha high 9 rankingranking concern, concern, not justnotin just India in but India in but in 10 neighbouring neighbouring countries countries such as suchNepal, as Nepal, 11 Bangladesh Bangladesh and Pakistan. and Pakistan. Liquidity 8 Liquidity 6.4 6.4 Credit9 risk Credit risk 6.3 6.3 Management 10 Management 6.2 6.2 Strategy 11 Strategy 6.1 6.1 12 Product risk 12 Product risk 5.8 5.8 This risk Thiswas risklinked was linked to concern to concern about the about the 13 Governance 5.8 13 Governance 5.8 quality quality of MFIs' of MFIs' relationships relationships with their with their 14 Transparency of objectives 5.8 14 Transparency of objectives 5.8 clients:clients: whetherwhether lenderslenders really understood really understood 15 Financial capability 5.8 15 Financial capability 5.8 their clients' their clients' needs and needs borrowing and borrowing capacity, capacity, or whether, or whether, as one as respondent one respondent said, “They said, “They 16 Staffing 5.6 16 Staffing 5.6 just want just to wantincrease to increase the loan the size”. loan size”. 17 Macro-economic risk 5.6 17 Macro-economic risk 5.6 Govinda Govinda Bahadur Bahadur Raut, Raut, head head of theof the 18 Income volatilityvolatility 5.4 18 Income 5.4 microfinance microfinance department department at Muktinath at Muktinath 19 Technology management 5.3 19 Technology management 5.3 Bikas Bank Bikas inBank Nepal, in Nepal, said that said “MFIs that “MFIs are are facing facing a challenge a challenge in analyzing in analyzing loans and loans and clients clients ...resulting ...resulting in client in over-indebtedness. client over-indebtedness. This challenge This challenge will increase will increase in the in the days ahead daystoo.” ahead too.” This cluster This cluster of risksofincluded risks included the growth the growth of competition of competition which which many respondents many respondents saw driving saw driving MFIs toMFIs bad to business bad business and ethical and ethical practices. practices. An Indian An Indian respondent respondent said: said: “Competition “Competition has started has started in many in markets many markets and weand canweseecan thesee dilution the dilution of due of due diligence diligence standards”. standards”. Regulatory Regulatory risk, another risk, another vexed vexed area onarea the on sub-continent, the sub-continent, continues continues to ranktohigh, rankwith high,intrusive with intrusive rules such rulesassuch interest as interest rate caps rateearning caps earning many many mentions. mentions. FundingFunding and liquidity and liquidity concerns concerns also remain also remain high, inhigh, part in duepart to fears due tothat fears thethat damage the damage to microfinance's to microfinance's reputation reputation will putwill donors put donors and investors and investors off. This off.risk This varies risk from varies from one institution one institution to another, to another, but thebut chief the operating chief operating officer officer of oneofmicrofinance one microfinance networknetwork said: “Avenues said: “Avenues for raising for raising funds are funds shrinking”. are shrinking”. There was There generally was generally lower concern lower concern in this region in this about regioninstitutional about institutional risks: the risks: quality the quality of governance, of governance, management management and staffing, and staffing, though though more can morealways can always be done be todone to improveimprove it. A respondent it. A respondent from India from said Indiathat said“most that “most MFIs are MFIsmanaged are managed by by professionals professionals and have andgood havegovernance”. good governance”. 28 CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org Microfinance: An evolving industry Sam Mendelson and Daniel Rozas provide the context to the risks identified by the Microfinance Banana Skins surveys over the last six years, and ask where microfinance goes next Microfinance since 2007: An industry’s changing face When the first Microfinance Banana Skins was published in early 2008, the industry was enjoying the final months of what now looks like a golden era. The report’s title – Risk in a booming industry – caught the spirit of the times. Muhammad Yunus had won the Nobel Peace Prize a couple of years earlier during the UN-declared Year of Microcredit. Microfinance institutions (MFIs) in many countries were enjoying double-digit growth rates, fuelled by an even faster influx of funds from enthusiastic investors. The process of commercialisation, i.e. putting microfinance onto a professional footing, was largely complete. The main risk seemed to be whether the industry could keep it up. For example, the growth in investment meant that too much money ended up chasing too few institutions and clients, and produced an unsustainable growth in capacity. Rising commercialism meant that microfinance’s social mission came increasingly to be neglected in favour of the pursuit of profit. MFIs in some markets lacked access to the human capital needed to run institutions that were becoming increasingly complex, offering a widening array of products and services. Hedging against currency risk – a growing problem for foreign-funded MFIs – was undeveloped. Regulators took actions which didn’t always show an understanding of what the industry needed, for example by capping interest rates or prohibiting deposit-taking. The lack of credit bureaus leveraged the consequences of overheated markets to create problems of overindebtedness. __________________________ Sam Mendelson is M&E/Knowledge Specialist at Arc Finance - a consultancy specialising in advancing the clean energy finance sector at the Bottom of the Pyramid - including through microfinance. He is the current Citi/DFID CSFI Development Fellow, former Senior Consultant in the Emerging Markets practice at ESL (UK) and has published widely on financial inclusion, technology and emerging markets. Daniel Rozas, an independent consultant, is a leading expert on sector-level risks facing microfinance. In 2009, Daniel built a model showing the presence of a microcredit bubble in Andhra Pradesh, a state that one year later saw the largest crisis in the sector's history. He has co-created MIMOSA, an index that scores over 100 countries on their level of microcredit saturation. Prior to his microfinance career, Daniel gained first-hand experience with credit bubbles while working for the US mortgage investor Fannie Mae during 2001-08. None of these underlying issues could be laid at the feet of Wall Street. They were created by the microfinance industry itself. So when the global financial crisis struck, it brought a series of shocks, some internal, some not. The eruption of repayment crises in several countries and the collapse of a number of large MFIs made people realise that, far from occupying a special world of its own, microfinance was subject to risk like any other financial industry. Meanwhile, research of a more rigorous kind than had previously been conducted called into question the efficacy of microfinance as a means of improving the lives of the poor, and in so doing not only attacked the very foundations of the industry, but also opened up a whole new area of risk: that of reputation. Far from being the panacea for poverty-alleviation upon which the industry was originally based, it was now facing charges that microfinance was not even meeting the Hippocratic threshold1. But the perception of microfinance’s role was evolving too. Other areas of research showed that the real needs of microfinance clients went well beyond the small, boilerplate loans which were the mainstay of traditional microfinance’s product line. The focus on poverty alleviation began to give way to a broader Financial Inclusion agenda whose purpose was to deliver “a full suite of quality financial services, provided at affordable prices, in a convenient manner, and with dignity for the clients”2. New means of assessing the social impact of microfinance evolved to guide the industry’s work. New technologies also made it possible to provide financial services that were cheaper, more accessible and better able to meet clients’ needs. Specialist microfinance fund managers became an increasingly important source of microfinance investments. Alongside these developments, microfinance also became increasingly integrated in the formal financial sector, with MFIs becoming fully-licensed banks, commercial banks targeting lower income customers, and regulators taking greater oversight of both. As a consequence of all this turbulence, microfinance is now an industry in flux, facing difficult choices about the next stage in its development. As Joanne Ledgerwood writes in the 2013 Microfinance Handbook: “Fifteen years [after the first Handbook], the shift to financially inclusive systems...appropriately broadens the objectives beyond economic development and poverty alleviation to include the ability of poor women and men to better manage risks, smooth income, invest in productive activities, and build assets”. An analysis of the events which brought microfinance to this challenging point in its evolution helps illuminate the road ahead. 1 To illustrate how extreme this perception had become, the UK Government’s All-Party Parliamentary Group (APPG) on Microfinance in 2011 quoted Milford Bateman: “The microfinance movement…has failed to provide robust evidence that it is meaningfully associated with poverty reduction…many specialists [now believe] that microfinance actually undermines the process of sustainable poverty reduction and ‘bottom-up’ economic and social development”. 2 Definition from The Center for Financial Inclusion at Accion, Washington DC. Microfinance in crisis Most people view the crisis which engulfed microfinance in the last few years as a comparatively sudden event, the product of dramatic change in the industry. In reality, a disaster which affects the majority of MFIs in a single country is not new. The pioneer markets of modern microfinance, Bolivia and Bangladesh, both experienced episodes of high delinquency at the turn of the millennium3. There have also been examples of large MFIs collapsing after a period of runaway growth, for example Corposol in Colombia.4 Nevertheless, such events remained largely unknown until 2009 when four countries underwent repayment crises at the same time: Nicaragua, Morocco, Pakistan, and Bosnia & Herzegovina. That year’s Banana Skins, Confronting Crisis and Change, highlighted the fallout from crises that had their roots in industry-specific risks. After expanding rapidly, these markets suffered the fatal combination of excessive competition, inadequate regulatory infrastructure (including credit bureaus), overstretched MFI systems and controls, and erosion of lending discipline in MFIs.5 The result was a mountain of bad debt and repayment strikes that caused the collapse of several large MFIs and extensive losses in others. However, it was the crisis in the Indian state of Andhra Pradesh (AP) in 2010 that provided the explosive charge around that time. The 2011 Banana Skins report Losing its Fairy Dust, published within a few months of the AP crisis, captured the mood in the sector, which was just emerging from multiple repayment crises in smaller countries, only to see the largest microfinance market essentially implode, causing significant damage to the sector’s reputation. In just a few months, the thrust of media coverage of microfinance shifted from social entrepreneurs trying to solve the problem of poverty, to rapacious moneylenders reaping profit off the backs of the poor. Allegations proliferated about overborrowing, borrower suicides and usurious interest rates – even when the truth was more nuanced. The huge profits made by investors during the high profile IPO of SKS, India’s largest MFI, added to the sense of scandal. The government of AP responded by issuing an ordinance that effectively prohibited microfinance activity in the state.6 This action triggered a nationwide crisis of liquidity as Indian banks curtailed their lending to MFIs, forcing them to hold back loan disbursements, thus damaging their relationships with their customers, even outside AP. The impact reached 3 Asif Dowla: How to deal with a default tsunami in the microfinance industry: Lessons from Grameen Bank http://bit.ly/1grCI1H; E. Rhyne: Commercialization and Crisis in Bolivian Microfinance 4 5 6 Jean Steege: The Rise and Fall of Corposol (1998) http://bit.ly/1ljGtn2 CGAP Focus Note 61 (2010): Growth and Vulnerabilities in Microfinance. http://bit.ly/1sRCRhJ This was not entirely without precedent. In 2006, the government of AP temporarily closed down microfinance offices in one district (Krishna), allegedly in response to complaints about usurious interest rates and highly commercialised MFIs ‘hard-selling’ microloans. On that occasion, however, MFIs were able to find an accommodation with the government. MIX Reporting: 97M borrowers 78M depositors $69B assets Basel Committee Microfinance & Core Banking Principles UN Year of Microcredit MIV assets reach $6.0B 2010 G20 Principles for Innovative Financial Inclusion SKS IPO Andhra Pradesh crisis begins 2011 2007 2012 Morocco crisis begins Better than Cash Alliance Bosnia crisis begins 2013 Client Protection Certification Staying relevant Portfolios of the Poor 2009 2014 Smart Campaign launch Facing reality EIU Microscope launch Banerjee/Duflo RCT finds no impact in India Microinsurance Innovation Facility & Microinsurance Network launched MIV assets reach $8.1B CGAP Funder survey launched Alliance for Financial Inclusion founded 2008 TrueLift launch Universal Standards of Social Performance Monitoring MIV assets reach $3.9B MIX Reporting: 68M borrowers 59M depositors $47B assets Global Findex launched MIV assets reach $7.0B Roodman: Due Diligence MIX Reporting: 94M borrowers 80M depositors $125B assets UN-PRI Principles for Investors in Inclusive Finance M-PESA launch Losing its fairy dust 1st Andhra Pradesh crisis (Krishna District) 2006 1st MIV surveys by Symbiotics & MicroRate MIV assets reach $1.2B Yunus & Grameen Bank share Nobel Peace prize MIX Reporting: 49M borrowers 37M depositors $22B assets 2005 Social Performance Task Force established Nicaragua crisis begins Morduch/ Roodman refute findings of earlier Bangladesh study Pakistan crisis begins MF Transparency launched Compartamos IPO Confronting crisis and change Risk in a booming industry foreign investors – whose Indian exposure was mainly in MFI equity – via asset impairments that were taken over the subsequent year. The crisis in India quickly came to dominate global headlines. For an industry that had spent the prior couple of years trying to settle a handful of smaller countries' problems, a full-blown crisis in the world’s largest microfinance market was a major shock and a devastating blow to its reputation. For many people both inside and outside the sector, India was the first indication that microfinance might have problems that went beyond purely localised concerns. And another problem that had been hidden at the heart of microfinance from its beginning was about to come to the fore. From anecdote to RCT: the evolution of microfinance research Since Mohammed Yunus’ early claims that microfinance would put poverty in a museum, the industry had billed itself as a key tool for alleviating – and even eliminating – poverty. Initially, this claim was made largely by the industry’s promoters themselves. But by the 1990s, a series of impact studies in Bangladesh showing substantial improvement in borrowers’ livelihoods came to be viewed as the gold standard for proving microfinance’s efficacy. This changed in 2009 with two concurrent publications. One was a landmark study of the slums of Hyderabad, which showed that microfinance had had a relatively modest impact on a subset of clients, and little impact on most others.7 The study was conducted using randomised control trial (RCT) methodology which was more rigorous than earlier methods and better able to separate the impacts of microfinance from other factors that might affect the lives of the poor. While it was not the first microfinance RCT, it heralded a new trend in social science, becoming the new benchmark for microfinance research. While the first study showed the new path for research, the second brought down the edifice on which microfinance had stood for over a decade. It sought to replicate one of the landmark 1990s studies in Bangladesh, and found that the methodology for its most prominent claim – that 5% of Grameen Bank’s clients get out of poverty every year – was based on faulty methodology. Instead, it found that these same clients’ well-being had been essentially unchanged by their affiliation with Grameen. Summarising the impact from the new RCT studies and his replication of the earlier Bangladesh studies, David Roodman later wrote in his book Due Diligence that “on current evidence, the best estimate of the average impact of microcredit on the poverty of clients is zero” [emphasis ours]. 7 http://bit.ly/1qS5PMx The tremors set off by all this research came not just from the findings but also from the timing. To learn that microfinance was bad at helping the poor was one thing. To learn it just as microfinance seemed to be collapsing in one of its biggest markets was another. 2011 onwards All this was not to say that the provision of financial services to underserved areas of the population didn’t bring significant benefits. A noted RCT advocate Esther Duflo of the MIT Poverty Action Lab, attributed the controversy to the fact that the studies “showed that microfinance is not magic. But while we didn’t discover that microfinance launches people out of poverty, we did discover that it’s making a very real difference to some people. The new, forthcoming research will help us discover more about who benefits from microfinance and help us design financial products that work better for the poor8.” The 2012 Banana Skins survey, entitled Staying Relevant, encapsulated these issues well: how does microfinance continue to find a purpose in the face of pessimistic empirical impact results, commercialisation and consolidation? How does an industry that began touting its povertyalleviating bona fides stay relevant today and tomorrow? Another important study around this time, Portfolios of the Poor published by Princeton University Press, showed that far from being simple, the financial lives of the poor were extremely complex – characterised by many methods of informal financial disintermediation. This and other research into behavioural economics underpinned a new agenda of financial inclusion which placed its focus on understanding clients’ needs and creating the products and services to meet them. For many, this was now the way forward for the industry. Clients and products: how microfinance is learning to listen Since the start of modern microfinance, the main focus has been on standardising products and services. This allowed service providers to reduce the cost of serving poor clients, but often at the expense of meeting their actual needs. The boilerplate microfinance product – the one-size-fits-all microenterprise loan – continues to play a central role. But it is not what is always best matched clients’ needs, and monoline lending models based on such products have been implicated in several crises, especially in Andhra Pradesh. Understanding client needs Much recent research has pointed to under-appreciated aspects of poor people’s lives. Being poor and financially excluded is about more than lack of money; the high volatility of people’s incomes exacerbates their poverty and makes it difficult for them to service their loans. Income volatility also forces them to enter into smaller and more frequent financial transactions which are costlier to provide, and drive up rates for the borrower. The poor also bear a disproportionate share of the costs of banking because they often have to travel to a physical branch, and may be obliged to buy unsuitable products, for example, ones with 8 Microfinance Impact and Innovation Conference in New York: http://www.cgap.org/news/first-look-new-research-microfinance-impactand-innovation minimum balance requirements, or inappropriate loan terms, or instalments which do not fit their income patterns. While income generation used to be the raison d’être of microfinance, income smoothing has become an important new goal. Clients rarely earn $2 a day. They may earn $10 one day and nothing at all for the rest of the week. In such circumstances, putting food on the table every day can be a struggle. People also need finance for big expenditures: life cycle events like birth, education, marriage, purchase of major assets, business investment, and so on. They also need finance (loans, savings and insurance) for emergencies: ill health, fires, floods and cyclones. Savings, credit FINANCIAL NEEDS Savings, simple pension products Birth, Education, Marriage OUTCOMES Credit and cash management, insurance Prepare for old age Working Life Short/long term credit facilities or savings services Enhanced ability to manage planned financial needs Enhanced E h dh household h ld capacity to manage shocks & vulnerabilities Improved social, educational and financial status Deal with emergencies Support others Insure Assets Remittances Asset, illness, Asset illness death insurance Leveraging opportunities as they arise Fig 1: The Client Financial Lifecycle – with thanks to Microsave Product design What products do meet these criteria? They obviously vary with clients’ needs: a soy farmer with a family in a village in sub-Saharan Africa trying to sell his produce in an urban market has different needs from an unmarried rickshaw driver in a Pakistani city. Graham Wright of Microsave argues that as a bare minimum, poor people need a transaction or basic savings account (perhaps with an overdraft attached); deposit accounts for different purposes; a shortterm (up to one year) loan for working capital and consumption smoothing, education etc.; a longer term secured loan to facilitate purchase of a large asset such as a house or a vehicle, and a life insurance policy and possibly health, livestock and asset insurance too. This suite of products9, matched to a person’s life cycle, is illustrated in the figure above. 9 For further on the appropriate use of credit and savings, see http://bit.ly/1hesMX4 How the Banana Skins results track industry trends Some Banana Skins come and go, some are hardy perennials. A tabulation of the Top Ten Banana Skins since the survey series began in 2008 shows how risk perceptions change over time, sometimes dramatically – see below. The first survey, in 2008, was conducted before the full impact of the financial crisis was known. The top concerns were about the institutional strength of MFIs – their management, their governance, their ability to run healthy, growing businesses. Credit risk is barely on the radar screen at No. 10. The picture changes dramatically in 2009, with the industry in the thick of the financial crisis. Credit risk shoots to the top of the list, closely followed by liquidity risk as fears grip the banking markets. Concerns about institutional strength are still there, but they have been edged out of their high places by more urgent, life-threatening risks. The world has calmed down a bit by 2011. However, credit risk remains the top concern with overindebtedness frequently mentioned as a cause – although not a specific Banana Skin. The newcomers to the ranking are reputation risk and political interference, reflecting the combined impact of visceral critiques from India and elsewhere, as well as sceptical findings from the ivory towers of academia. The picture becomes clearer in 2012: credit risk concerns dominate with the emergence of overindebtedness as a top issue for the industry. But most of the risks in the Top Ten are institutional: the quality of management and corporate governance, along with related issues of risk management and client management. The 2014 survey shows that concern about overindebtedness and credit risk has not gone away, despite an improving global economy; in fact it may be getting worse in some places. Again, governance and management remain high level concerns. This cluster of risks has persisted in a high position throughout the series, suggesting that they represent some of the toughest challenges facing the industry. This year’s survey also addresses more far-reaching risks facing the industry: the need for fresh strategies, products, technology and structures, all of which are closely linked to the industry’s evolution and survival. But the survey shows up a paucity of strategic thinking in MFIs, and a striking lack of concern about the risk of getting it wrong in key areas such as products and technology. Along with the cluster mentioned above, this could turn out to be another major area of risk for the industry. Microfinance Banana Skins Top Ten 2008- 2014 2008 2009 Risk in a booming industry Confronting crisis and change 1 Management quality 1 Credit risk 2 Corporate governance 2 Liquidity 3 Inappropriate regulation 3 Macro-economic trends 4 Cost control 4 Management quality 5 Staffing 5 Refinancing 6 Interest rates 6 Too little funding 7 Competition 7 Corporate governance 8 Managing technology 8 Foreign currency 9 Political interference 9 Competition 10 Credit risk 10 Political interference 2011 2012 Losing its fairy dust Staying relevant 1 Credit risk 1 Overindebtedness 2 Reputation 2 Corporate governance 3 Competition 3 Management quality 4 Corporate governance 4 Credit risk 5 Political interference 5 Political interference 6 Inappropriate regulation 6 Quality of risk mgt. 7 Management quality 7 Client management 8 Staffing 8 Competition 9 Mission drift 9 Regulation 10 Unrealisable expectations 10 Liquidity 2014 Facing reality 1 Overindebtedness 2 Credit risk 3 Competition 4 Risk management 5 Governance 6 Strategy 7 Political interference 8 Management 9 Regulation 10 Staffing Together, these products should deliver: ● convenience, which requires proximity to the MFI and user-friendly hours; ● accessibility, which means local agents, ATM cards or mobile money to avoid having to deal with crowded branches and complicated forms; and ● affordability, which needs to encompass direct as well as indirect or hidden costs (bribes, hidden fees, compulsory savings, etc.). Despite these needs, financial institutions serving the mass market rarely seem to have the time (or inclination, as some MBS respondents have observed) to conduct market research to identify prospective clients’ real needs and aspirations. Many rely on so-called “bath-tub product development” – products based on senior management’s experience and gut instinct, and rolled out without any pilot testing or consultation. Finding out what clients need is key to successful product design. This is true for all three main product areas: credit, savings and insurance. Credit While microenterprise credit has been at the heart of the sector since the beginning, there have been significantly fewer advances beyond that. Its core innovation was the introduction of relatively short-term loans (usually less than a year) with fixed repayments, usually weekly or fortnightly, that include both principal and interest. This has enabled the sector to make small loans at a relatively low cost. It turns out that such loans are well suited to the cash flows of market traders and some small producers, mainly for funding working capital. They also work for some types of income smoothing, which is why microcredit targeted at enterprises is so commonly used for household expenses. However, such loans are less suited for acquiring larger assets, funding crop inputs, making home improvements, and other activities that can benefit from appropriately-designed credit. This form of lending often requires components such as initial grace periods and longer terms (along with larger sizes and lower interest rates). Income-smoothing can also help when clients are able to top-up or pay-down their loans depending on changes in their income. Each of these, and other, areas has seen significant innovation by many MFIs, but in the aggregate, they remain subordinated to microcredit loans. Without embracing and effectively serving these broader needs, MFIs will remain relegated to the relatively limited segment of traders and small producers that comprise the world’s poor. Savings Access to savings products is as important to clients as credit. First, so long as savings are secure and accessible, they are essentially risk-free to the client. They are also a much cheaper way to smooth expenditure than borrowing. Despite this, only 25% of adults in lower income countries have a formal savings account (in high-income countries, the figure is 89%).10 The number of depositors reported to the MIX rose from 37m with $11.9bn saved in 2005 to 86m with $71bn in 2011 (although many accounts are dormant). As CGAP has outlined in its extensive work on the subject, most poor people use informal ways to save: putting it under the proverbial mattress, participating in savings clubs, investing in livestock or saving with family. A lot of the time, there is a risk of loss, theft or depreciation. Though small deposits may entail significant operating costs to MFIs, they also have a number of advantages. They are an important means of strengthening client relationships, and in competitive markets they may prove an important way of retaining clients and crossselling profitable products, such as money transfers and insurance. Clients who save also make less risky borrowers. And although small savings rarely raise enough funding on their Microinsurance: reducing cost and reaching scale To reach new markets, microinsurance will need to continue to innovate on: ● controls (paring the long list of exclusions and requirements for claims settlement); ● marketing (building trust and conveying information in a way that gets through to a low income market); ● agents (traditional agents are not effective in selling microinsurance); ● policy documents (making them easier to understand for clients with low literacy); ● product features (making them adaptable to the needs of the market); ● understanding the market, its segments and clients, and their needs; and ● delivery (getting products out to millions of people efficiently and effectively). own, the infrastructure supporting them can be leveraged to draw in large deposits. Together, they can provide a strong foundation of local deposits that reduces dependence on banks and foreign lenders, while eliminating foreign currency risk. Insurance Poor clients are susceptible to shocks, and the consequences of them are greater. Billions of poor people – even those who have recently escaped poverty – live on the edge of disaster. A single major shock, such as serious illness or death of a breadwinner could push a family into complete destitution. And while saving for the unexpected is a useful and common practice, it is rarely sufficient to cover major shocks. While microfinance has come to encompass both credit and savings for many MFIs, insurance for the underserved (or ‘microinsurance’) remains the least developed part of the 10 World Bank Findex, 2011 financial product suite. It is also harder to deliver. Providers have found it difficult to offer insurance beyond credit life (which pays off the insured's loan in the event of death). Despite coming late to the sector, the microinsurance sector has evolved dramatically in the last decade. Health, funeral and crop insurance are being offered in many countries. Indexbased insurance pushes down costs. Alternative delivery channels such as mobile network operators (MNOs) are being deployed. Education about the importance of being insured is proliferating. While microinsurance is in some ways the hardest product to offer, it can provide potentially the biggest reward for clients and institutions alike. Responsible Finance & Social Performance Management: doing good while doing well One of the features of the recent phase of microfinance has been the growth of public concern about “mission drift”, the risk that MFIs might be drawn away from their social purpose into more profit-led enterprises. Driven by this and concerns that microfinance (both non- and forprofit) might sometimes harm clients, a number of initiatives have been launched to strengthen and measure MFIs’ social performance. The emergence of these frameworks, collectively known as Social Performance Management (SPM), has been one of the most important developments of the past decade. While some of these efforts date back to early 2000s (the CERISE social audit tool was first created in 2001), the majority of them have come about since 2007 and have involved a number of initiatives covering the work of both MFIs and investors. At heart, they seek to balance reporting on financial metrics, so as to put the social returns of double-bottom line institutions on a more equal footing. Nearly all propose a number of indicators that MFIs and others could adopt in order to better monitor their social return. Though the number of such initiatives may appear burdensome, they are largely complementary. MFTransparency sets out standards for disclosure of interest rates, while the Smart Campaign’s Client Protection Principles set out a basic list of do-no-harm standards (including MFTransparency-based interest rate disclosures). The UN-PRI’s Principles for Investors in Inclusive Finance (PIIF) largely incorporate these two initiatives, but in a manner that is appropriate to investors. Other initiatives go beyond the do-no-harm standard, seeking to measure social return itself. The Universal Standards for Social Performance Management spell out a set of metrics that socially-motivated MFIs may seek to measure, while the Truelift Pro-Poor Seal of Excellence provides outside recognition for MFIs that demonstrate verified commitment to social objectives. Many of these efforts have been supported by specialized microfinance ratings agencies, which have participated in the formulation of social performance standards and conducted independent assessments and social ratings of MFIs. Social reporting has also been added to the sector’s primary MFI reporting portal, the MIX Market. SPM has its supporters and critics. In only a few years it has become enormously influential, affecting regulators, investors, donors, practitioners, and ultimately clients. But the proliferation of standards, reporting requirements and ratings risks becoming a burden – particularly on smaller institutions. If social compliance by these institutions comes at the expense of other goals such as better management and service, SPM risks winning a pyrrhic victory. Technology’s promise The two biggest obstacles to reaching underserved members of the population, particularly in remote areas, are cost and access. Since 2007, some of the most exciting developments in microfinance have been those which promise to reduce, even overcome, these obstacles using new technology and delivery channels. One of these is mobile money: the use of mobile phones to transfer funds and make payments. As of June 2013, 219 services were operating in 84 countries11 with 61m accounts, up from 37m a year before. By the end of the decade, 300m Africans are expected to have a smart phone. The development of M-banking, market/value chain applications, biometric ID, agent models, Point of Sale devices and Near Field Communication, 3G Internet outreach and the affordability of cloud-based MIS for even small institutions will provide opportunities for cost reduction and outreach which were unthinkable only a few years ago. NUMBER OF LIVE MOBILE MONEY SERVICES FOR THE UNBANKED BY REGION (2001-2013; YEAR END) 250 219 200 EAST ASIA AND PACIFIC 116 LATIN AMERICA AND CARIBBEAN 100 64 SOUTH ASIA 38 50 0 MIDDLE EAST AND NORTH AFRICA 179 150 EUROPE AND CENTRAL ASIA 1 2 2 5 6 7 11 16 2001 2002 2003 2004 2005 2006 2007 2008 SUB-SAHARAN AFRICA 2009 2010 2011 2012 2013 Fig 2: Ledgerwood, 2013: The New Microfinance Handbook At the end of 2013, nine markets (Cameroon, the DRC, Gabon, Kenya, Madagascar, Tanzania, Uganda, Zambia and Zimbabwe) already had more mobile money accounts than 11 GSMA, Mobile Money for the Unbanked programme, 2013 state of the industry report (Feb. 2014) http://bit.ly/1kh9em2 bank accounts, compared to just four markets the year before12. According to the GSMA, the trade body of the mobile phone industry, as of June 2013, 53,000 merchants were accepting payments via mobile money and 16,000 organisations use mobile money as a payment platform for accepting bill payments or making salary payments13. Mobile technology offers more than payments, for example remittances which, according to World Bank estimates, amounted to $514bn in 2012, and could be double that after including informal mechanisms such as Hawala. Migrant workers send home US$450bn a year to their families in developing countries – five times official ODA, and over the next five years these could total more than US$2.5tr. Most of this goes to urban areas, but the greatest impact is in rural areas which receive some 40 percent of the total. Bill payment and airtime top-up rank alongside bulk payment and merchant payment as new mobile opportunities. Insurers are joining up with MNOs such as Tigo in Ghana and MTN in Kenya to offer free credit life policies as part of PAYG mobile products. But promising though these new technologies may be for reaching the underserved in a sustainable way, they also present their challenges. It will take an enormous joint effort by practitioners, investors, and support providers to exploit them successfully and avoid the risks, for example of further depersonalising the client relationship, or even of making financial services – especially credit – too easy to obtain. Regulators will also have to create frameworks which support pro-poor banking, and these are very different from bricks-andmortar branching. The Better than Cash Alliance (www.betterthancash.org) was launched by several governments, NGOs, foundations, payments platforms and financial institutions in October 2011 with the objective of making “the transition from cash to digital payments to achieve the shared goals of empowering people and growing emerging economies”. Investment in microfinance The structure of investment in microfinance has been another important area of change. Although the microfinance industry funds itself largely from local sources, foreign funding has long been vital to its development. In the early days, this was dominated by grants, guarantees and debt from public and non-profit entities. This has continued. But with awareness generated by Yunus’ Nobel Prize and the UN’s Year of Microcredit, the sector also saw the emergence of a new source of funding: social investors seeking to make a difference to poor people’s lives while generating commercially competitive returns. These investors continue to play a dominant role in MFI development, even as their importance to the MFI funding mix has decreased. The primary channels for social investors are Microfinance Investment Vehicles (MIVs) – investment funds dedicated to microfinance run by specialised managers using traditional investing expertise adapted to the needs of MFIs. The first of these MIVs were launched in 12 13 The New Microfinance Handbook 2013 http://bit.ly/1kh9em2 Total Commitments to Microfinance as of December 2009: $21.3 billiona Private Donors and Investors Public Donors and Investors (Foundations, Institutional and Individual Investors) (Multilaterals, Bilaterals, DFIs) $14.6 billion $11 blnb $2.4 bln $1.2 bln Microfinance Investment Intermediaries (MIIs) $8.1 bln Apexes and other Intermediaries $6.7 billion $5.7 bln $0.9 blnb $0.1 bln No data Microfinance (Support for microfinance at all levels of the financial system: retail, market infrastructure, and policy) a b Amounts based on data submitted by 61 funders and 90 MIIs. Includes funding through governments. Fig 3: Source: El-Zogbi, 2011 the early 2000s, but 2006-07 saw an explosion of commercial funding in the sector. According to the annual MicroRate survey, MIV investment grew by 350% in those two years and then doubled again over the next five. Throughout the period, the share of investment intermediary investing (mostly from MIVs) remained high, and was responsible for channelling nearly 40% of all cross-border funding in microfinance in 2009. Although MIVs are able to invest in NGOs, their natural preference is for “investment-ready” MFIs, which usually means commercial entities: banks and non-bank financial institutions (NBFIs). Unsurprisingly, the growth of MIVs paralleled the trend towards commercialisation of microfinance, with fast-growing, profitable MFIs becoming the most popular recipients of such funding. The need to invest in rapidly-growing funds in countries and institutions able to receive them has also led to significant concentration of investments, especially at the country level. In 2010, 60% of foreign investment (including MIVs) went to just 10 countries which were selected more for their investment climate than the level of financial exclusion: nearly all were middle-income countries, with a combined population of 100 million.14 Two of the largest recipients – Nicaragua and Bosnia & Herzegovina – also subsequently became primary “crisis” countries, provoking comment that social investment vehicles were creating overcapacity and undermining the stability of the very markets in which they invested. Despite the growth of MIVs, the flow of cross-border funding continues to be dominated by public sector investors, especially development finance institutions (DFIs) who provided nearly 75% of all such investment in 2012.15 A significant proportion of their money comes through MIVs, which are better equipped to find and manage small investments. In addition, 14 15 Reille et. al. “Foreign Capital Investment in Microfinance: Reassessing Financial and Social Returns” Calculations based on CGAP (http://www.cgap.org/data/trends-international-funding-financial-inclusion) DFIs channel a substantial portion of their investments through holding companies, which invest primarily in greenfield institutions which are often located in less established markets and, unlike most MFIs, operate as fully licensed banks from the start. It is certainly the case that MFIs' ability to tap deposits has reduced their dependence on foreign lenders for funding. However, locally-based investors in both debt and equity, such as banks and investment funds, have also grown substantially, and in a number of markets, pose a major competitive challenge to traditional microfinance investors. Meanwhile, more socially-oriented funding through crowdfunding platforms, high net worth individuals and institutional grants continues to contribute a small but steady share of funding too. MIV Universe 100 $9 90 Other Assets MF Portfolio Assets ts (in USD US billions) 1.9 Survey participants $7 70 1.7 $6 1.7 60 1.8 $5 50 1.1 $4 40 0.8 6.2 $3 $2 $1 $0 0.5 0.5 3.8 4.2 4.7 30 5.3 20 3.1 10 1.5 0.7 2005 80 # of survey p participants $8 0 2006 2007 2008 2009 2010 2011 2012 Fig 4: Source: MicroRate MIV Survey 2013 The way ahead As we argued at the outset, microfinance is an industry in flux. It’s criticised for what many see as its questionable, even negative record on poverty alleviation, and is apparently unable to forcefully defend its achievements or articulate a clear future for itself in a fast-changing world. Much of the current discourse around it is about new objectives such as financial inclusion and impact investing, leaving traditional microlending looking very much like “yesterday’s news”. But microfinance is still here, and demand for what it offers – the chance for poor people to get on the financial ladder – remains huge. Reaching these people requires strategies which identify and respond to what the market wants, exploit new opportunities (mobile technology, for example, among many), and run sound and efficient businesses which are able to serve the needs of clients who have thus far been bypassed. There are immense challenges ahead. Regulation has to be appropriate without stifling innovation and growth. Overheating markets must be recognised before they slide into repayment crises, but market forces have to be allowed to work. Savings must be recognised as crucial to clients, but need to be delivered while maintaining profitability. Insurance innovation must be encouraged, but it needs massive scale to work. Affordable funding must continue to flow into the industry, but with better signals for recognising when it may be too much or too concentrated. Similarly, donor and grant funding should target new markets and segments that cannot yet support fully commercial activity. Technology is the great emancipator, and can do what microfinance always needed: reduce the costs of providing service, with higher quality services provided profitably and more cheaply to a broader range of clients. But not to the extent that they again bypass the needs of clients. New service providers and platforms, such as insurance companies, MNOs, commercial banks, specialised lenders, retailers and mobile money have expanded microfinance beyond the traditional MFI. But they must remain mindful that providing services to the poor and vulnerable carries with it particular responsibilities. Who would undertake such an apparently Sisyphean task? We recognise the size of the challenges. But there is innovation everywhere, and the lessons from the hubristic early decades of microfinance have probably been learned. What’s left now that the smoke has cleared is an industry focused on how to roll out quality, demand-led financial services to the underserved from larger, commercial providers; Doing No Harm of course, but less myopically driven to Do Good. What will this look like in the years ahead? Perhaps the need to take advantage of (by then) more established alternative delivery channels will have been subsumed by a preoccupation with the consequences of ever-increasing commercialisation: fewer, larger providers, less focus on social mission, higher staffing standards and needs. The effects of climate change may start to be particularly felt in some key microfinance markets. It’s foreseeable too that regulators in other markets which suffer credit crises will react with interest rate and margin caps, scaring away the remaining investors from microfinance and towards ‘impact investment’ and voguish social investment opportunities. The decreasing cost of cloud-based IT systems, Point of Contact and other mobile technologies and cheaper connectivity will help smaller providers better manage their portfolios and compliance requirements, while remaining competitive in the face of increasingly consolidated Tier 1 MFIs, as well as commercial banks and alternative service providers such as MNOs. Some of these smaller providers will find niches where they can leverage technology and field presence to reach new segments that remain unserved. Those who don’t will fade away. Finally, overindebtedness has been the highest risk in the past two Banana Skins reports. It is an “inherent” risk, and one which is both driven by competition (via bad lending practices) and which drives others (credit risk, reputation and funding). It’s likely to remain a high concern for some time – and it may well be that Microfinance Banana Skins 2019 still includes it as the top risk. This largely depends on how well institutions build their understanding of clients and are able to leverage credit bureaus, which will be increasingly widely available. But these market tools by themselves are no panacea. Over the past decade, we’ve seen overlending on a massive scale to consumers in the world’s most developed economies, despite their strong regulators, credit bureaus, risk management systems, and all the other standard responses for strengthening microfinance. It was not always thus. Following the New Deal regulation in the US in the 1930s, the banking sector saw extraordinary stability lasting into the mid-1980s. Overlending was a low risk. Starting in the early 1980s, deregulation in the US and UK ended this. Since then, financial crises have become more frequent and more severe. While developed economies struggle to enact needed regulation, countries with active microfinance markets will probably continue to lag behind, especially because they have the additional burden of balancing the need for stability with the desire to increase financial inclusion. Given this context, we find it difficult to imagine that the risk of overindebtedness – with its tendency to spill over into regulation, funding, and other perennial risks – can be eradicated any time soon. The primary chain of risks for microfinance is that credit risk and high overindebtedness make markets increasingly sensitive to adverse macroeconomic conditions and other external shocks. The combination of these factors can lead to repeated market failures and a deteriorating reputation of the industry (both as a social intervention and a commercial investment) which can have the double impact of government interference at a local level and investors fleeing – leaving an industry which cannot survive or thrive. We see the risk of this chain reaction becoming significantly reduced, while the downside risks can be made less severe on both clients and institutions. The warning signs of overindebtedness are becoming better understood, and having this risk at the front of the minds of so many makes it less likely that the sector will race over the proverbial cliff. Instead, steps are being taken to reduce the likelihood of extreme crisis, as well as mitigate the effects of a downturn, including via stronger client protection measures. We are witnessing exactly this process in Peru right now, where the signs of high credit risk and overindebtedness are very strong, but the reaction of both government and investors has been towards stabilising the market, rather than upending it entirely. Likewise, client protection requirements, including limits on collection methods, have mitigated the impact on clients. So overindebtedness may remain a spectre hanging over the industry’s head for the long term, but it is less of an existential risk that it was just a few years ago. Despite dealing with serious threats, the past several years since the first Banana Skins report has revealed an industry which can still learn, innovate and adapt. C S F I / New York CSFI Western Western Europe Europe For West ForEuropean West European respondents, respondents, the greatest the greatest 1is Overindebtedness 1 Overindebtedness risk facing risk facing the microfinance the microfinance industryindustry is 2 Governance 2 Governance overindebtedness overindebtedness and its and financial its financial and and reputational reputational fall-out.fall-out. Daniel Daniel Schriber, Schriber, 3 Competition 3 Competition director, director, investment investment operations operations at Symbiotics at Symbiotics 4 Regulation 4 Regulation in Switzerland, in Switzerland, said that said“growth that “growth has been has been 5 Political interference 5 Political interference globallyglobally strong strong and well andmanaged well managed in mostin most 6 Risk management 6 Risk management regionsregions over the over pastthefew pastyears. few Regulation years. Regulation has improved has improved in mostin countries. most countries. However, However, 7 Strategy 7 Strategy risks linked risks linked to over-indebtedness to over-indebtedness in some in some 8 Credit8 risk Credit risk countries countries remain remain and as and suchasI such continue I continue to to 9 Staffing 9 Staffing think that think thisthat is the thislargest is the largest risk microfinance risk microfinance 10 Macro-economic risk 10 Macro-economic risk is facing is in facing the coming in the coming years.”years.” 11 Management 11 Management Competition Competition is is driving driving greater greater risk risk taking taking 7.3 7.3 7.2 7.2 7.1 7.1 6.9 6.9 6.9 6.9 6.8 6.8 6.7 6.7 6.7 6.7 6.4 6.4 6.4 6.4 6.3 6.3 Respondents Respondents linked linked these risks these torisks intense to intense 12 Income volatilityvolatility 6.2 12 Income 6.2 competition competition in manyinmarkets many markets drivingdriving MFIs toMFIs to 13 Product risk 6.2 13 Product risk 6.2 take greater take greater lendinglending risks, and risks, to weakness and to weakness in in 14 Financial capability 6.1 14 Financial capability 6.1 internalinternal governance governance and controls. and controls. A A 15 Client 5.8 15relationships Client relationships 5.8 respondent respondent from afrom leading a leading investment investment firm firm was concerned was concerned that there thathad there been had“no been real “no real 16 Technology management 5.8 16 Technology management 5.8 progress progress in the in improvement the improvement of governance of governance 17 Funding 5.7 17 Funding 5.7 and good andpractices”. good practices”. On the On riskthe management risk management 18 Transparency of objectives 5.6 18 Transparency of objectives 5.6 front, there front, was thereconcern was concern that improvement that improvement 19 Liquidity 5.4 19 Liquidity 5.4 was proving was proving slow. Aslow. senior A senior executive executive at an at an investment investment fund said fund that said “there that is “there a need is afor need for the industry the industry to moretowidely more widely embrace embrace the bestthe practice best practice risk techniques risk techniques of the banking of the banking sector.”sector.” Respondents Respondents from this from region this also region saw also microfinance saw microfinance as vulnerable as vulnerable to action to -action or non- or nonaction -action by the- by authorities. the authorities. The ability The ability of regulation of regulation to maketothings make worse things is worse seen istoseen to be high, beeither high, because either because it fails ittofails provide to provide a healthy a healthy operating operating environment, environment, or its or its motivation motivation is questionable, is questionable, particularly particularly in politically in politically chargedcharged markets. markets. Maria Teresa Maria Teresa Zappia,Zappia, chief investment chief investment officer officer at BlueOrchard at BlueOrchard FinanceFinance in Switzerland, in Switzerland, said that said that “regulatory “regulatory issues seem issuestoseem be more to beand more more anda more challenge a challenge that microfinance that microfinance providers providers need toneed be ready to be to ready dealtowith. dealChanges with. Changes in regulation in regulation may happen may happen overnight overnight (e.g. (e.g. interestinterest rate caps, rate restrictions caps, restrictions on local on currency local currency hedging, hedging, on short-medium on short-medium term term money money inflowsinflows from abroad) from abroad) and MFIs and are MFIs often arenot often prepared not prepared to reacttosmoothly.” react smoothly.” Although Although the political the political heat around heat around microfinance microfinance has abated, has abated, one respondent one respondent said that said that “it can “it arise canquickly arise quickly as the sector as the issector naturally is naturally easily politicised”. easily politicised”. The high Theplace high (No. place7)(No. given 7) to given strategy to strategy risk reflects risk reflects the feeling the feeling among among many many European European respondents respondents that thethat microfinance the microfinance industryindustry is not giving is not giving enoughenough thoughtthought to to its future its in future increasingly in increasingly difficultdifficult times. Emmanuelle times. Emmanuelle Javoy, Javoy, a microfinance a microfinance expert in expert in France,France, said that saidMFIs that had MFIsreached had reached a size awhere size where they needed they needed to “defend to “defend their their specificities/necessities/results/ specificities/necessities/results/ etc. in etc. a convincing in a convincing way”. But way”. their Butfailure their failure to do soto do so meant that meant “microfinance that “microfinance is essentially is essentially at risk at of risk being of fully beingdiluted fully diluted in the classic in the classic bankingbanking sector without sector without having having broughtbrought significant/meaningful significant/meaningful changeschanges to the way to the way banks operate.” banks operate.” CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org 29 C S F I / New York CSFI The TheBanana BananaSkins Skins 1. 1. Overindebtedness: Overindebtedness: The The riskrisk that that clients clients willwill borrow borrow beyond beyond their their capacity capacity to to repay. repay. 4 4 Score: Score: 7.57.5 Previous Previous position: position: 1 1 “Overindebtedness, “Overindebtedness, again again andand again,” again,” saidsaid Frank Frank Abate, Abate, executive executive director director of the of the Fundación Fundación Dominicana Dominicana de de Desarrollo Desarrollo in the in the Dominican Dominican Republic, Republic, summarising summarising the the dominant dominant riskrisk theme theme of of thisthis report report – and – and repeating repeating the the message message of of the the previous previous Banana Banana Skins Skins report report in 2012 in 2012 when when overindebtedness overindebtedness alsoalso ranked ranked as the as the toptop concern concern andand contributed contributed to atomajor a major credibility credibility crisis crisis in the in the industry. industry. TheThe perception perception thatthat overindebtedness overindebtedness is the is the toptop riskrisk is widespread. is widespread. It came It came No.No. 1 in1 in all all geographic geographic regions regions save save two: two: South South Asia Asia (where (where it came it came No.No. 2) and 2) and Sub-Saharan Sub-Saharan Africa Africa (No. (No. 3). 3). TheThe most most concerned concerned region region waswas Latin Latin America America where where a number a number of of countries countries have have serious serious debtdebt problems problems (see(see box). box). Respondents Respondents of every of every typetype ranked ranked it it No.No. 1 except 1 except regulators regulators whowho putput it atitNo. at No. 5. 5. Who Who worries worries most? most? Some Some MFIs MFIs are are 'going 'going overboard' overboard' with with their their lending lending activities activities Rating Rating of overindebtedness of overindebtedness risk risk by region by region (out(out of 10) of 10) Latin America Latin America 8.4 8.4 EastEast Asia/Pacific Asia/Pacific 8.0 8.0 Middle East/North Africa Middle East/North Africa 7.8 7.8 TheThe riskrisk of overindebtedness of overindebtedness waswas head head andand shoulders shouldersabove abovethe therestrestwith with57% 57%of of respondents respondents scoring scoring it at it least at least 8 on 8 on a 10a 10point point scale. scale. More More thanthan a third a third of respondents of respondents (36%) (36%) whowho provided provided unprompted unprompted comments comments mentioned mentioned overindebtedness overindebtedness specifically. specifically. If there If there is aistheme a theme behind behind overindebtedness overindebtedness it isitthe is the growth growth of competition of competition withwith which which it it North America 7.7 7.7 North America hashas a 50a per 50 per centcent correlation. correlation. This This is likely is likely to to continue continue because because of of the the heavy heavy inflow inflow of of Eastern Europe/Central Eastern Europe/Central AsiaAsia 7.5 7.5 funds funds into into this this market, market, and and the the strong strong interest interest Western Europe Western Europe 7.3 7.3 shown shown by by non-microfinance non-microfinance institutions institutions in in Africa Africa 7.0 7.0 acquiring acquiring a share a share of of the the business business – but – but on on commercial commercialrather ratherthanthansocially-driven socially-driven South South AsiaAsia 6.9 6.9 terms. terms. According According to one to one US-based US-based observer, observer, “competitive “competitive pressures pressures to to grow grow portfolios portfolios andand institutions institutions have have forced forced some some MFIs MFIs to to go go overboard overboard withwith their their lending lending activities.” activities.” Chuck Chuck Waterfield Waterfield of of Microfinance Microfinance Transparency Transparency worried worried thatthat “short-term “short-term profit profit seeking, seeking, growth growth for for growth's growth's sake, sake, inability inability to resist to resist overindebting overindebting people, people, andand the the frequent frequent habit habit of charging of charging very very high, high, non-transparent non-transparent prices, prices, all all riskrisk converging converging to to create create a massive a massive crisis crisis in country in country after after country, country, destroying destroying what what remains remains of of the the 4 The The minimini chartchart at the at head the head of each of each section section shows shows the score the score distribution distribution on aon scale a scale of 1-10. of 1-10. “Score “Score ” is ”theis the “Previous “Previous position position ” shows ” shows the position the position of this of this risk risk in the in last the last Banana Banana average average score score of the of risk the risk out of outten. of ten. Skins Skins survey survey in 2012. in 2012. 4 30 CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org C S F I / New York CSFI image imagethat thatthe thegoal goalofofmicrofinance microfinanceis istotohelp helpthe thepoor.” poor.”Larry LarryReed Reedfrom fromthe the Microcredit MicrocreditSummit Summitsaw sawmore moreominous ominouspossibilities. possibilities.“We've “We'vehad hadcollapses collapsesinin Morocco, Morocco,Bosnia, Bosnia,Nicaragua, Nicaragua,Pakistan Pakistanand andIndia. India.Now Nowthere thereis istalk talkabout aboutPeru Peruand and Mexico Mexicobeing beingnext. next.How Howmany manymore moreofofthese thesewill willweweneed needtotogogothrough throughbefore beforewewe learn learnhow howtotoprevent preventthem?” them?” IsIsoverindebtedness overindebtedness just justaalegacy legacyofofthe the bad badold olddays? days? Powerful Powerfulthough thoughthese thesenumbers numbersand andcomments commentsare, are,they theyrepresent representperceptions perceptionsrather rather than thanrealities realitiesand andcan cantherefore thereforebebechallenged. challenged.But Butperceptions perceptionsononthis thisscale scaleare arehard hard totodismiss, dismiss,particularly particularlysince sincethe theoverindebtedness overindebtednessproblem problemtouches touchessosomany manyissues issues surrounding surroundingmicrofinance: microfinance:apart apartfrom fromcompetition, competition,they theyinclude includeclient-level client-levelrisks risks such suchasasincome incomevolatility volatility(53%) (53%)and andfinancial financialcapability capability(47%). (47%).It Italso alsohas hasa ahighly highly damaging damagingimpact impactononreputation reputationwhich whichtriggers triggersother otherrisks riskssuch suchasaspolitical politicalbacklash backlash and andpublic publicanger. anger.InInthe themicrofinance microfinancecommunity communityitself, itself,it itcan canfoster fosterdisillusion disillusionand and dismay. dismay. For Forsome somerespondents, respondents,overindebtedness overindebtednessis isa alegacy legacyfrom fromthe thebad badold olddays dayswhich which will willeventually eventuallywash washthrough. through.Therefore, Therefore,while whilethe thepotential potentialforforlosses lossesis isstill stilllarge large and andworthy worthyofofconcern, concern,the therisk riskis isonona adownward downwardpath. path.Remedial Remedialaction actionis isalso also progressing: progressing:a agrowing growingnumber numberofofcredit creditbureaux bureauxare aremaking makingover-borrowing over-borrowingeasier easier totoidentify, identify,regulation regulationofofthe theindustry industryis isgrowing, growing,risk riskmanagement managementpractices practicesare are improving, improving,and andeconomic economicconditions conditionsininmany manyparts partsofofthe theworld worldare arehealthier. healthier. Progress Progressininallallthese theseareas areasis isuneven unevenand, and,asasone onerespondent respondentput putit,it,“glacially “glaciallyslow”, slow”, but butit itis ishappening. happening. For Forthese theseand andother otherreasons, reasons,a asignificant significantnumber number(39%) (39%)ofofrespondents respondentssaw sawthe therisk risk asasmoderate moderate(score (scoreofof4-7). 4-7).Christian ChristianEtzensperger EtzenspergerofofresponsAbility, responsAbility,a aSwiss Swissfund fund manager, manager,said saidthat thatoverindebtedness overindebtednessis is“a“aperennial perennialrisk riskininmicrofinance, microfinance,but butservice service providers providersshould shouldbybynow nowhave haveunderstood understoodit itand andhave haveappropriate appropriateunderwriting underwriting standards standardsininplace.” place.”AAconsultant consultantfrom fromNorth NorthAmerica Americasaw sawimprovement, improvement,noting notingthat that the the“SMART “SMARTCampaign Campaign……[is] [is]raising raisingawareness awarenessininthis thisarea.” area.”Similarly, Similarly,Rashmi Rashmi Singh SinghofofSKS SKSMicrofinance, Microfinance,India’s India’slargest largestMFI, MFI,said saidthat thatthe the“use “useofofthe thecredit credit bureau bureaubybymost mostMFIs MFIsininIndia Indiahas hasreduced reducedthe therisk riskofof[client] [client]overindebtedness”. overindebtedness”. However, However,only onlya afew fewrespondents respondentswere weredismissive dismissiveofofthis thisrisk: risk:only onlytwo twoscored scoredit itasas 2,2,and andnone nonescored scoredit itasas1.1. 2.2.Credit Creditrisk: risk:The Therisk riskthat thatpoor poorlending lendingpractices practiceswill willlead leadtotoloan loan losses losses Score: Score:6.9 6.9 Previous Previousposition: position:4 4 Although Althoughthe thespecific specificproblem problemofofoverindebtedness overindebtednessheads headsthe thelist listofofrisks risksininthis this survey, survey,the themore morefundamental fundamentalissue issueofofcredit creditrisk riskis isnot notfarfarbehind. behind. This Thisrisk riskhas hasedged edgedupupthe therankings rankingsforfora anumber numberofofreasons. reasons.One Oneis isthe theslippage slippagethat that people peoplesee seeininMFIs' MFIs'lending lendingstandards standardsasasthey theyconfront confrontgrowing growingbusiness businesspressures: pressures: competition, competition,pricing, pricing,staffing staffingdifficulties difficultiesand andinadequate inadequatemarket marketinformation. information.OfOf these, these,rising risingcompetition, competition,particularly particularlyfrom fromfinancially financiallypowerful powerfulnew newentrants, entrants,was was CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org 31 C S F I / New York CSFI The debt puzzle Although overindebtedness emerges from this survey as by far the largest risk concern in microfinance, it comes at a time when the sector’s bad debt experience seems to be improving. According to the Microfinance Information eXchange (MIX), bad loans have been declining in all regions except Africa in the last two years. How can this be? PAR 30 + writeoffs (global) 9% 8% 7% 6% 8.2% 6.1% 5.9% 5% 4% 2004 05 06 07 08 09 10 11 12 13 Source: MIX There are a number of possible explanations. One is that bad debts are not the same as overindebtedness: people can remain overindebted without defaulting on their loans. Overindebtedness becomes a problem when it is exposed by a crisis, as happened in the US sub-prime market in 2007, and in India in 2011. On the present outlook, a major global debt-induced crisis in microfinance seems unlikely, but if it did occur, the financial and reputational shock could be severe. Just how severe is hard to say because there are no reliable statistics on the level of overindebtedness in microfinance markets. Another explanation is that this survey is about perceptions rather than numbers. People perceive overindebtedness to be a big problem even though that may not be the case statistically. However this still makes it a problem: perceptions influence behaviour and decisions, and affect reputations. A third explanation could be that people are confusing overindebtedness with multiple borrowing. People who take out several loans with different lenders may not be overindebted, though it is likely that they are. A fourth is that overindebtedness is confined to specific markets, as is the case, but has a generalised impact which means that the true scale of the problem needs to be measured more closely. A final explanation is that MFIs may be concealing the size of their bad debt problems, or rolling over doubtful loans in order to prevent them showing up as bad. This would mean there is an accounting issue. 32 CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org C S F I / New York CSFI oftenoften identified identified as the as the chiefchief culprit. culprit. Jessie Jessie Greene, Greene, senior senior investment investment officer officer at at Développement Développement international international Desjardins Desjardins in Canada, in Canada, saidsaid that that “new“new entrants entrants in the in the microlending microlending segment...don't segment...don't adhere adhere to best to best practice, practice, lending lending largelarge amounts amounts without without the necessary the necessary procedures.” procedures.” A particular A particular concern concern is multiple is multiple borrowing, borrowing, usually usually a symptom a symptom of sloppy of sloppy lending lending practices practices plusplus the absence the absence of market of market information information suchsuch as credit as credit bureaux bureaux to identify to identify the over-borrowed. the over-borrowed. Many Many respondents respondents focused focused specifically specifically on internal on internal control control issues issues at MFIs, at MFIs, suchsuch as the as deleterious the deleterious effect effect of competitive of competitive pressure pressure on credit on credit procedures procedures and and pricing, pricing, and and low low staffstaff quality. quality. A respondent A respondent fromfrom Guatemala Guatemala saidsaid that that “credit “credit culture culture has deteriorated: has deteriorated: therethere is noisresponsibility no responsibility to [make] to [make] goodgood loans...” loans...” Linked Linked to this to this is the is issue the issue of client of client relationships: relationships: thesethese maymay be deteriorating be deteriorating as loan as loan officers officers strive strive to reach to reach lending lending targets targets rather rather thanthan helphelp theirtheir customers, customers, or as or as automated automated loanloan procedures procedures taketake overover fromfrom human human judgment. judgment. Frank Frank Streppel, Streppel, deputy deputy managing managing director director of Triodos of Triodos BankBank in the in Netherlands, the Netherlands, saidsaid therethere was was an “increasing an “increasing pushpush for for process-oriented process-oriented credit credit delivery delivery rather rather thanthan one one based based on on a client a client relationship”. relationship”. Is the Is the client client relationship relationship weakening? weakening? Others Others believed believed the problem the problem arosearose when when MF MF providers providers moved moved into into newnew markets markets to to sustain sustain theirtheir growth, growth, notably notably consumer consumer finance finance where where demand demand was was strong strong and and access access easier, easier, but but where where credit credit quality quality was was oftenoften lower. lower. A development A development bankbank respondent respondent fromfrom the Philippines the Philippines saidsaid that that “the“the risk risk herehere is the is confusion the confusion of enterprise of enterprise finance finance withwith consumer consumer finance, finance, which which has has proven proven to betoabe higher a higher credit credit risk risk and and detrimental detrimental for borrowers”. for borrowers”. However However not not everyone everyone shared shared a gloomy a gloomy viewview of the of the credit credit outlook. outlook. The The chiefchief financial financial officer officer of a of large a large international international investment investment fundfund saidsaid that that “credit “credit is always is always a a risk risk if sound if sound lending lending practices practices are not are followed. not followed. However, However, it is itone is one that that is capable is capable of of being being mitigated mitigated by good by good practices.” practices.” and and a development a development officer officer in the in Philippines the Philippines saidsaid “With “With better better understanding, understanding, this this risk risk is starting is starting to decrease.” to decrease.” Credit Credit risk risk was was mostmost strongly strongly correlated correlated withwith weakness weakness in MFIs’ in MFIs’ management management and and controls, controls, i.e. risk i.e. risk management management (48%), (48%), management management (43%) (43%) and and governance governance (42%). (42%). It It was was alsoalso linked linked to the to quality the quality of the of MFIs’ the MFIs’ client client relationships relationships (41%). (41%). 3. Competition: 3. Competition: TheThe riskrisk thatthat the the growth growth of competition of competition from from existing existing providers providers andand newnew entrants entrants will will cause cause microfinance microfinance service service providers providers to compromise to compromise their their business business andand ethical ethical standards standards Score: Score: 6.9 6.9 Previous Previous position: position: 8 8 Concern Concern about about the growth the growth of competition of competition in the in microfinance the microfinance market market is showing is showing a a resurgence, resurgence, mainly mainly because because therethere is more is more of itofdue it due to the to the rapidrapid enlargement enlargement of of lending lending capacity. capacity. People People see it seeundermining it undermining credit credit practices, practices, squeezing squeezing margins margins and and eroding eroding ethical ethical standards standards in aninindustry an industry where where ethics ethics matter. matter. CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org 33 C S F I / New York CSFI The growth The of growth competition of competition stems mainly stems from mainly the entry from of thenew entry institutions of new institutions into the into the microfinance microfinance market, many market, of them manycommercial of them commercial banks seeking banksa seeking share of athe share action, of the action, but also non-banks but also non-banks such as telecom such ascompanies telecom companies with mobile with payment mobile systems, payment and systems, and finance companies finance companies offering consumer offering consumer loans. Theloans. fact that The many fact that of them many are of them not are not regulated regulated as banks, as or banks, don’t stick or don’t to industry stick torules, industry makes rules, thismakes competition this competition “unfair” “unfair” in people’sineyes. people’s eyes. Luis Miguel LuisDiaz-Llaneza, Miguel Diaz-Llaneza, chief financial chief officer financialof officer Financiera of Financiera Independencia Independencia in in Mexico, said Mexico, that microfinance said that microfinance in his country in his“faces country a strong “faces challenge a strong challenge in over- in oversupply andsupply bad practices and bad introduced practices introduced in the last in couple the last of couple years. Many of years. small Many and small new and new entrant participants entrant participants are eager are to carve eager ato market carve ashare market for share themselves, for themselves, and are and are unfortunately unfortunately willing to willing forego basic to forego risk basic reduction risk reduction practices, practices, affecting not affecting only their not only their risk profile, risk butprofile, that ofbut thethat entire of industry.” the entire industry.” In India, In Dr India, N. Jeyaseelan, Dr N. Jeyaseelan, chief executive chief executive officer of officer Hand in of Hand, Hand in saidHand, that said that “competition “competition has startedhasin started many in markets many and markets we can and see we the can dilution see the ofdilution due of due diligence diligence standards”.standards”. For many For respondents, many respondents, excessive excessive competition competition lay behindlay thebehind the problem of problem overindebtedness. of overindebtedness. This survey’s This results survey’s showed resultsa showed correlation a correlation of 50% of 50% between the between two. the two. The level The of concern level ofabout concern competition about competition varies greatly varies from greatly one market from one to market another.toItanother. It is strong inis Eastern strong inEurope Eastern and Europe Central and Asia, Central for example, Asia, for where example, it ranks whereNo. it ranks 2, andNo. 2, and in Latin America in Latin(No. America 3), but (No. lower 3), but in the lower Middle in the East Middle and Africa East and (both Africa No. (both 8). It is No. 8). It is also more also prevalent more in prevalent urban areas in urban where areas there where is a larger there isconcentration a larger concentration of potential of potential business than business in rural than areas. in rural areas. It is also Ita ishigh alsoconcern a high for concern investors for investors in microfinance in microfinance (No. 2) and (No.the 2) MFIs and the MFIs themselvesthemselves (No. 3) but (No.less 3) so butfor lessoutside so forobservers, outside observers, many of many whom of said whom that said that Oversupply Oversupply is is competition competition was a good was thing. a good A UK thing. microfinance A UK microfinance consultantconsultant said that “sometimes said that “sometimes new entrants newbring entrants credibility bring credibility or industryor bargaining industry bargaining power with power the regulator, with the regulator, or or leading leading to badto bad innovation.innovation. They mayThey also may exacerbate also exacerbate competition competition for the same for the clients; samebringing clients; bringing practices practices down margins downand margins rates is andstill rates beneficial is still beneficial from a macro frompoint a macro of view!” point of Some view!” alsoSome also said that commercial said that commercial entities did entities not automatically did not automatically have to behave unethical: to be unethical: “the two “the two concepts are concepts not mutually are notexclusive!” mutually exclusive!” one of them onesaid. of them said. 4. Risk4. management: Risk management: The risk The that risk microfinance that microfinance service service providersproviders will fail to will identify fail to and identify manage and manage the risksthe in their risks business in their business Score 6.8Score 6.8 Previous position: Previous position: 6 6 Although Although much emphasis much emphasis has been has placed beenonplaced strengthening on strengthening risk management risk management in in microfinance microfinance institutionsinstitutions in recent in years, recent thisyears, is stillthis an isarea stillofanconcern, area of for concern, two for two reasons. One reasons. is thatOne progress is thathas progress been slow. has been Theslow. other The is more otherworrying: is more worrying: that risks that risks may be multiplying may be multiplying faster thanfaster the industry's than the industry's ability to ability keep up to with keep them. up with Onethem. One African respondent African respondent said that “increasing said that “increasing complexitycomplexity may outpace maythe outpace level of therisk level of risk management management competences competences in the sector.” in the sector.” 34 CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org C S F I / New York CSFI Respondents Respondents identified identified several several strands strands to this to this risk.risk. OneOne was was a poor a poor grasp grasp of the of the importance importance of risk of risk management management in the in industry. the industry. As aAs respondent a respondent said:said: “Many “Many MFIs MFIs engage engage in risk in risk management management efforts efforts due due in part in part to pressures to pressures theythey faceface fromfrom regulators regulators or investors or investors rather rather thanthan fromfrom a deep a deep appreciation appreciation of risk of risk management management and and the social the social and and financial financial value value it can it can bringbring to antoinstitution.” an institution.” Another Another was was whether, whether, at the at the practical practical level, level, adequate adequate systems systems werewere being being put put in in placeplace to manage to manage risk.risk. A respondent A respondent fromfrom Kenya Kenya saidsaid that that “most “most MFIs MFIs are faced are faced withwith serious serious problems problems installing installing internal internal control control systems, systems, and and theythey havehave no measures no measures of of assessing assessing the institutional the institutional and and business business risksrisks that that are inherent are inherent in their in their operations.” operations.” 'Still 'Still a weak a weak understanding understanding of of what what risk risk management management is is about' about' Evidence Evidence of the of failings the failings of risk of risk management management lies lies mostmost obviously obviously in the in growth the growth of of overindebtedness overindebtedness which which suggests suggests that that credit credit risk risk controls controls are ineffective are ineffective or being or being by- bypassed. passed. But,But, as a as number a number of respondents of respondents pointed pointed out, out, risk risk management management alsoalso needs needs to to be applied be applied beyond beyond traditional traditional credit credit risk risk into into the the areasareas of operational, of operational, financial, financial, product product and and eveneven reputational reputational risk.risk. A microfinancier A microfinancier in Guatemala in Guatemala saidsaid that that “there “there is is still still a weak a weak understanding understanding among among all the all the staffstaff of financial of financial institutions institutions of what of what integrated integrated risk risk management management is about...” is about...” As innovation, As innovation, competition competition and and growth growth taketake MF MF providers providers into into newnew and and unfamiliar unfamiliar territory, territory, risk risk management management practices practices havehave constantly constantly to evolve. to evolve. A respondent A respondent fromfrom a a US US NGO NGO saidsaid that that “the“the microfinance microfinance industry industry has has changed changed significantly significantly in the in last the last several several years, years, becoming becoming moremore competitive competitive in several in several markets, markets, withwith moremore diverse diverse customer customer segments segments and and increasing increasing regulatory regulatory requirements. requirements. The The smaller, smaller, weaker weaker institutions institutions maymay not have not have the resources the resources to evolve to evolve withwith the market the market or respond or respond to the to the regulatory regulatory requirements. requirements. Specifically, Specifically, somesome institutions institutions maymay attempt attempt to move to move 'up 'up market' market' without without sufficient sufficient grounding grounding in risk in risk management management and and newnew product product development development to control to control the additional the additional risk risk theythey maymay be taking be taking on.”on.” Concern Concern about about risk risk management management was was fairly fairly evenly evenly spread spread among among the geographical the geographical regions regions and and respondent respondent types. types. It correlated It correlated closely closely withwith the quality the quality of governance of governance (56%) (56%) and and management management moremore generally generally (54%). (54%). A number A number of respondents, of respondents, however, however, camecame up with up with a more a more positive positive message: message: awareness awareness of the of importance the importance of risk of risk management management is growing, is growing, systems systems are being are being built,built, risk risk mitigants mitigants suchsuch as credit as credit bureaux bureaux are spreading, are spreading, and and greater greater professionalism professionalism is is being being applied. applied. A respondent A respondent fromfrom Mexico Mexico saidsaid that that “risk“risk management management is a isnew a new theme theme for the for popular the popular financial financial intermediaries intermediaries in the in country the country and and is one is one of the of most the most important important areasareas for improvement.” for improvement.” CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org 35 C S F I / New York CSFI Peru Peru under stress Peruunder understress stress Peru under The country ononrisk is Peru. The country that stands out risk Peru. The countrythat thatstands standsout out The country that stands out on on risk risk isis is Peru. Peru. Respondents there gave credit risk an Respondents there gave credit risk an Respondents there gave credit risk an Respondents there gave credit risk an average score 9.5 out ofof10, far higher average score 10, far higher average scoreofof average score of 9.5 9.5 out out of of 10, 10, far far higher higher than the global average of 6.9. than the global average of 6.9. than the the global global average of 6.9. than 6.9. How Peru scored How Peru scored How HowPeru Peruscored scored 111Credit Creditrisk risk 1 Credit Creditrisk risk 222Overindebtedness Overindebtedness Overindebtedness 2 Overindebtedness 333Client Clientrelationships relationships Client relationships 3 Client relationships 444Risk Risk management Riskmanagement management 4 Risk management 555Strategy Strategy Strategy 5 Strategy Peru World Peru World World Peru Peru World 9.5 6.9 9.5 6.9 6.9 9.5 9.5 6.9 9.0 7.5 9.0 7.5 7.5 9.0 9.0 7.5 8.4 6.1 8.4 6.1 6.1 8.4 8.4 6.1 8.3 6.8 8.3 8.3 6.8 6.8 8.3 6.8 8.1 6.7 8.1 8.1 6.7 6.7 8.1 6.7 The top risks these eight The top risks identified these eight The top risksidentified identifiedbyby The top risks identified by these these eight eight respondents are allallclosely linked toto portfolio respondents are closely linked portfolio respondents are linked respondents are all closely linked to to portfolio portfolio performance in the country’s microfinance performance in microfinance performance in the country’s microfinance performance in the country’s microfinance service providers. service providers.In the thefree freecomment comment service service providers. providers. In In the free free comment comment section, six mentioned section, sixofof ofthem mentioned section, six them mentioned section, six of them mentioned overindebtedness overindebtednessasasa arisk, risk,most mostoften oftenas asthe the overindebtedness overindebtedness as a risk, most most often often as as the the top risk. Their referred toto “narrow top risk. Theircomments referred “narrow top risk. Their comments referred to “narrow top risk. Their comments referred to “narrow operatingmargins, margins,especially inin saturatedmarkets,” markets,” “inadequate “inadequate regulation of operating saturated of banks banks operating operating margins, margins, especially especially in in saturated saturated markets,” markets,” “inadequate “inadequate regulation regulation of of banks banks affiliated with[consumer] [consumer]retailers,” retailers,” “inadequate consumer protection,” and affiliated with “inadequate consumer protection,” affiliated with [consumer] retailers,” “inadequate consumer protection,” and affiliated with [consumer] retailers,” “inadequate consumer protection,” and “excessivegrowth growthexpectations expectationsby bysome somemanagers.” managers.” “excessive “excessive “excessive growth growth expectations expectations by by some some managers.” managers.” The context for these The context these The for The context context for these these findings isisnoteworthy noteworthy findings is findings noteworthy findings is noteworthy 20% because Peru was ranked at 20% because Peru was ranked atat 20% because Peru was ranked Profit 20% the because Peru was by ranked at Profit Profit top of the scale the the top of the scale by the Profit the top of the scale by the margin the top of the scale by the 8 16% margin Microscope index of margin 88 16% index ofof 16% Microscope margin 8 16% Microscope Microscope index index of microfinance business microfinance business microfinance business microfinance business 6 12% environment for six years in 66 12% for six years in 12% environment for six years 5 6 12% environment environment forare sixwellyears in in 5 5Its MFIs PAR 30 + a row. PAR 3030+ + MFIs are wella arow. PAR row. Its MFIs are well5Its 8% PAR 30 + MFIs having are wella row. Itsmany developed, full writeoff 4 44 writeoff 8% 8% many having full developed, many having full 4 writeoff 8% developed, developed, many having full banking licences and large writeoff banking licences and large banking licences and large Gross loan 2 4% banking licences and large deposits. They are also wellGross loan Gross loan 22 4% 4% They are also wellGross loan deposits. They portfolio 2 4% deposits. deposits. featuring They are are also also wellwellregulated, portfolio portfolio regulated, featuring regulated, featuring portfolio 0 0% mandatory and a regulated,ratings featuring 00 0% 0% ratings and a mandatory and 0 2007 08 09 10 11 12 13 0% mandatory reliable creditratings bureau. mandatory ratings and a a 2007 0808 0909 1010 1111 1212 1313 reliable credit bureau. 2007 reliable credit bureau. Source:2007 MIX Market However, performance 08 09 10 11 12 13 reliable credit bureau. However, performance However, trends during that time have been poor: bad loans increased, profit performance margins shrank. However, performance trends during that time have been poor: bad loans increased, profit shrank. trends during that time have been poor: bad loans increased, profit margins shrank. In 2013, perhaps response to these pressures, theincreased, country's profit MFIsmargins slowed their trends during thatintime have been poor: bad loans margins shrank. InIn 2013, perhaps ininresponse totothese pressures, the country's MFIs slowed their 2013, perhaps response these pressures, the country's MFIs slowed their growth to single-digits. In 2013, perhaps in response to these pressures, the country's MFIs slowed their growth to single-digits. growth growth to to single-digits. single-digits. A symptom of the sector’s malaise is the recent sale of MiBanco, the country’s largest AAMFI. symptom the sector’s malaise isisthe recent sale main of MiBanco, the country’s symptom of sector’s malaise recent the country’s Besetofby internal liquidity problems, shareholder put largest itlargest up A symptom of the the sector’s malaise is the the MiBanco's recent sale sale of of MiBanco, MiBanco, the ACP, country’s largest MFI. Beset by internal liquidity problems, MiBanco's main shareholder ACP, put it –upup MFI. Beset by internal liquidity problems, MiBanco's main shareholder ACP, put for sale in a bid to raise cash. Unfortunately, MiBanco's own subpar performance MFI. Beset by internal liquidity problems, MiBanco's main shareholder ACP, put it it up for sale inina abid to raise cash. MiBanco's subpar –– for sale bid raise cash. Unfortunately, MiBanco's own subpar performance high credit inUnfortunately, (slightly) negative returnsown in 2012 andperformance full recovery not for sale in alosses bid to toresulting raise cash. Unfortunately, MiBanco's own subpar performance – 6 high credit losses resulting in (slightly) negative returns in 2012 and full recovery not high credit losses resulting in negative returns in and not – dampened excitement among potential buyers. Its recovery sale expected 2015 high credituntil losses resulting in (slightly) (slightly) negative returns in 2012 2012 and full full recovery not 66 7 – –dampened excitement potential Its sale expected until expected until 2015 excitement among potential Its valuation was2015 nearly that commanded byamong other Peru MFIs buyers. inbuyers. the recent past, – dampened dampened excitement among potential buyers. Its sale sale expected until 20156 half 77 valuation bybyother MFIs past, 7 valuation wasnearly nearlyhalf half thatcommanded commanded otherPeru PeruWhen MFIsin inthe the recent and not was only because of that MiBanco's immediate such arecent well-known valuation was nearly half that commanded byproblems. other Peru MFIs in the recent past, past, and not only because MiBanco's immediate When abullish well-known brand commands so of little premium, it's a sign problems. that investors aresuch less on the and not only because of MiBanco's immediate problems. When such a well-known and not only because of MiBanco's immediate problems. When such a well-known brand commands sosolittle sector itself. brand commands littlepremium, premium,it's it'sa a asign signthat thatinvestors investorsare areless lessbullish bullishonon onthe the brand commands so little premium, it's sign that investors are less bullish the sector itself. sector itself. sector Peru isitself. the world’s largest microfinance market by assets8, and also its largest for $ bn $ $bn $10bn bn 1010 10 Worrying trends inMFIs MFIs Worrying Worrying trends Worryingtrends trendsinin in MFIs MFIs 88 9 foreign investment . Put microfinance together, the market situationbyby inassets the country worrying. Yet for there Peru is the world’s largest , and is also its largest Peru Peru is is the the world’s world’s9 9largest largest microfinance microfinance market market by assets assets8,, and and also also its its largest largest for for are also signs of hope. The sector’s highly ranked infrastructure regulation may foreign investment . Put together, the situation in the country worrying. Yet there foreign investment is worrying. Yet there 9. Put together, the situation in the countryisand foreign investment . Put together, the situation in the country is worrying. Yet there yet prove their worth in averting crisis. ranked are also signs of hope. The sector’sa highly infrastructure and regulation may are are also also signs signs of of hope. hope. The The sector’s sector’s highly highly ranked ranked infrastructure infrastructure and and regulation regulation may may yet prove their worth ininaverting a crisis. yet yet prove prove their their worth worth in averting averting a a crisis. crisis. 5 http://idbdocs.iadb.org/wsdocs/getDocument.aspx?DOCNUM=38098109 6 5 5 Fitch Ratings Press release, October 1 2013. 57 6 6 MiBanco was sold to Edyficar for 1.3x its book value. By comparison, 6 7 7sold in 2009, its valuation was nearly twice that – 2.5x book value. 78 http://idbdocs.iadb.org/wsdocs/getDocument.aspx?DOCNUM=38098109 http://idbdocs.iadb.org/wsdocs/getDocument.aspx?DOCNUM=38098109 when Edyficar itself was http://idbdocs.iadb.org/wsdocs/getDocument.aspx?DOCNUM=38098109 Fitch FitchRatings RatingsPress Pressrelease, release,October October1 12013. 2013. Fitch Ratings Press release, October 1 2013. MiBanco was sold totoEdyficar MiBanco Edyficarforfor1.3x 1.3xitsitsbook bookvalue. value.ByBycomparison, comparison,when whenEdyficar Edyficaritself itselfwas was MIX 2012was datasold MiBanco was sold to Edyficar for 1.3x itsthat book value. By comparison, when Edyficar itself was sold 2009, itsitsvaluation was 9 inin sold 2009,MIV valuation wasnearly nearlytwice twice that– –2.5x 2.5xbook bookvalue. value. Microrate survey 2013 8 sold in 2009, its valuation was nearly twice that – 2.5x book value. 8 MIX 2012 2012data data 8 MIX 9 9 MIX 2012 data Microrate MIV MIVsurvey survey2013 2013 9 Microrate Microrate MIV survey 2013 36 CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org C S F I / New York CSFI 5. Governance: 5. Governance: The risk The that risk the that boards theofboards microfinance of microfinance providersproviders will fail to will provide fail to the provide necessary the necessary oversightoversight and strategic and strategic directiondirection Score: 6.7Score: 6.7 Previous position: Previous position: 2 2 Board-level Board-level risk has always risk has been always a high been Banana a highSkin Banana in theSkin six in years the we six have yearsbeen we have been running these running surveys, theseand surveys, it persists and itinpersists this latest in this one.latest Governance one. Governance is a concern is ainconcern in two ways:two whether ways:people whether at the people top at of the MFIs topare of up MFIs to the are job, up toand thewhether job, andboards whether boards have whathave it takes whattoitlead takestheir to lead institutions their institutions forward inforward increasingly in increasingly difficult times. difficult times. The head The of strategy head ofatstrategy a large at global a large network globalsaid network that there said that was there “significant was “significant room room for continued for continued improvement improvement in board skills in board and skills knowledge”. and knowledge”. On board On quality, boardthe quality, concerns the were concerns familiar werefrom familiar previous from surveys previousand surveys included and included insufficient insufficient knowledgeknowledge and experience and experience among board among members, board members, poor training, poorlack training, of lack of independence, independence, failure to failure stand up to to stand strong up executives to strong executives or charismatic or charismatic founders etc.. founders etc.. 'Still room 'Still for room for But respondents But respondents are now seeing are now additional seeing additional risks as microfinance risks as microfinance becomes more becomes more improvement' improvement' competitive: competitive: poor understanding poor understanding of the structural of the structural changes taking changesplace taking in place the in the industry, pressure industry, to pressure compromise to compromise the institution’s the institution’s social mission social in mission order to in sustain order to sustain in governance in governance growth, uncertainty growth, uncertainty about strategic about direction, strategic direction, and failureand to failure grasp the to grasp essentials the essentials of of risk management. risk management. Andrew Pospielovsky, Andrew Pospielovsky, a non-executive a non-executive director ofdirector AccessBank of AccessBank in Tajikistan, in Tajikistan, said said that “historically that “historically MFIs haveMFIs relied have on relied volunteer on volunteer board members; board members; the industry the isindustry is becoming becoming more complicated more complicated and requires andprofessional requires professional boards.” boards.” The need The for more need strategic for more thinking strategicand thinking foresight and at foresight board level at board was level also stressed was also stressed by respondents. by respondents. Philip Brown, Philipmanaging Brown, managing director ofdirector microfinance of microfinance risk at Citirisk UK, at Citi UK, said that boards said that “are boards no longer “are no overseers longer overseers but have to butbehave more to strategic be more and strategic risk and risk management management focussed.”focussed.” From Bangladesh, From Bangladesh, Fazlul Hoque, Fazlul associate Hoque, director associateofdirector Sajida of Sajida Foundation, Foundation, said that “not saidthe thatleast “notchallenge the least challenge [is] to develop [is] tothe develop manager/leader the manager/leader who who could takecould the social take the mission socialofmission NGOs forward”. of NGOs forward”. A numberAofnumber respondents of respondents felt that governance felt that governance was improving was improving with betterwith people better andpeople and more responsibility. more responsibility. If there were If there difficulties, were difficulties, they tended they to be tended localised to be or localised confined or confined to particular to particular sectors, like sectors, the co-operatives. like the co-operatives. Alejandro Alejandro Puente, director Puente,ofdirector externalof external relation atrelation GenteraatinGentera Mexico,insaid Mexico, that “leading said thatinstitutions “leading institutions increasingly increasingly have morehave more professionalized professionalized structures”. structures”. Governance Governance was seen to was beseen a high to be level a high risk level among risk allamong respondent all respondent types except types theexcept the MFIs themselves MFIs themselves (who ranked (who it No. ranked 13) itwhich No. 13) maywhich carrymay a message carry aabout message the need about the need for greaterfor attention greater to attention this area. to this Geographically, area. Geographically, concern was concern strongest was in strongest investorin investor and network and regions network (e.g. regions North (e.g.America North America and Westand Europe) West and Europe) lowest andinlowest in practitioner practitioner regions (e.g. regions East (e.g. Europe East and Europe Central andAsia Central and Latin Asia and America) Latin America) with the with the exception exception of Africa where of Africa it ranked where No. it ranked 2. A bank No. 2. examiner A bank in examiner West Africa in West saidAfrica that said that “the main “the risksmain facing risks microfinance facing microfinance industry […] industry are poor […]corporate are poor corporate governance governance at at board andboard management and management level as well levelasaspoor wellunderstanding as poor understanding of how toof implement how to implement a a functionalfunctional microfinance microfinance model.” model.” CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org 37 C S F I / New York CSFI TheThe riskrisk thatthat microfinance microfinance service service providers providers willwill fail fail to to 6. 6. Strategy: Strategy: provide provide a service a service thatthat makes makes them them relevant relevant andand competitive competitive in in a a changing changing marketplace. marketplace. Score: Score: 6.7 6.7 Previous Previous position: position: NotNot included included For For the the firstfirst timetime this this year,year, we included we included a question a question about about strategic strategic riskrisk in the in the Banana Banana Skins Skins survey, survey, and and it emerges it emerges highhigh in the in ranking. the ranking. TheThe reason reason for for listing listing it asitaasspecific a specific Banana Banana SkinSkin is that is that we we already already ask ask questions questions about about the the components components of strategic of strategic risk:risk: governance, governance, management, management, competition, competition, product product development, development, funding funding etc..etc.. But But there there is aisbigger a bigger picture picture question: question: howhow important important is strategic is strategic riskrisk for MF for MF providers providers in aninincreasingly an increasingly complex complex world? world? TheThe main main point point thatthat emerges emerges fromfrom the the responses responses is that is that MFIs MFIs don'tdon't givegive much much thought thought to strategic to strategic risk.risk. They They are are concerned concerned withwith the the day-to-day day-to-day running running of the of the business, business, and and onlyonly occasionally occasionally havehave to make to make decisions decisions thatthat might might be described be described as as strategic: strategic: a big a big investment, investment, the the introduction introduction of aofnew a new product product or technology, or technology, a new a new funding funding opportunity. opportunity. As As a respondent a respondent in Africa in Africa said:said: “Many “Many MFIs MFIs are are running running without without strategies. strategies. They They respond respond as events as events unfold.” unfold.” 'Insufficient 'Insufficient thought' thought' given given to to strategic strategic planning planning In the In the viewview of many of many respondents, respondents, MFIs MFIs without without a clear a clear business business strategy strategy are are putting putting themselves themselves at risk at risk at aattime a time when when the the outlook outlook for microfinance for microfinance has has never never beenbeen more more uncertain. uncertain. A UK A UK consultant consultant said:said: “The “The biggest biggest riskrisk is that is that MFIs MFIs fail fail to capitalise to capitalise on on theirtheir corecore niche niche in an in evolving an evolving financial financial inclusion inclusion agenda agenda which which is based is based on aondirect a direct personal personal relationship relationship withwith clients clients and and an ability an ability to leverage to leverage this this to create to create value value for for clients.” clients.” Laurie Laurie Spengler, Spengler, president president of Enclude of Enclude in the in the US,US, linked linked strategy strategy to funding to funding risk.risk. A focus A focus on on strategic strategic planning planning and and effective effective execution execution “will “will strengthen strengthen the the ability ability of MFIs of MFIs to attract to attract and and maintain maintain funding funding relationships”, relationships”, she she said.said. TheThe sector sector needs needs to innovate to innovate andand taketake backback the the initiative initiative of developing of developing newnew ways ways to finance It seems to prefer riding a wave of soft funding, to finance the the poorpoor ... It...seems to prefer riding a wave of soft funding, highhigh margins write-offs believing to on be unassailable on unassailable moral margins andand slowslow write-offs believing itselfitself to be moral highhigh ground. Microfinance becoming simply an alternative method of delivering ground. Microfinance risksrisks becoming simply an alternative method of delivering government aid subsidies. government andand aid subsidies. Kevin Kennedy Kevin Kennedy Clearcape, Uganda Clearcape, Uganda As As a number a number of respondents of respondents noted, noted, the the overriding overriding strategic strategic riskrisk is that is that MFIs MFIs loselose theirtheir relevance relevance as financial as financial institutions institutions amid amid the the whirlwind whirlwind of change of change (see(see box). box). Martin Martin Holtmann, Holtmann, global global headhead of of microfinance microfinance at the at the International International Finance Finance Corporation, Corporation, saidsaid thatthat “while “while there there is generally is generally adequate adequate riskrisk management management in the in the conventional conventional sense sense of managing of managing credit credit riskrisk and and operational operational risks, risks, many many MFIs MFIs are are not not adequately adequately focusing focusing on (or on guarding (or guarding against) against) the risk the risk of becoming of becoming obsolete”. obsolete”. ThisThis waswas a risk a risk to which to which observers observers of the of the microfinance microfinance industry industry (including (including strategy strategy consultants) consultants) attached attached a considerably a considerably greater greater weight, weight, placing placing it No. it No. 2, than 2, than practitioners practitioners whowho placed placed it No. it No. 6. 6. 38 CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org C S F I / New York CSFI Yes, but what is microfinance for? The biggest existential risk facing MFIs is that they may no longer have a role to play. Many respondents to this survey saw traditional microfinance being overtaken by change: new entrants, new technologies, different objectives such as “financial inclusion” and “impact investing” - all putting its future at risk. To address what might be called “obsolescence risk”, MFIs need to be clear about their role. Should they fight to preserve microfinance's special mission, concentrating on the financially excluded, the rural communities, on value-driven services, and live off special funding? Or should they recognise the new realities and try to become more like commercial banks to meet the competition? As a London-based banker said, microfinance “is diverging into two streams, the larger and more commercial players that ‘get’ broader financial inclusion and carve a leading role, while the smaller organisations do not yet understand the financial inclusion ecosystems in their countries”. Complexity makes the strategic choices harder. Gil Lacson of Women's World Banking said that “as the sector became an industry, it evolved from simple micro-credit to a more complex commercial microfinance to inclusive finance and soon expanding to inclusive business”. Furthermore, the re-labelling of microfinance players as purveyors of a broader service could make things worse by “leading to dilution of core skills, confusion, lack of focus, as microfinance players aim to cover too much ground without the appropriate skill set”, according to Isabelle Barres, director of the Smart Campaign. The best of both worlds? The goal, of course, should be to deliver the best of both worlds. A consultant in Canada thought that “microfinance would benefit from seeing itself as a type of banking and adopt to the extent possible the governance, internal controls and risk management structures of mainstream banks, while of course, adapting these norms to microfinance's typical 'double bottom line'.” Angus Poston, founder of Bridge in the Philippines said that “rather than defensively justifying their existence, microfinance providers should innovate and expand their ambition, to reach more people through new business models and grow to meet the challenge of the vast numbers of unbanked. Ultimately, success in this innovation will prove that inclusive banking is both commercially viable and demanded.” Jesse Fripp of Enclude, an advisory firm, saw the MFIs' dilemma as “akin to the old Black & Decker sales adage: ‘Are you selling drills, or are you selling holes?’ In other words, [is the] true focus on the outcome of full inclusivity, or the instrument of the traditional MFI? As disruptive technology innovations, new business models, and the big data approach drive a ‘mainstreaming’ of market focus, traditional MFIs face a potentially existential crisis if they cannot learn and adapt to new market realities and changing client demands”. CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org 39 C S F I / New York CSFI Therisk riskthat thatintervention interventionbybypoliticians politicians 7.7.Political Politicalinterference: interference:The will willharm harmthe themicrofinance microfinancesector sectorand anddistort distortthe themarket market Score: Score: 6.5 6.5 Previous Previous position: position: 55 Interference Interferencebybygovernments governmentsand andpoliticians politiciansin inthethemicrofinance microfinancebusiness businessis isa high a high level levelrisk, risk,butbutin inspecific specificjurisdictions, jurisdictions,many manyofofwhich whicharearewell-known. well-known.It Itranked ranked high highin inSouth SouthAsia Asia(where (whereIndia Indiahashasseen seena alotlotofofit)it)and andthetheMiddle MiddleEast/North East/North Africa, Africa, forfor example example Morocco Morocco which which hashas had had itsits microfinance microfinance troubles. troubles.Outside Outside these these areas, areas, respondents respondents tended tended to to play play it down. it down. It It was was rated rated lowest lowest in in East East Europe Europe Central Central Asia Asiaand andEast EastAsia AsiaPacific. Pacific. Significantly, Significantly,concern concernhashasalso alsodeclined declinedin inLatin Latin America America where where it it was was rife rife a few a few years years back, back, though though some some respondents respondents said said it it could could still still rebound. rebound. Political Politicalinterference interferenceusually usuallytakes takesthetheform formofofmanipulating manipulatingthethemicrofinance microfinance business business through through controls controls such such asas interest interest rate rate caps, caps, directed directed lending lending oror prohibitions prohibitions ononcertain certaintypes typesofofactivity activity(e.g. (e.g.deposit-taking). deposit-taking). InInextreme extremecases, cases,it itincludes includes political political support support forfor “no “no pay” pay” movements movements byby borrowers borrowers against against unpopular unpopular MFIs, MFIs, asas occurred occurred in in Bolivia Bolivia and and Nicaragua Nicaragua in in recent recent years. years. The The main main risk risk in in mymy country country is is thethe increasing increasing intrusion intrusion of of thethe state state into into private private activities. Today have a law Economía Popular y Solidaria (EPyS) and more activities. Today wewe have a law onon Economía Popular y Solidaria (EPyS) and more than five committees and institutions address subsector, including than five committees and institutions to to address thethe subsector, including a a Superintendent and a financial institution. Superintendent and a financial institution. Financial controller, Ecuador Financial controller, Ecuador Political Political interference interferenceon on the thewane waneinin some someplaces places Well-intentioned Well-intentioned political political interference interference doesn’t doesn’t necessarily necessarily make make good good policy, policy, either. either. Government-sponsored Government-sponsoredloan loanprogrammes, programmes,such suchasasKenya’s Kenya’sUWEZO UWEZOFund, Fund,distort distort thethemarket marketand andtake takeclients clientsaway awayfrom fromMFIs. MFIs.AsAsa respondent a respondentfrom fromGhana Ghanasaid: said: “Some “Some clients clients think think that that microloans microloans areare free free in in areas areas where where governments governments participate participate directly directly in in retail retail lending lending activities”. activities”. Where Where will will it go it go from from here? here? Strong Strong and and appropriate appropriate regulation regulation may may reduce reduce thethe scope scope forfor political political meddling, meddling, asas will will “mainstreaming”. “mainstreaming”. AA South South American American investor investor said said thethe risk risk was was high high after after “the “the sector's sector's PRPR fiasco fiasco in in thethe past past 5 years…but 5 years…but will will dissipate dissipate in in a a future future cycle”. cycle”. But But others others were were more more pessimistic. pessimistic.A A UK UK investor investor said: said: “As “As thethe sector sector becomes becomesincreasingly increasinglycommercialized, commercialized,I feel I feelit itwill willbebeever evermore moreononthetheradar radarofof governments, governments,taxtaxauthorities authoritiesand andregulators. regulators.I see I see'tax 'taxgrabs', grabs',interest interestrate ratecaps, caps, foreign foreignexchange exchangerestrictions restrictionsand andregulatory regulatorylimits limitsononcapital capitaland andliquidity liquidityallall playing playing a greater a greater role role in in ourour lives.” lives.” Not Notallallpolitical politicalinterference interferenceis isnegative. negative. Some Somerespondents respondentssaw sawpolitical political “involvement” “involvement” asas something something to to bebe welcomed. welcomed. AA Madagascan Madagascan central central banker banker said said that that state stateintervention interventionin inregulation regulationhad hadimproved improvedthethelegal legaland andinstitutional institutionalframework framework forfor microfinance microfinance in in hishis country, country, and and supported supported MFIs MFIs in in trouble. trouble. This This risk risk runs runs very very close close to to regulatory regulatory risk risk with with which which it is it is 61% 61% correlated, correlated, asas might might bebe expected. expected.Among Among respondent respondent types, types, it was it was ranked ranked highest highest byby MFIs MFIs and and investors. investors. Groups Groups giving giving it ait low a low ranking ranking included included credit credit raters raters and and regulators. regulators. 40 CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org C S F I / New York CSFI Reputation Reputation still still at at risk risk Although Although we we did did not not ask ask aa question question specifically specifically about about reputation reputation risk, risk, many many of of our our respondents respondents said said itit was was aa very very live live issue issue for for microfinance. microfinance. The The main main source source of of reputation reputation damage damage continues continues to to be be the the problems problems of of overindebtedness overindebtedness and and over-charging over-charging which, which, while while present present only only in in specific specific markets, markets, taint taint the the image image of of the the industry industry as as aa whole. whole. Hanns Hanns Martin Martin Hagen, Hagen, chief chief financial financial sector sector economist economist at at KfW KfW Entwicklungsbank Entwicklungsbank in in Germany, Germany, said said that that one one reputational risk risk … … stemming stemming of of the the main main risks risks over over the the next next 2-3 2-3 years years was was ““reputational from from irresponsible irresponsible lending lending practices practices””.. Madeleine Madeleine Dy, Dy, an an independent independent consultant consultant in in the the US, US, said said that that reputation reputation and and overindebtedness overindebtedness risk risk ““are are both both growing growing and and the the impact impact of of crises crises in in the the sector sector over over the the last last couple couple of of years years does does not not seem seem to to have have diminished diminished””.. There There are are also also wider wider questions questions about about microfinance microfinance losing losing its its sense sense of of mission mission and and failing failing to to prove prove its its worth worth as as an an answer answer to to poverty poverty and and financial financial exclusion. exclusion. AA microfinance as as aa respondent respondent from from aa Far Far East East development development bank bank said said that that ““microfinance panacea panacea for for poverty poverty reduction reduction has has lost lost credibility credibility with with the the public, public, especially especially after after the the 2009 2009 financial financial crisis, crisis, and and hence hence in in the the appetite appetite of of public public investors investors to to Eric Savage, Savage, president president and and chief chief executive executive of of Unitus Unitus support support the the industry. industry.”” Eric Capital Capital in in India, India, said said that that ““the the industry's industry's poverty poverty alleviation alleviation benefits benefits have have been been oversold, oversold, so so we we risk risk looking looking foolish foolish relative relative to to the the claims. claims. This This can can have have many many demoralizing demoralizing effects effects for for participants. participants.”” As As for for the the consequences consequences of of reputation reputation risk, risk, respondents respondents saw saw these these taking taking the the form form of of further further political political backlash, backlash, tougher tougher regulation regulation and and loss loss of of confidence confidence among among clients clients and and investors. investors. 8. The risk risk that that poor poor management management in in microfinance microfinance 8. Management: Management: The service service providers providers will will damage damage the the business. business. Score: Score: 6.5 6.5 Previous Previous position: position: 33 Although Although management management in in MF MF providers providers has has become become stronger stronger and and more more professional, professional, there there isis still still aa widespread widespread perception perception that that improvement improvement needs needs to to continue, continue, particularly particularly as as the the pressures pressures on on the the business business increase. increase. A A development development bank bank respondent respondent from from South South East East Asia Asia said said that that “the “the main main challenge challenge isis that that most most MFIs MFIs have have laudable laudable social social objectives objectives but but lack lack the the professionalism professionalism to to grow grow and and manage manage risk risk properly.” properly.” This This isis not not aa risk risk about about which which itit isis possible possible to to make make generalisations. generalisations. The The level level of of concern concern differs differs greatly greatly from from one one region region to to another. another. ItIt isis highest highest in in the the East East Asia Asia Pacific Pacific region region (where (where itit ranks ranks No. No. 2), 2), followed followed by by Africa Africa (No. (No. 5) 5) and and Middle Middle East East and and North North Africa Africa (No. (No. 7). 7). There There isis also also aa question question of of size: size: generally generally bigger bigger MFIs MFIs are are better better run run than than small. small. CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org 41 C S F I / New York CSFI IfIfthere thereisisa aconsensus consensusabout aboutthe themessage messagebehind behindthis thisrisk, risk,ititisisthat thatmicrofinance microfinance needs needsstrong strongand andcapable capableleaders leadersatata atime timewhen whencompetition competitionisisgrowing, growing,business business conditions conditions are are getting getting tougher, tougher, and and big big questions questions are are being being asked asked about about microfinance’s microfinance’srole. role.More MoreMFIs MFIsare arealso alsoreaching reachinga asize sizewhere whereprofessionalism professionalismmust must replace replacephilanthropy. philanthropy.“There “Thereare aretoo toomany manydo-gooders” do-gooders”said saidone onerespondent. respondent. Among Amongthe thespecific specificissues issuesidentified identifiedwere werepoor poorsuccession successionplanning, planning,inadequate inadequate training trainingand andlack lackofofknowledge knowledgeofofthe theincreasingly increasinglycomplicated complicatedsystems systemsneeded neededtoto run runa amodern modernMF MFbusiness. business. The Thechairman chairmanofofananNGO NGOininthe theUS USsaid saidthat thatthe the challenges challengesfacing facingmicrofinance microfinancewere were“balancing “balancinggrowth growthand anddelivery deliveryquality quality- -which which requires requiresleadership leadershipand andmanagement managementskills skillsthat thatare aretoo toooften oftena aconstrained constrainedresource”. resource”. Not Notsufficient sufficientfor for MFIs MFIsto tohave have 'well-meaning 'well-meaning management' management' The Theproblem problemofofbalancing balancingcommercial commercialand andphilanthropic philanthropicinterest interestalso alsorequires requires particularly particularlywell-honed well-honedskills. skills.Jacques JacquesBoribond, Boribond,a aformer formerWorld WorldBank Bankmicrofinance microfinance adviser advisertotothe theCentral CentralBank BankofofKosovo, Kosovo,said: said:“It“Itisisnot notsufficient sufficientfor forMFIs MFIstotohave have well-meaning well-meaning management management with with high high ethical ethical intentions. intentions. MFIs MFIs are are financial financial institutions institutionsand andasassuch suchmust musthave havemanagement managementwith withsuitable suitableexperience experienceofofthe the financial financialsector.” sector.” Among Amongrespondent respondenttypes, types,only onlythe theregulators regulatorsplaced placedthis thisinintheir theirtop topfive fiverisks. risks.The The people peoplewho whoactually actuallyrun runmicrofinance microfinanceinstitutions institutionsand andtheir theirinvestors investorsplaced placeditit around aroundthe theNo. No.8 8mark. mark.AAnumber numberofofrespondents respondentssaid saidthat thatthere therewas wasa agenerally generally improving improving trend trend and and many many MFIs MFIs were were very very well well run. run. Dragane Dragane Mehmedovic, Mehmedovic, secretary secretarygeneral generalofofthe theAssociation AssociationofofMicrocredit MicrocreditOrganizations OrganizationsininBosnia Bosnia&& Herzegovina, Herzegovina,said saidthat that“many “manyMFIs MFIshave haveexcellent excellentmanagement managementand andprocedures”. procedures”. Therisk riskthat thatmicrofinance microfinanceservices serviceswill willnot notdevelop develop 9.9.Regulation: Regulation:The because becauseofofaalack lackofofappropriate appropriateprudential prudentialsupervision supervisionand and regulation. regulation. Score: Score:6.4 6.4 Previous Previousposition: position:99 Regulation, Regulation,which whichshould shouldsupport supportthe themicrofinance microfinanceindustry, industry,tends tendstotobebeviewed viewedasas unhelpful, unhelpful,which whichisiswhy whyititcontinues continuestotofeature featureininthe theTop TopTen TenBanana BananaSkins. Skins. AA large largenumber numberofofresponses responsessaw sawregulation regulationasasa aprocess processwhich, which,while whilenecessary, necessary,was was not notalways alwayshelpful. helpful. This Thisrisk riskcorrelated correlatedstrongly stronglywith withPolitical PoliticalInterference Interference(e.g. (e.g.inincases casessuch suchasasthe the imposition impositionofofinterest interestrate ratecaps). caps).ItItwas washighest highestininthe theMiddle MiddleEast Eastand andNorth NorthAfrica Africa region regionand andSouth SouthAsia, Asia,and andlowest lowestininEastern EasternEurope Europeand andCentral CentralAsia Asiaand andthe theEast East Asia AsiaPacific. Pacific.Among Amongrespondent respondenttypes, types,ititwas wasranked rankedhighest highestbybyinvestors investors(No. (No.5), 5), and andlowest, lowest,perhaps perhapsunsurprisingly, unsurprisingly,bybyregulators regulators(No. (No.18). 18). Several Severalrespondents respondentssaid saidthat thatthe thereal realrisk riskwas wasnot notlack lackofofregulation, regulation,asasour our definition definitionimplied, implied,but buttoo toomuch muchofofit,it,ororthe thewrong wrongtype. type. An AnNGO NGOrepresentative representative argued arguedthat that“there “therewon’t won’tbebea alack lackofofregulation, regulation,but but[the [theproblem problemis]is]ititmay maynot not always alwaysbebeappropriate”. appropriate”.An Aninvestor investorininColombia Colombiasaid saidititwas wasnot nota aquestion questionwhether whether 42 CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org C S F I / New York CSFI microfinance microfinance services services “will “will notnot develop” develop” butbut thatthat they they “will “will develop develop in ainway a way thatthat is is notnot propitious propitious for for thethe good good of all of all stakeholders”. stakeholders”. Nevertheless, Nevertheless, a number a number of respondents of respondents diddid seesee thethe absence absence of (good) of (good) regulation regulation as aas a risk. risk. “Without “Without well-structured well-structured andand appropriate appropriate supervision supervision andand regulations, regulations, thethe problems problems which which have have plagued plagued thethe microfinance microfinance sector sector willwill continue continue to give to give it the it the negative negative image image thatthat it has it has acquired acquired in in many many countries”, countries”, wrote wrote one,one, adding adding thatthat “without “without supervised supervised regulations regulations appropriate appropriate for for commercial commercial MFIs MFIs (including (including their their transformation transformation from from NGO NGO status) status) thethe microfinance microfinance sector sector faces faces decline, decline, andand ‘light ‘light touch’ touch’ regulation regulation of the of the microfinance microfinance sector sector is aisrelic a relic of the of the pastpast andand is aisdisservice a disservice to the to the sector”. sector”. Others Others emphasised emphasised thatthat regulation regulation waswas an an opportunity opportunity as much as much as aas a risk. risk. AnAn Ecuadorian Ecuadorian practitioner practitioner said: said: “In“In mymy country country [we] [we] would would rather rather riskrisk excess excess [than [than dearth] dearth] of supervision of supervision andand control”. control”. Absence Absence ofof good good regulation regulation still still a major a major risk risk TheThe riskrisk in regulation in regulation is that is that it will it will hit hit thethe wrong wrong note note by by being being burdensome, burdensome, stifling stifling andand costly costly for for an an industry industry which, which, as as oneone respondent respondent pointed pointed out,out, is increasingly is increasingly weighed weighed down down by by its its self-imposed self-imposed social social performance performance management management reporting reporting requirements. requirements. Regulation Regulation alsoalso needs needs to evolve to evolve to take to take account account of changes of changes such such as the as the convergence convergence of traditional of traditional MFIs MFIs andand commercial commercial banks, banks, andand thethe introduction introduction of new of new technologies technologies andand delivery delivery channels. channels.Some Some respondents respondents saidsaid thisthis evolution evolution waswas notnot happening. happening. Henry Henry Mbaguta, Mbaguta, assistant assistant commissioner commissioner at the at the Ministry Ministry of Finance of Finance in Uganda, in Uganda, said: said: “I “I amam a little a little uncertain uncertain as as to to thethe future future of of thethe mobile mobile money money revolution. revolution. Mobile Mobile banking banking seems seems to be to be growing growing at aatfaster a faster pace pace than than thethe imaginative imaginative capacities capacities of the of the regulators. regulators. TheThe tendency tendency is is therefore therefore to to wait wait firstfirst as as thethe service service providers providers experiment.” experiment.” Regulation Regulation varies varies from from country country to to country, country, of of course. course. Judging Judging by by thethe responses, responses, countries countries where where regulation regulation is good is good or improving or improving include include Pakistan, Pakistan, Mexico, Mexico, Peru Peru andand Colombia, Colombia, while while it isitworsening is worsening in Brazil, in Brazil, Nigeria Nigeria andand Jamaica, Jamaica, andand is virtually is virtually nonnonexistent existent in Myanmar in Myanmar andand Iraq. Iraq. (See (See separate separate boxbox for for India). India). Regulation Regulation is only is only as strong as strong as the as the people people who who implement implement it. Philip it. Philip Appiah-Mensah Appiah-Mensah of of UDF UDF Microfinance Microfinance in in Ghana Ghana wrote wrote thatthat “some “some central central banks banks lacklack thethe human human resources resources capacity capacity to regulate to regulate andand supervise”. supervise”. Where Where next? next? Whatever Whatever their their view, view, respondents respondents sawsaw more more regulation regulation coming. coming. “The “The lessless ableable MFIs MFIs willwill baulk baulk at such at such ‘impositions’; ‘impositions’; thethe better-quality better-quality MFIs MFIs willwill seesee thisthis as aasplus a plus to set to set themselves themselves above above thethe rest,rest, duedue to their to their ability ability to comply to comply with with thethe newnew regulatory regulatoryenvironment environmentas aswell wellas asgrasping graspinginnovation innovationfor fortheir theircontinued continued development”, development”, wrote wrote Jesse Jesse Fripp Fripp of Enclude. of Enclude. “But “But to achieve to achieve this,this, MFIs MFIs willwill have have to to access access more more capital capital in the in the future, future, thusthus giving giving commercial commercial MFIs MFIs thethe advantage advantage over over their their NGO NGO competitors”. competitors”. CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org 43 C S F I / New York CSFI India: India:the thefever fevercools cools India, India,the theworld's world'slargest largestmicrofinance microfinancemarket marketby bynumber numberofofcustomers, customers,has hashad hadaa turbulentrelationship relationshipwith withthe theindustry. industry.InInearlier earlierBanana BananaSkins Skinssurveys, surveys,rows rows turbulent aboutusurious usuriousinterest interestrates, rates, about overindebtedness,the theAndhra AndhraPradesh Pradesh overindebtedness, How HowIndia Indiascored scored affair,regulation regulationand andreputation reputationallall affair, (out (outofof10) 10) occupiedaahigh highplace placeininthe theresults. results. occupied India India World World But Butthings thingshave havechanged. changed.The Thefever feverhas has abated abatedtotothe theextent extentthat thatIndian Indian respondents respondentsthis thistime timerated ratedmany manyrisks risks lower lowerthan thanrespondents respondentsfrom fromelsewhere. elsewhere. InInthe theaccompanying accompanyingtable tablenote note particularly particularlythe thelower lowerscores scoresfor for overindebtedness overindebtednessand andcredit creditrisk. risk.The The strongest strongestecho echofrom fromthe thepast pastisispolitical political risk riskwhich whichcontinues continuestotodominate dominatethe the ranking rankingsuggesting suggestingthat, that,ininthis thisrespect respect atatleast, least,India Indiastill stillhasn't hasn'tgot gotback backtoto normal. normal. 1 1 Political Politicalinterference interference 7.0 7.0 6.5 6.5 2 2 Regulation Regulation 6.6 6.6 6.4 6.4 3 3 Overindebtedness Overindebtedness 6.4 6.4 7.5 7.5 4 4 Risk Riskmanagement management 6.2 6.2 6.8 6.8 5 5 Client Clientrelationships relationships 6.2 6.2 6.1 6.1 6 6 Funding Funding 6.2 6.2 5.8 5.8 7 7 Liquidity Liquidity 6.2 6.2 5.8 5.8 8 8 Strategy Strategy 6.0 6.0 6.7 6.7 9 9 Competition Competition 1010 Credit Creditrisk risk 6.0 6.0 6.9 6.9 5.8 5.8 6.9 6.9 The Theregulation regulationofofthe themicrofinance microfinance industry industrywas wasaastrong strongtheme themeamong amongrespondents. respondents.Some Somewere weresupportive supportiveofofthe the Microfinance MicrofinanceBill Billwhich whichwas wastabled tabledininParliament Parliamentlast lastyear yearbut butsubsequently subsequentlysent sent “Hadititbeen beencleared, cleared,the thelegitimacy legitimacyofofthe theindustry industry back backfor forreconsideration. reconsideration.“Had could could[be] [be]better better ”,”,wrote wroteone onepractitioner. practitioner. The TheReserve ReserveBank BankofofIndia's India'spost-2010 post-2010interventions interventionswere werewelcomed welcomedby bysome. some. “has The Thecreation creationofofthe theseparate separateclass classofofnon-banking non-bankingfinancial financialcompany company(NBFC) (NBFC)“has brought broughtininclarity clarityamong amongvarious variousstakeholders stakeholders ”,”,wrote wrotethe thechairman chairmanofofan anNBFC, NBFC, who whonevertheless neverthelesssaid saidthat thatthe themain mainrisk risktotothe theindustry industrycontinues continuestotobe bepolitical political interference. interference.According Accordingtotoanother anotherrespondent, respondent,politicians politiciansdevise devisemicrofinance microfinance schemes schemesthat thatare arenot notsustainable, sustainable,such suchasaslow lowcost costloans, loans,and andhave haveaahabit habitofof declaring declaringloan loanwaivers waiverson onthe theeve eveofofelections. elections. The Thegovernment's government'sresponse responsetotothe theAP APcrisis crisisled ledtotothe themainstream mainstreambanking bankingsector sector “hasaa being beingdragooned dragoonedinto intoproviding providingmicrofinance microfinanceservices. services.The Thegovernment government“has strong strongfinancial financialinclusion inclusionagenda agenda[for] [for]which whichthe theresponsibility responsibilitytotodeliver deliverisisbeing being ”,”,wrote wroteGeoff GeoffKing KingofofAircel AircelLtd LtdininIndia. India. discharged dischargedthrough throughthe thebanking bankingsector sector “This “Thisisisleading leadingtotoaahigh highlevel levelofofresistance resistancefrom frombanks, banks,over-amplified over-amplifiedfears fearsover over risks risks[and] [and]resistive resistivegovernance governancewhich whichisissqueezing squeezingthe theenergy energyand andresources resourcesofof ”.”. the themicrofinance microfinanceproviders providers 44 CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org C S F I / New York CSFI The risk Thethat riskmicrofinance that microfinance serviceservice providers providers will failwill to fail to 10. Staffing: 10. Staffing: recruitrecruit and retain and retain suitably suitably qualified qualified staff. staff. Score:Score: 6.3 6.3 Previous Previous position: position: 14 14 Concern Concern about human about human resources resources is growing is growing becausebecause the industry the industry is expanding, is expanding, and and new entrants new entrants are creating are creating critical critical staff shortages staff shortages in manyinmarkets. many markets. The riskThe is that risk the is that the microfinance microfinance industryindustry may have mayneither have neither the willthe norwill thenor resources the resources to counter to counter these these tendencies, tendencies, and thatand thethat quality the quality of theirof business their business will decline. will decline. Respondents Respondents from many from countries many countries reportedreported difficulties difficulties in recruiting in recruiting and retaining and retaining good staff. goodThe staff. pay The offered pay offered by microfinance by microfinance institutions institutions is oftenislow often compared low compared to to other industries, other industries, and theand prospects the prospects are distinctly are distinctly less glamorous less glamorous than inthan competing in competing careerscareers in telecoms in telecoms and commercial and commercial banking. banking. Even where Even where MF providers MF providers do manage do manage to recruit to recruit good people, good people, there isthere a high is a high probability probability that they thatwill theybewill poached be poached by competitors, by competitors, particularly particularly the commercial the commercial banks who banksarewho willing are willing to pay to forpay their forskills. their The skills. problem The problem is particularly is particularly acute inacute in middle middle management management where where staff demand staff demand is strongest. is strongest. Some said Somethat saidMFIs that were MFIs were investing investing in staffinforstaff sales forbut sales notbut thenot back theoffice, back office, which meant which that meant their thatsystems their systems suffered. suffered. MF careers MF careers not not glamorous glamorous enough enough A US-based A US-based microfinance microfinance consultant consultant said that said “ifthat institutions “if institutions do not do invest not more investinmore in building building adequate adequate trainingtraining systemssystems for theirforfield theirstaff, fieldwe staff, are we likely aretolikely see declining to see declining portfolio portfolio quality quality and increasing and increasing scandals scandals involving involving abuse and abusefraud.” and fraud.” Fonahanmi Fonahanmi Idris, deputy Idris, deputy generalgeneral manager manager at Safetrust at Safetrust Mortgage Mortgage Bank inBank Nigeria, in Nigeria, said that said “most that “most microfinance microfinance lenders/promoters lenders/promoters cannot cannot attract attract and retain and qualified retain qualified and skilful and skilful key key staff; they staff; prefer they paying prefer paying peanutspeanuts and always and always having having high staff high turnover”. staff turnover”. The level Theoflevel risk of varies risk according varies according to localtoconditions local conditions and individual and individual types of types MF of MF provider. provider. Marjolaine Marjolaine Chaintreau, Chaintreau, vice-president vice-president at Citi Microfinance, at Citi Microfinance, said: “This said:risk “This risk needs to needs be seen to beinseen a context in a context of growth of growth and competition. and competition. When When institutions institutions are are growinggrowing fast, recruitment fast, recruitment and training and training becomebecome one of one the major of the issues, major issues, but it might but it might not apply not to apply all institutions to all institutions or business or business environments.” environments.” A number A number of respondents of respondents agreed agreed that thisthat might this only mightbeonly a temporary be a temporary problem. problem. A banker A banker in Mexico in Mexico said that said that “microfinance “microfinance is emerging is emerging as a strong as a strong industryindustry where where staff can staff seecan a career see a career path. path. This generates This generates greater greater retention”. retention”. RegionsRegions where where this risk thisranked risk ranked highesthighest were Latin were America Latin America (No. 6)(No. and 6)Africa and Africa (No.7).(No.7). CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org 45 C S F I / New York CSFI The risk The that risk that clients clients will not will be notable be able to to 11. 11. Financial Financial capability: capability: makemake informed informed decisions decisions because because of lack of lack of financial of financial knowledge. knowledge. Score: Score: 6.2 6.2 Previous Previous position: position: Not applicable Not applicable The financial The financial capability capability of microfinance of microfinance clientsclients was awas moderate a moderate concern concern for most for most respondents, respondents, even even though though it haditahad strong a strong correlation correlation (47%)(47%) with overindebtedness, with overindebtedness, the top therisk. top Geographic risk. Geographic variation variation was also wasmoderate, also moderate, though though for respondents for respondents in Subin SubSaharan Saharan AfricaAfrica financial financial capability capability ranked ranked No. 17 No.out 17ofout 19ofrisks 19 risks – significantly – significantly lowerlower than the thanrest. the rest. AreAre MF MF clients clients 'more 'more savvy' savvy' than than people people say? say? Responses Responses revealed revealed sharply sharply different different perspectives perspectives on this onrisk thisbetween risk between the borrower the borrower and the andlender. the lender. FromFrom the borrower’s the borrower’s side, it side, wasitan was issue an issue of whether of whether the client the client had had the ability the ability to make to make appropriate appropriate financial financial decisions. decisions. Ron Ron Bevacqua Bevacqua of Access of Access advisory advisory in theinPhilippines, the Philippines, saw this saw risk this as risk important, as important, “to the “toextent the extent that lack that of lack of financial financial knowledge knowledge leads leads clientsclients to over-borrow.” to over-borrow.” On the On lender the lender side, side, manymany viewed viewed capability capability as a asnon-issue. a non-issue. Chris Chris Linder, Linder, International International Executives Executives Service Service Corps,Corps, Italy, Italy, said that said“there that “there is wayistoo waymuch too much still instill in paternalistic paternalistic attitudes attitudes aboutabout financial financial literacy/education. literacy/education. Clients Clients are much are much smarter smarter and sophisticated and sophisticated than any thanofany us.” ofThis us.” view This view was shared was shared by many. by many. Danielle Danielle Piskadlo Piskadlo from from the Center the Center for Financial for Financial Inclusion Inclusion at Accion at Accion pointed pointed out that out “clients that “clients have have always always been more been more financially financially savvysavvy than they thanare theygiven are given ‘credit’ ‘credit’ for.” for.” If theIftwo theperspectives two perspectives have have a common a common ground, ground, it is init how is in MF howproviders MF providers manage manage their relationship their relationship with clients, with clients, especially especially in theinarea the of area transparency of transparency of pricing of pricing and and product product terms.terms. One US-based One US-based observer observer described described the intersection the intersection in these in these words: words: “Clients “Clients can most can most likelylikely make make decisions decisions if they if are theypresented are presented with actual with actual facts facts on on pricing, pricing, etc. Most etc. Most are pretty are pretty astuteastute aboutabout financial financial matters matters if presented if presented properly.” properly.” However, However, a central a central bank bank regulator regulator commented commented that “given that “given the education the education level level of theof the targettarget customer, customer, any understanding any understanding of contracts of contracts written written in theinnational the national language language is is not always not always obvious.” obvious.” A respondent A respondent from from the cooperative the cooperative movement movement in Mexico in Mexico said said that financial that financial education education wouldwould help “eradicate help “eradicate the culture the culture of non-payment”. of non-payment”. 46 CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org C S F I / New York CSFI TheThe riskrisk thatthat microfinance microfinance service service providers providers will will 12.12. Product Product risk: risk: not not offer offer appropriate appropriate products products to clients to clients because because of aoffailure a failure to to understand understand their their changing changing needs. needs. Score: Score: 6.2 6.2 Previous Previous position: position: Not Not applicable applicable The The risk risk to microfinance to microfinance service service providers providers whowho offeroffer poorpoor or inappropriate or inappropriate products products is that is that theythey will will loselose business business and and put put theirtheir existence existence at risk. at risk. But But therethere is also is also an an ethical ethical issue: issue: true true microfinance microfinance exists exists to provide to provide a specific a specific service, service, and and MFIs MFIs whowho do do not not provide provide products products that that helphelp theirtheir clients clients escape escape poverty poverty are are failing failing in their in their mission. mission. MFMF providers providers 'show 'show little little innovation' innovation' Although Although this this risk risk was was not not ranked ranked among among the the top top ten, ten, it was it was one one which which aroused aroused strong strong feelings. feelings. Many Many respondents respondents felt felt that that MFIs MFIs werewere running running one one or both or both of the of the risksrisks described described above. above. Alvaro Alvaro Rodriguez Rodriguez Arregui, Arregui, vicevice chairman chairman of Compartamos of Compartamos in in Mexico, Mexico, said:said: “I see “I most see most microfinance microfinance institutions institutions trapped trapped in the in early the early 90s 90s withwith veryvery littlelittle innovation”. innovation”. MFIs MFIs maymay fail fail to meet to meet theirtheir customers' customers' needs needs for afornumber a number of reasons. of reasons. OneOne is that is that theythey attach attach littlelittle importance importance to them. to them. For For MFIs, MFIs, this this was was the No. the No. 18 risk 18 risk out of out19, of 19, strongly strongly suggesting suggesting that that product product development development is low is low on their on their agenda. agenda. A related A related reason reason is that is that MFIs MFIs maymay lacklack the resources the resources or the or desire the desire to conduct to conduct market market research, research, so they so they are are “second-guessing “second-guessing whatwhat theirtheir clients clients actually actually need” need” as one as one respondent respondent put it. putBrigit it. Brigit Helms, Helms, director director of DAI of DAI in Mozambique, in Mozambique, saidsaid that that “service “service providers providers talk talk a lota about lot about understanding understanding clients clients better better but but are largely are largely unwilling unwilling to to invest invest in proper in proper market market research.” research.” Some Some respondents respondents saidsaid that that the product the product range range was was driven driven not by notclient by client needs needs but by butwhat by what could could be turned be turned out easily out easily and and profitably. profitably. A third A third reason reason is regulation. is regulation. ThisThis is a is particular a particular concern concern in India in India where where regulations regulations on new on new products products and and savings savings are are tight,tight, preventing preventing innovation. innovation. But But it was it was alsoalso mentioned mentioned in other in other countries, countries, Bosnia Bosnia & Herzegovina & Herzegovina for example. for example. A respondent A respondent fromfrom IndiaIndia saidsaid that that “given “given regulation, regulation, MFIs MFIs in India in India offeroffer veryvery standardized standardized products products to clients.” to clients.” EvenEven where where MF MF providers providers know know whatwhat theirtheir clients clients want, want, theythey might might not not havehave the the means means or ability or ability to develop to develop suitable suitable products. products. A US A microfinance US microfinance consultant consultant said:said: “I “I continue continue to be to surprised be surprised at how at how littlelittle capability capability mostmost MFIs, MFIs, and and especially especially cooperatives, cooperatives, havehave for developing for developing newnew products. products. EvenEven if they if they see clients see clients changing, changing, theythey are are ill-equipped ill-equipped to translate to translate thesethese observations observations into into meaningful meaningful product product adaptations adaptations or new or new products.” products.” Product Product weaknesses weaknesses might might lie inlierange in range or design, or design, or, or, increasingly, increasingly, in the in form the form of delivery. of delivery. Some Some respondents respondents regretted regretted that that where where MFIs MFIs extended extended theirtheir product product range, range, it tended it tended to betointo be into undesirable undesirable areasareas suchsuch as consumer as consumer finance. finance. ThisThis risk risk could could growgrow in importance in importance as changes as changes in the in the microfinance microfinance industry industry accelerate accelerate and and technology technology speeds speeds up new up new products products and and delivery delivery channels. channels. Deborah Deborah Drake, Drake, vice-president vice-president of the of Center the Center for Financial for Financial Inclusion Inclusion at Accion at Accion International International in in the the US, US, saidsaid that that “the“the microfinance microfinance industry industry mustmust continue continue to evolve to evolve in order in order to to remain remain relevant relevant and and provide provide the services the services and and products products that that clients clients needneed and and which which are increasingly are increasingly being being provided provided by new by new entrants entrants suchsuch as telcos.” as telcos.” CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org 47 C S F I / New York CSFI SomeSome respondents respondents felt these felt these concerns concerns werewere exaggerated, exaggerated, and and that that microfinance's microfinance's record record on the onproduct the product frontfront was often was often betterbetter than than portrayed. portrayed. Tamsir Tamsir BorisBoris Sembene, Sembene, senior senior internal internal auditor auditor at Microcred at Microcred in Senegal, in Senegal, said said that that “adjustments “adjustments are often are often mademade to products to products and services and services to meet to meet customer customer needs, needs, taking taking into account into account the need the need for client for client protection protection and product and product innovation”. innovation”. A respondent A respondent fromfrom Mexico Mexico said said that that “all the “all time, the time, therethere is a greater is a greater awareness awareness of the of importance the importance of designing of designing products products and services and services that meet that meet the needs the needs of customers of customers and to andaccompany to accompany this with this with financial financial education.” education.” 13.13. Macro-economic Macro-economic risk: risk: The The risk risk thatthat microfinance microfinance service service providers providers and and theirtheir clients clients will will be damaged be damaged by trends by trends in the in wider the wider economy, economy, suchsuch as inflation, as inflation, volatile volatile commodity commodity prices prices and and lacklack of of growth growth Score: Score: 6.1 6.1 Previous Previous position: position: 13 13 Macroeconomic Macroeconomic risk is risk moderate is moderate thanks thanks to thetogenerally the generally improved improved state state of theofglobal the global economy. economy. This This risk was risk assessed was assessed lowest lowest in South in South Asia Asia (5.6),(5.6), East East Asia Asia Pacific Pacific (5.5)(5.5) and North and North America America (5.7)(5.7) and highest and highest in thein Middle the Middle East East and North and North Africa Africa region region (7.3)(7.3) – a result – a result of continued of continued economic economic turmoil, turmoil, post-Arab post-Arab Spring. Spring. Microfinance Microfinance more more vulnerable vulnerable to global to global upsups andand downs downs However, However, the theme the theme of the ofresponses the responses is that is while that while overall overall macroeconomic macroeconomic risk has risk has lost lost its crisis its crisis severity, severity, it is itstill is still there,there, notably notably in volatile in volatile food food and and fuel fuel prices. prices. Microfinance Microfinance may may also have also have become become moremore vulnerable vulnerable to thetoups theand ups downs and downs of global of global markets markets and and to the to policies the policies adopted adopted by governments by governments to deal to deal with with them.them. Daniel Daniel Schriber, Schriber, director director of investment of investment operations operations at Symbiotics at Symbiotics in Switzerland, in Switzerland, said said therethere was “an wasincreasing “an increasing correlation correlation between between the global the global economy economy and microfinance, and microfinance, which which used used not to notbetothe be case. the case. But But as many as many MFIsMFIs are growing are growing fast, fast, developing developing their their portfolios portfolios not only not only in theinpure the pure micro-entrepreneurs micro-entrepreneurs segment, segment, but also but also in sectors in sectors like like SME,SME, housing, housing, consumer consumer lending, lending, etc., etc., therethere are more are more and more and more ties between ties between the the country country macro-economic macro-economic situation situation and the andperformance the performance of anofMFI.” an MFI.” Although Although this risk this affects risk affects microfinance microfinance providers providers directly directly through through interest interest ratesrates and and general general business business conditions, conditions, it most it most oftenoften reaches reaches themthem through through clients clients who who havehave beenbeen hit by hiteconomic by economic difficulty difficulty or retreat or retreat fromfrom buying buying financial financial services. services. A Latin A Latin American American practitioner practitioner said said that that during during 20122012 and and 20132013 export export pricesprices tended tended to to stagnate stagnate and and eveneven decrease, decrease, “a situation “a situation that that affected affected the domestic the domestic economic economic performance performance of countries, of countries, resulting resulting in lower in lower demand demand for goods for goods and services, and services, job job losseslosses or reduction or reduction of wages of wages in agriculture, in agriculture, and lower and lower exports”. exports”. Agrifinance Agrifinance is arguably is arguably moremore susceptible susceptible to macro-economic to macro-economic swings swings than than bread-andbread-andbutterbutter urbanurban enterprise enterprise lending. lending. The The chiefchief operating operating officer officer of a of non-profit a non-profit socialsocial investment investment fund fund wrotewrote that for thatlending for lending to small to small to medium to medium agricultural agricultural enterprises enterprises in in ruralrural areas,areas, “the “the competitive competitive pricing pricing landscape landscape is one is one of the of the biggest biggest risks…Agricultural risks…Agricultural businesses businesses face face a series a series of inherent of inherent risksrisks - weather, - weather, disease, disease, crop crop failure, failure, and the and lack the lack of adequate of adequate insurance, insurance, and most and most agricultural agricultural businesses businesses are are facedfaced with with commodity-based commodity-based pricing pricing and have and have little little to notoopportunity no opportunity to adequately to adequately manage manage priceprice risk”.risk”. 48 CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org C S F I / New York CSFI All that All that beingbeing said, said, several several respondents respondents sought sought to downplay to downplay this risk, this risk, noting noting that that whilewhile markets markets can be canaffected, be affected, microfinance microfinance providers providers with with goodgood creditcredit risk systems risk systems and quality and quality portfolios portfolios should should be resilient, be resilient, and there and there is anisonus an onus on the oninvestor the investor too: too: “Funds “Funds that monitor that monitor macro macro risk can risklimit can limit damage”, damage”, wrotewrote one investor. one investor. Macroeconomic Macroeconomic risk risk was was largely largely uncorrelated uncorrelated with with others, others, reflecting reflecting its special its special position position as a as complex a complex external external risk but risk one but that one can that exacerbate can exacerbate otherother risksrisks at theat the clientclient and service and service provider provider level.level. The risk The did, risk however, did, however, correlate correlate 42% 42% with with Income Income Volatility, Volatility, reflecting reflecting the effect the effect that that food food and fuel and fuel pricesprices can have can have on household on household income income at theatBase the Base of theofPyramid. the Pyramid. 14.14. Client Client relationships: relationships: The The risk risk thatthat poorpoor client client relationship relationship management management will will leadlead to damaging to damaging client client behaviour, behaviour, e.g. e.g. an an unwillingness unwillingness to repay to repay theirtheir loans. loans. Score: Score: 6.1 6.1 Previous Previous position: position: 7 7 The The nature nature of the of relationship the relationship between between MF providers MF providers and their and their clients clients is changing is changing alongalong with with the character the character of theofbusiness. the business. The fact The that fact concern that concern aboutabout poor poor relationship relationship management management has fallen has fallen quitequite sharply sharply in in the rankings the rankings suggests suggests that that things things are getting are getting better. better. Indeed, Indeed, manymany respondents respondents supported supported this view this view with with their their comments. comments. Godwin Godwin Ehigiamusoe, Ehigiamusoe, managing managing director director of LAPO of LAPO Microfinance Microfinance BankBank in Nigeria, in Nigeria, said said that “client that “client engagement/relationship engagement/relationship management management has improved has improved in most in most countries countries in recent in recent years”. years”. Do Do MFMF providers providers measure measure clients’ clients’ Nonetheless, Nonetheless, respondents respondents identified identified a number a number of issues of issues in this in area this area which which they they saw saw as pressing as pressing and and exposing exposing the industry the industry to risk. to risk. The The fact fact that that overindebtedness overindebtedness financial financial capacity? capacity? continues continues to betoa be biga problem big problem is evidence is evidence that MF that providers MF providers are not are paying not paying closeclose attention attention to their to their customers’ customers’ financial financial capacity. capacity. A US A consultant US consultant said said that that “the “the pressure pressure to make to make loansloans fasterfaster and cheaper and cheaper to compete to compete has led has toleda to deterioration a deterioration of of quality quality in process in process as well as well as relationships as relationships with with clients, clients, resulting resulting in a deterioration in a deterioration of of portfolio portfolio quality. quality. This This trendtrend seems seems particularly particularly strong strong in markets in markets like Peru like Peru where where rapidrapid expansion expansion and increasing and increasing competition competition havehave led toled some to some very very poor poor practices practices and and is putting is putting the whole the whole sectorsector at risk.” at risk.” SomeSome respondents respondents saw saw this as thispart as part of a of broader a broader process process in which in which contact contact between between MF providers MF providers is becoming is becoming moremore distanced distanced because because microfinance microfinance is becoming is becoming moremore commercial, commercial, because because technology technology is automating is automating the relationship, the relationship, and MF and providers MF providers are losing are losing interest interest in theinpersonal the personal touch, touch, for example for example by not byextending not extending their their physical physical branch branch networks networks into into deprived deprived areas.areas. The The headhead of wholesale of wholesale lending lending at aat a microfinance microfinance bankbank in India in India said that said “the that overall “the overall management management focusfocus is going is going to betoonbe on efficiency efficiency and productivity and productivity and not andon notcustomer on customer centricity.” centricity.” SomeSome respondents respondents werewere concerned concerned that, that, as this as gap this opened gap opened up, MF up, providers MF providers would would lose touch lose touch with with their their clients clients (an issue (an issue described described moremore fullyfully underunder No. 12 No.Product 12 Product risk risk and No. and 6No. Strategy) 6 Strategy) and therefore and therefore fail infail their in their mission. mission. A consultant A consultant in theinUK the said: UK said: “For “For me the me biggest the biggest risk risk is that is that MFIsMFIs fail to failcapitalise to capitalise on their on their core core nicheniche in anin an CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org 49 C S F I / New York CSFI evolving evolving financial financial inclusion inclusion agenda agenda which which is based is based on aon direct a direct personal personal relationship relationship withwith clients clients and an andability an ability to leverage to leverage this to thiscreate to create valuevalue for clients.” for clients.” A related A related issueissue is that is that of client of client protection protection where where respondents respondents felt that felt that muchmuch remains remains to betodone be done aboutabout the transparency the transparency of loan of loan termsterms and and costs,costs, and and in understanding in understanding of of borrowers’ borrowers’ financial financial capacity. capacity. Alioune Alioune Diongue, Diongue, in charge in charge of internal of internal control control at at Microsen Microsen in Senegal, in Senegal, said said that MFIs that MFIs werewere “very“very exposed exposed to this to risk, this risk, especially especially thosethose who who do not do comply not comply withwith rulesrules on data on data protection, protection, and do andnot do respect not respect theirtheir customers customers (for example (for example by pursuing by pursuing themthem for loan for loan payments payments at their at their homes homes at unsocial at unsocial hours).” hours).” There There was was reason reason for optimism for optimism aboutabout the the management management of this of this risk risk insofar insofar as as microfinance microfinance service service providers providers ranked ranked it much it much higher higher ((No.((No. 8) than 8) than non-providers non-providers (No.(No. 12) and 12) investors and investors (No.(No. 18), 18), suggesting suggesting that that therethere is anisawareness an awareness of the of issues. the issues. ThisThis issueissue ranked ranked highest highest in South in South AsiaAsia (No.(No. 3) and 3) and LatinLatin America America (No.(No. 7) and 7) and lowest lowest in theinMiddle the Middle East East and North and North Africa Africa (No.(No. 19). 19). 15.15. Technology Technology management: management: TheThe risk risk thatthat microfinance microfinance service service providers providers will will suffer suffer losses losses fromfrom IT mismanagement IT mismanagement or fail or fail to to capitalise capitalise on new on new developments developments in IT. in IT. Score: Score: 6.0 6.0 Previous Previous position: position: 16 16 RisksRisks in this in area this area fall into fall into two broad two broad categories: categories: systems systems and new and new typestypes of banking. of banking. MFIs MFIs could could ‘miss ‘miss thethe technology technology train’ train’ On systems, On systems, the story the story is little is little changed changed fromfrom earlier earlier Banana Banana SkinsSkins surveys: surveys: a lotaoflot of MFIsMFIs havehave inadequate inadequate information information and and control control systems, systems, and and lack lack the resources the resources and and skillsskills to improve to improve them.them. PoorPoor systems systems lead lead to inefficiency to inefficiency and and weakweak risk risk management, management, increasing increasing the danger the danger of losses. of losses. The The newer newer concerns concerns relaterelate to the toemergence the emergence of technologies of technologies which which are reshaping are reshaping the the provision provision of banking of banking services, services, particularly particularly online online and mobile. and mobile. To many To many respondents, respondents, this this is the is crucial the crucial issueissue because because it touches it touches on aon whole a whole new new phase phase of microfinance of microfinance evolution evolution which which couldcould makemake or break or break manymany institutions. institutions. The The key thing key thing aboutabout thesethese technologies technologies is that is that they they offeroffer a solution a solution to the toaccess the access and and distribution distribution problems problems that that havehave hampered hampered MFIsMFIs in the in the past.past. C. Ross C. Ross Croulet, Croulet, microfinance microfinance advisor advisor in the in US, the US, said said that that “digital “digital financial financial services services (DFS), (DFS), which which can breach can breach the limits the limits to financial to financial inclusion inclusion cost cost effectively, effectively, is a is strategy a strategy that that manymany MFIsMFIs will will needneed to adopt to adopt quickly quickly to maintain to maintain relevancy relevancy and market and market share.” share.” However, However, a number a number of respondents of respondents werewere cautious cautious aboutabout new new technology. technology. One One concern concern was was that that it could it could encourage encourage over-borrowing over-borrowing by making by making access access to loans to loans easier, easier, and and by removing by removing the personal the personal element element fromfrom banking banking relationships. relationships. One One of of themthem was was concerned concerned aboutabout “mobile “mobile money money leading leading to more to more aggressive aggressive 'push''push' lending, lending, further further exacerbating exacerbating the problems the problems of overheated of overheated markets markets and overindebtedness.” and overindebtedness.” An equally An equally important important risk,risk, in many in many respondents' respondents' view,view, was was “missing “missing the train” the train” as one as one of them of them put put it, i.e. it, lacking i.e. lacking the foresight the foresight to exploit to exploit new new technology. technology. An NGO An NGO respondent respondent said said that that MFIsMFIs couldcould “fail“fail to fully to fully embrace embrace technology. technology. It will It will disrupt disrupt 50 CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org C S F I / New York CSFI current current deliverydelivery models models and thatand canthat feelcan threatening, feel threatening, but without but without major change major change too too many clients many will clients remain will remain unserved.” unserved.” This risk This wasrisk closely was closely correlated correlated with Strategy with Strategy (53%), (53%), underlining underlining the importance the importance of of technology technology issues toissues the future to theoffuture MF providers. of MF providers. 16. Income 16. Income volatility: volatility: The risk The that riskfluctuations that fluctuations in clients’ in clients’ incomeincome will affect will affect their capacity their capacity to repay to repay their loans. their loans. Score: Score: 6.0 6.0 Previous Previous position: position: Not applicable Not applicable Although Although this risk thisrelates risk relates closely closely to a borrower’s to a borrower’s loan repayment loan repayment ability ability and and therefore therefore to overborrowing, to overborrowing, it is seen it as is seen low ranking. as low ranking. Many respondents Many respondents stressedstressed this this link, butlink, saidbut thatsaid borrowers that borrowers were often werebetter oftenatbetter managing at managing their finances their finances than people than people gave them gavecredit them for, credit andfor, conditions and conditions were getting were getting better. better. Sergio Sergio GuzmanGuzman of the of the SMARTSMART Campaign Campaign said thatsaid “Income that “Income volatility volatility will always will always be a concern be a concern for those forofthose of us whous work whoatwork the BOP, at thesince BOP,the since clients the we clients work wewith workarewith oneare event oneaway eventfrom away from being destitute. being destitute. Often these Oftenevents these are events unpredictable. are unpredictable. However However (fingers(fingers crossed)crossed) I do I do not envision not envision an economic an economic downturn downturn of the proportions of the proportions of 2008ofhappening 2008 happening in the in the developing developing world inworld 2014.” in 2014.” AnotherAnother respondent respondent said thatsaid “this thatis “this always is always a high risk a high risk in any MF in any portfolio, MF portfolio, but it can butbeit managed.” can be managed.” We are We trying aretotrying improve to improve people'speople's lives in lives a prudent in a prudent way, and way, yetand there yetremains there remains a a significant that individuals be negatively impacted by the debt they take significant risk thatrisk individuals may be may negatively impacted by the debt they take we are investors, impact investors, of a negative effect on borrowers’ are impact the risk the of arisk negative effect on borrowers’ lives lives MF clients MF clients are are on. Sinceon.weSince is the biggest riskWe to us. We dowith invest with commercial return expectations, but is the biggest risk to us. do invest commercial return expectations, but ‘one ‘one eventevent awayaway financialfinancial lossalmost would be almost more bearable than negative effects on the loss would morebebearable than negative effects on the lives of lives of borrowers we funded. ” ” that wethat funded. fromfrom destitution’ destitution’ borrowers Investment Investment banker, banker, UK UK Geographically, Geographically, this riskthis wasrisk ranked was ranked highest highest by Eastern by Eastern Europe Europe (No. 4)(No. and 4) East and East Asia Pacific Asia Pacific (No. 5),(No. but low 5), but elsewhere. low elsewhere. It did not It did varynot much varybymuch respondent by respondent type. type. IncomeIncome volatility volatility is seen is to seen be closely to be closely linked to linked a client’s to a client’s financial financial capability capability and to and to the nature the of nature that person's of that person's work, particularly work, particularly agriculture. agriculture. It is alsoIt seen is also to seen be country to be country specificspecific when itwhen comes it comes to politics to politics and catastrophes. and catastrophes. One UK-based One UK-based consultant consultant suggested suggested that income that income volatility volatility “comes“comes close toclose top three to top[risks] three in [risks] mostinconflictmost conflictaffectedaffected and fragile and states.” fragile states.” An MFIAn representative MFI representative in Guatemala in Guatemala saw several saw several factors factors at work,atincluding work, including “changes “changes in the price in theofprice agricultural of agricultural products, products, productproduct substitution substitution which causes which reduced causes reduced sales, the sales, impact the impact of climate of climate change,change, the issue theofissue gender”. of gender”. One One US-based US-based consultant consultant noted that noted “The thatpoorer “The the poorer client, the the client, more thevulnerable more vulnerable they arethey are to interruptions to interruptions in income in income - most - commonly most commonly due to due health to health shocks shocks and other and other household household crises but crises alsobut duealso to theft, due tofire, theft, accidents fire, accidents and cropand failure.” crop failure.” Some commentators Some commentators viewed viewed the riskthe in quite risk ina quite different a different light, noting light, that noting onethat of the one of the servicesservices that microfinance that microfinance can provide can provide is the management is the management of income of income volatility. volatility. Jesse Jesse Fripp ofFripp Enclude of Enclude saw thissaw riskthis being risk “mitigated being “mitigated by a broader by a broader shift toshift a blend to a ofblend of income-smoothing/asset income-smoothing/asset protecting protecting credit and credit non-credit and non-credit productsproducts and services.” and services.” CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org 51 C S F I / New York CSFI TheThe riskrisk thatthat microfinance microfinance 17.17. Transparency Transparency of objectives: of objectives: service service providers providers will will loselose the the confidence confidence of funders, of funders, partners partners andand clients clients by failing by failing to live to live up to uptheir to their stated stated objectives objectives andand mission. mission. Score: Score: 5.9 5.9 Previous Previous position: position: 11101110 The The responses responses to this to this Banana Banana SkinSkin werewere full full of passion: of passion: “With “With the the recent recent commercialization commercialization of the of sector the sector in total in total disregard disregard of the of initial the initial social social objective, objective, the the reality reality of this of this loss loss of confidence of confidence increases increases by the by the day!” day!” said said Anthony Anthony Kamau Kamau Mwangi, Mwangi, headhead of microfinance of microfinance at K-Rep at K-Rep BankBank in Kenya. in Kenya. Yet Yet the reality the reality is that is that this this Banana Banana SkinSkin ranked ranked veryvery low low on the on risk the risk scale. scale. Moreover, Moreover, concern concern on this on this frontfront has has fallen fallen sharply sharply sincesince our our last last survey survey in 2012 in 2012 (when (when the question the question was was specifically specifically about about the risk the risk of Mission of Mission Drift). Drift). MFMF risks risks losing losing its its distinctive distinctive social social character character The The concern concern was was the familiar the familiar one one that that MF MF providers providers will will be pushed be pushed by commercial by commercial pressures pressures into into easier easier and and moremore profitable profitable markets markets thanthan the deprived the deprived onesones theythey werewere set up set toupserve. to serve. ThisThis would would include include lending lending into into concentrated concentrated urban urban markets markets whenwhen theythey should should be out be seeking out seeking the financially the financially excluded, excluded, lending lending for consumption for consumption rather rather thanthan business business development. development. ThisThis would would cause cause themthem to lose to lose theirtheir distinctive distinctive social social character character and and becoming becoming like like banks. banks. In Africa, In Africa, an MFI an MFI respondent respondent said said his competitor his competitor was was nownow earning earning moremore as anasinsurance an insurance broker broker and and estate estate agentagent thanthan as a as purveyor a purveyor of of microfinance microfinance services. services. LuisLuis Fernando Fernando Sanabria, Sanabria, general general manager manager of Fundación of Fundación Paraguaya, Paraguaya, said said that that “many “many microfinance microfinance institutions institutions havehave forgotten forgotten theirtheir original original mission mission of providing of providing toolstools for for clients clients to progress, to progress, and and havehave focused focused on ensuring on ensuring corporate corporate profitability profitability and and solvency.” solvency.” The The potential potential risksrisks are clear. are clear. Elisabeth Elisabeth Rhyne, Rhyne, managing managing director director of the of Center the Center for for Financial Financial Inclusion Inclusion in the inUS, the US, said said that that “the “the microfinance microfinance sector sector risksrisks being being absorbed absorbed in the in bigger the bigger financial financial system system and and being being unable unable to maintain to maintain its distinctive its distinctive social social character. character. It risks It risks being being unable unable to continue to continue to raise to raise donor donor support support for the for social the social side side of itsofactivities”. its activities”. However, However, judging judging by the by low the low risk risk scorescore attached attached to this to this Banana Banana Skin,Skin, the damage the damage remains remains potential potential rather rather thanthan actual. actual. A respondent A respondent fromfrom Madagascar Madagascar said said that that “there “there is generally is generally strong strong loyalty loyalty between between investors investors and credit and credit institutions. institutions. The The achievement achievement of social of social and and financial financial objectives objectives is broadly is broadly on track.” on track.” A consultant A consultant in France in France said said therethere was was “little “little risk risk herehere because because the donors the donors probably probably needneed the MFIs the MFIs moremore thanthan the the MFIsMFIs needneed to remain to remain in the in MF the MF sector. sector. (They (They support support MFIsMFIs for political for political visibility visibility purposes.)” purposes.)” 10 52 10 In 2012, In 2012, this risk thiswas riskdefined was defined as “Mission as “Mission drift”drift” CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org C S F I / New York CSFI The risk risk that that microfinance microfinance service service providers providers will will fail fail to to 18. 18. Funding: Funding: The attract attract and and retain retain diversified diversified sources sources of of debt debt and and equity equity Score Score5.8 5.8 Previous Previousposition: position:17,19 17,191111 Funding Funding isis seen seen overall overall as as aa low low risk, risk, as as itit was was inin the the previous previous survey survey inin 2012, 2012, mainly mainlybecause becauseititremains remainsgenerally generallyplentiful, plentiful,though thoughthis thisview viewvaries varieswidely widelyacross across the thespectrum spectrumof ofMFIs. MFIs. Concern Concern about about the the availability availability of of funding funding was was strongest strongest inin South South Asia Asia (6.4) (6.4) and and Africa Africa (6.2), (6.2), but but was was very very low low among among North North American American and and European European respondents respondents where where investors investors and and observers observers predominate. predominate. In In short, short, those those receiving receiving funding funding were were more moreconcerned concernedthan thanthose thoseproviding providingit. it. The The problem problem with with funding funding is is that that there there may may be be too too much much of of itit Generally, Generally,funding fundingfor formicrofinance microfinanceisisabundant, abundant,some somewould wouldsay saytoo toomuch muchso sogiven given the the rapid rapid expansion expansionof of capacity capacity inin recent recent years. years. Investors Investors want want toto be beinvolved involvedwith with microfinance, microfinance, and and new new providers providers continue continue toto appear. appear. As As one one respondent respondent said: said: “There “Thereare aretoo toomany manyMIVs MIVschasing chasingtoo toofew fewMFIs”. MFIs”. The The risk risk issues issues have have more more toto do do with with who who gets gets the the money. money. Smaller Smaller MFIs MFIs inin poorer poorer countries countries typically typically find find funding funding aa struggle. struggle. AA respondent respondent from from Kazakhstan Kazakhstan said: said: “We “We have have aa lack lack of of interest interest from from donors donors and and investors”, investors”, and and R. R. Siriwardhane, Siriwardhane, general generalmanager/CEO manager/CEOof ofthe theRegional RegionalDevelopment DevelopmentBank BankininSri SriLanka Lankasaid saidthat that“the “the funds funds mobilized mobilized by by us us are are not not sufficient sufficient toto meet meet demand demand for for microfinancing. microfinancing. IfIf we we could couldobtain obtainlow lowcost costfunds fundswe wecould couldprovide provideaabetter betterservice servicewith withwide widecoverage.” coverage.” For For some some respondents, respondents, the the main main concern concern was was the the increased increased diversion diversion of of capital capital toto commercial commercial MF MF providers providers and and banks, banks, and and away away from from socially socially driven driven NGOs NGOs and and NBFCs. NBFCs. AA US US support support provider provider said: said: “The “The funders funders clearly clearly prefer prefer Tier Tier 11 and and the the upper upper half half of of Tier Tier 22 MF MF providers. providers. At At aa macro macro level level this this can can lead lead toto the the amount amount of of funding fundingtoto[microfinance] [microfinance]being beingsufficient, sufficient,but butatataamicro microlevel level(the (theMFI MFIlevel) level)there there will will be be aa clear clear dominance dominance of of certain certain MFIs MFIs atat the the expense expense of of others”. others”. According According toto the the chief chief executive executive officer officer of of aa global global support support network: network: “Lots “Lots of of private private venture venture money moneyisisgoing goinginto intothe thefor-profit for-profitlenders lenders––that’s that’sterrific, terrific,but butnot notififthe theend endresult resultisis higher higherpriced pricedcapital capitalfor forthe thenon-profit non-profitlenders.” lenders.” However However there there isis an an opposite opposite concern: concern: that that an an overabundance overabundance of of donor donor money money for for weaker weaker MFIs MFIs has has created created aa dependency dependency which which isis holding holding them them back. back. Hans Hans Dieter Dieter Seibel, Seibel, professor professor emeritus emeritus atat the the University University of of Cologne, Cologne, said said that that “continual “continual donor donor support support toto unviable unviable and and unsustainable unsustainable credit credit NGOs NGOs [is [is creating] creating] dependence dependence on on investors investors and and donors donors as as sources sources of of funds, funds, instead instead of of self-reliance self-reliance on on deposit deposit mobilization mobilizationand andretained retainedearnings.” earnings.” Reputation Reputation concerns concerns were were also also expressed. expressed. An An American American support support provider provider believed believed that that“the “theimpact impactof ofcrises crisesininthe thesector sectorover overthe thelast lastcouple coupleof ofyears yearsdoes doesnot notseem seemtoto have have diminished, diminished, and and some some international international donors donors have have new, new, greater greater priorities, priorities, other other than than microfinance”. microfinance”. However, However, as as the the responses responses from from investors investors toto this this survey survey show, show, this thisrisk riskdoes doesnot notappear appeartotohave havematerialized materialized––yet. yet. 1111 InInthe the2012 2012survey, survey,we wedistinguished distinguishedbetween betweenToo Toolittle littlefunding, funding,which whichranked rankedNo. No.17, 17,and andToo Toomuch much funding, funding,No. No.19. 19. CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org 53 C S F I / New York CSFI TheThe riskrisk thatthat microfinance microfinance service service providers providers will will have have 19.19. Liquidity: Liquidity: insufficient insufficient liquidity liquidity to finance to finance theirtheir business business needs. needs. Score: Score: 5.8 5.8 Previous Previous position: position: 10 10 A sharp A sharp decline decline in concern in concern about about liquidity liquidity is one is one of the of big the changes big changes in sentiment in sentiment identified identified by this by this survey. survey. At the At height the height of the of global the global financial financial crisis, crisis, this this was was seenseen as as a topa Banana top Banana SkinSkin facing facing the industry. the industry. But times But times havehave changed. changed. The The fall can fall be canattributed be attributed to a to number a number of things. of things. One One is tighter is tighter regulation, regulation, and and closer closer involvement involvement by central by central banks banks in some in some countries countries in the in provision the provision of liquidity of liquidity to MF to MF providers. providers. Another Another is the is abundance the abundance of funding of funding in many in many markets, markets, and and the readiness the readiness of donors of donors to provide to provide liquidity liquidity assistance assistance where where needed. needed. Liquidity Liquidity risk risk is is lowlow butbut could could bounce bounce back back Nonetheless, Nonetheless, this this is not is anotrisk a risk which which can can be viewed be viewed withwith any any complacency. complacency. As aAs a number number of respondents of respondents pointed pointed out, out, liquidity liquidity crises crises can can hit overnight, hit overnight, and and cashcash flowflow management management remains remains crucial. crucial. Many Many werewere concerned concerned that,that, as one as one respondent respondent put it, put it, “most “most MFIsMFIs do not do have not have much much skillskill in liquidity in liquidity management”. management”. Another Another concern concern is theis impact the impact of growing of growing competition competition for savings for savings and and deposits deposits in a in a market market where where established established MFIsMFIs suchsuch as co-operatives as co-operatives havehave longlong enjoyed enjoyed a surplus a surplus of of funds. funds. Angela Angela Maria Maria Valencia Valencia Maya, Maya, director director of Microfinanzas of Microfinanzas Confiar Confiar Cooperativa Cooperativa Financiera Financiera in Colombia, in Colombia, said said that that “given “given the the highhigh levellevel of competition of competition for this for this market, market, banks banks cannot cannot afford afford to betobehind be behind in losing in losing strategies strategies and opportunities.” and opportunities.” ThisThis is also is also an area an area where where the level the level of risk of risk varies varies withwith locallocal conditions. conditions. The The survey survey showed showed concern concern to betohigh be high in Africa, in Africa, South South AsiaAsia and and EastEast AsiaAsia Pacific, Pacific, but low but low in in LatinLatin America, America, Middle Middle EastEast and and North North Africa. Africa. In the In Philippines, the Philippines, a respondent a respondent fromfrom a development a development bankbank said said that that liquidity liquidity shortage shortage was was “a major “a major impediment impediment to to growth”, growth”, but in butGuatemala, in Guatemala, a banker a banker said said “there “there is availability is availability of funds of funds for the forsector, the sector, but this but could this could be affected be affected if indebtedness if indebtedness grows grows and risk and risk indicators indicators rise”.rise”. MiBanco. MiBanco. Banex. Banex. BothBoth cases cases prove prove that that eveneven an “industry an “industry darling darling ” MFI ” MFI that that has has beenbeen highly successful, was was previously well-performing, deposit-taking, amply highly successful, previously well-performing, deposit-taking, amply funded locally cross-border, canor failbeorsold be sold at price low price if it has funded locally and and cross-border, can fail at low if it has insufficient liquidity. It happen can happen to MFI, any MFI, quickly results. insufficient liquidity. It can to any and and veryvery quickly withwith dire dire results. MFIsMFIs are financial are financial intermediaries: intermediaries: liquidity liquidity is paramount. is paramount. Abrams, Microfinance Analytics, JulieJulie Abrams, Microfinance Analytics, USA USA 54 CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org C S F I / New York CSFI APPENDIX: The questionnaire Microfinance Banana Skins 2014 Each year we ask practitioners and observers of the microfinance industry to describe their main concerns about the risks facing the business as they look ahead 2-3 years. The focus of the survey is on microfinance service providers of all types who are commercially scalable. 1. Who you are: a. Name b. Institution c. Position d. Country where you are based e. Replies are in confidence, but if you are willing to be quoted by name in the report please check the box. 2. Please select what best describes your role in microfinance: Option 1. I work for a microfinance service provider. i. A for-profit financial institution (NBFI, bank) ii. A not-for-profit financial institution (NGO, cooperative) iii. Other microfinance service provider/non-financial institution (including microinsurance, payment services, technology, etc) Please indicate the share of your institution's business in microfinance: i. 0-1/3 ii. 1/3-2/3 iii. More than 2/3 Option 2. I invest in microfinance service providers as a i. Private sector investor ii. Development finance institution iii. Fund manager/MIV iv. Other Option 3. I provide support to microfinance service providers as a i. Network/association ii. Foundation iii. Donor iv. Other Option 4. I work for an organisation which regulates or supervises institutions which provide microfinance services. Option 5. I am an observer, academic or consultant with microfinance. i. I work primarily with microfinance service providers ii. I work primarily with investors/donors iii. I work primarily with regulators iv. I work with all the above. CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org 55 C S F I / New York CSFI Option 6. I work for a rating agency Option 7. Other (please state) 3. Please describe, in your own words, the main risks you see facing the microfinance industry over the next 2-3 years, and any sub-sector with which you may be especially familiar. 4. Risks Below is a list of potential risks to the microfinance industry grouped by whether they originate mainly from the service provider, the client or the market environment. Please rate the severity of each on a scale of 1-10 (1 being negligible, 10 being acute), and provide comments. SERVICE PROVIDER 1. Credit risk The risk that poor lending practices will lead to loan losses. 2. Governance The risk that the boards of microfinance providers will fail to provide the necessary oversight and strategic direction. 3. Staffing The risk that microfinance service providers will fail to recruit and retain suitably qualified staff. 4. Liquidity The risk that microfinance service providers will have insufficient liquidity to finance their business needs. 5. Management The risk that poor management in microfinance service providers will damage the business. 6. Product risk The risk that microfinance service providers will not offer appropriate products to clients because of a failure to understand their changing needs. 7. Risk management The risk that microfinance service providers will fail to identify and manage the risks in their business. 8. Strategy The risk that microfinance service providers will fail to provide a service that makes them relevant and competitive in a changing marketplace. 56 CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org C S F I / New York CSFI 9. Technology management The risk that microfinance service providers will suffer losses from IT mismanagement or fail to capitalise on new developments in IT. 10. Transparency of objectives The risk that microfinance service providers will lose the confidence of funders, partners and clients by failing to live up to their stated objectives and mission. CLIENT 11. Client relationships The risk that poor client relationship management will lead to damaging client behaviour, eg an unwillingness to repay their loans. 12. Financial capability The risk that clients will not be able to make informed decisions because of lack of financial knowledge. 13. Income volatility to repay their loans. The risk that fluctuations in clients’ income will affect their capacity 14. Overindebtedness The risk that clients will borrow beyond their capacity to repay. MARKET ENVIRONMENT 15. Competition The risk that the growth of competition from existing providers and new entrants will cause microfinance service providers to compromise their business and ethical standards 16. Funding The risk that microfinance service providers will fail to attract and retain diversified sources of debt and equity 17. Macro-economic risk The risk that microfinance service providers and their clients will be damaged by trends in the wider economy, such as inflation, volatile commodity prices and lack of growth 18. Political interference distort the market The risk that intervention by politicians will harm the sector and 19. Regulation The risk that microfinance services will not develop because of a lack of appropriate prudential supervision and regulation. 5. What keeps you up at night? Please describe risks which concern you particularly as an institution or an individual involved with microfinance. CSFI / New York CSFI E-mail: info@csfi.org Web: www.csfi.org 57 CSFI PUBLICATIONS 114. “MICROFINANCE BANANA SKINS 2014: Facing reality” By David Lascelles, Sam Mendelson and Daniel Rozas. July 2014. ISBN 978-0-9926329-1-5. Free 113. “BANKING BANANA SKINS 2014: inching towards recovery” By David Lascelles and Keyur Patel. May 2014. ISBN 978-0-9926329-0-8. £25/$45/€35 112. “INSURANCE BANANA SKINS 2013: the CSFI survey of the risks facing insurers” By David Lascelles and Keyur Patel. July 2013. ISBN 978-0-9570895-9-4. £25/$45/€35 111. “CHINA’S BANKS IN LONDON” By He Ying. July 2013. ISBN 978-0-9570895-8-7. £10/$15/€15 110. “BATTING FOR THE CITY: DO THE TRADE ASSOCIATIONS GET IT RIGHT? By Keyur Patel. June 2013. ISBN 978-0-9570895-7-0. £25/$45/€35 109. “INDEpENDENT RESEARCH: because they’re worth it?” By Vince Heaney. November 2012. ISBN 978-0-9570895-6-3. £25/$45/€35 108. “COMBINING SAFETY, EFFICIENCY AND COMpETITION IN EUROpE’S pOST-TRADE MARKET” By Peter Norman. October 2012. ISBN 978-0-9570895-5-6. £25/$45/€35 107. “SEEDS OF CHANGE: Emerging sources of non-bank funding for Britain's SMEs” By Andy Davis. July 2012. ISBN 978-0-9570895-3-2. £25/$45/€35 106. “MICROFINANCE BANANA SKINS 2012: the CSFI survey of microfinance risk” By David Lascelles and Sam Mendelson. July 2012. ISBN 978-0-9570895-4-9. Free 105. “GENERATION Y: the (modern) world of personal finance” By Sophie Robson. July 2012. ISBN 978-0-9570895-2-5. £25/$45/€35 104. “BANKING BANANA SKINS 2012: the system in peril” By David Lascelles. February 2012. ISBN 978-0-9570895-1-8. £25/$45/€35 103. “VIEwS ON VICKERS: responses to the ICB report” November 2011. ISBN 978-0-9570895-0-1. £19.95/$29.95/€22.95 102. “EVOLUTION AND MACRO-pRUDENTIAL REGULATION” By Charles Taylor. October 2011. ISBN 978-0-9563888-9-6. £25/$45/€35 101. “HAS INDEpENDENT RESEARCH COME OF AGE?” By Vince Heaney. June 2011. ISBN 978-0-9563888-7-2. £25/$45/€35 100. “INSURANCE BANANA SKINS 2011: the CSFI survey of the risks facing insurers” May 2011. ISBN 978-0-9563888-8-9. £25/$45/€35 99. “MICROFINANCE BANANA SKINS 2011: the CSFI survey of microfinance risk” February 2011. ISBN 978-0-9563888-6-5. £25/$45/€35 98. “INCLUDING AFRICA - BEYOND MICROFINANCE” By Mark Napier. February 2011. ISBN 978-0-9563888-5-8. £25/$45/€35 97. “GETTING BRUSSELS RIGHT: “best practice” for City firms in handling EU institutions” By Malcolm Levitt. December 2010. ISBN 978-0-9563888-4-1. £25/$45/€35 96. “pRIVATE EqUITY, pUBLIC LOSS?” By Peter Morris. July 2010. ISBN 978-0-9563888-3-4. £25/$45/€35 95. “SYSTEMIC pOLICY AND FINANCIAL STABILITY: a framework for delivery” By Sir Andrew Large. June 2010. ISBN 978-0-9563888-2-7. £25/$45/€35 94. “STRUGGLING Up THE LEARNING CURVE: Solvency II and the insurance industry” By Shirley Beglinger. June 2010. ISBN 978-0-9563888-1-0. £25/$45/€35 93. “INVESTING IN SOCIAL ENTERpRISE: the role of tax incentives” By Vince Heaney. May 2010. ISBN 978-0-9561904-8-2. £25/$45/€35 92. “BANANA SKINS 2010: after the quake” Sponsored by PwC. By David Lascelles. February 2010. ISBN 978-0-9561904-9-9. £25/$45/€35 91. “FIXING REGULATION” By Clive Briault. October 2009. ISBN 978-0-9563888-0-3. £25/$40/€27 90. “CREDIT CRUNCH DIARIES: the financial crisis by those who made it happen” By Nick Carn and David Lascelles. October 2009. ISBN 978-0-9561904-5-1. £9.99/$15/€10 89. “TwIN pEAKS REVISITED: a second chance for regulatory reform” By Michael W. Taylor. September 2009. ISBN 978-0-9561904-7-5. £25/$45/€35 88. “NARROw BANKING: the reform of banking regulation” By John Kay. September 2009. ISBN 978-0-9561904-6-8. £25/$45/€35 87. “THE ROAD TO LONG FINANCE: a systems view of the credit scrunch” By Michael Mainelli and Bob Giffords. July 2009. ISBN 978-0-9561904-4-4. £25/$45/€35 86. “FAIR BANKING: the road to redemption for UK banks” By Antony Elliott. July 2009. ISBN 978-0-9561904-2-0. £25/$50/€40 For more CSFI publications, please visit our website: www.csfi.org Sponsorship The CSFI receives general support from many public and private institutions, and that support takes different forms. The Centre currently receives financial support from; inter alia: Ruffer PwC Citigroup Fitch Ratings Arbuthnot J.P. Morgan Accenture EY Aberdeen Asset Management ABI ACCA Aviva Bank of England Barclays CGI Chartered Insurance Institute City of London Council of Mortgage Lenders Deloitte DTCC Endava Eversheds FCA FIA Europe Fidelity International Finance & Leasing Association FRC FTI Consulting Gatehouse Bank HSBC ICMA Jersey Finance KPMG Law Debenture Corporation Legal & General Lloyds Banking Group Markit Moody’s Morgan Stanley Nabarro Nomura Institute OMFIF Payments Council Prudential Quiller Consultants Record Currency Management Royal Bank of Scotland Santander Schroders Standard Chartered Thomson Reuters WMA Z/Yen Zurich Absolute Strategy Association of Corporate Treasurers AFME Allen & Overy Bank of Italy Bank of Japan Berenberg Bank Brigade Electronics CISI Cognito Media EBRD Fairbanking Foundation Granularity HM Treasury Intrinsic Value Investors Investment Management Association Kreab Gavin Anderson Lansons Communications LEBA and WMBA Lending Standards Board Lombard Street Research MacDougall Auctions NM Rothschild Nutmeg Oxera Raines & Co Skadden, Arps TheCityUK The Share Centre Zopa The CSFI also receives support in kind from, inter alia: ifs University College Linklaters King & Wood Mallesons SJ Berwin SWIFT TPG Design BBA Clifford Chance Dentons Financial Times GISE AG The Centre has received special purpose funding from: Citi and CFI (for Microfinance Banana Skins); PwC (for Banking Banana Skins and Insurance Banana Skins); and Euro IRP (for Independent Research: because they’re worth it?). In addition, it has set up the following fellowship programmes: the PIC/CSFI fellowship in Pensions the Swiss Re/CSFI fellowship in Insurance; the DTCC/CSFI fellowship in Post-Trade Architecture; the VISA/CSFI fellowship in Identity in Financial Services; and the DFID/Citi/CSFI fellowship in Development. UK £25 US $45 €35 CSFI © 2 0 1 4 CSFI Registered Charity Number 1017352 Registered Office: North House, 198 High Street, Tonbridge, Kent TN9 1BE Registered in England and Wales limited by guarantee. Number 2788116

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