by David Lascelles and Sam Mendelson, Centre for the Study of Financial Innovation; June 2009.
For a clear risk report on the microfinance industry, the folks at the Centre for the Study of Financial Innovation give us “Microfinance Banana Skins 2009.” The “banana skins” in their title refers to potential risks, as in the classic cartoon slip-up. This report spotlights current risks associated with the microfinance industry. The risks are identified and ranked by investors, practitioners and regulators.
Microfinance is at a crossroads. It has achieved dramatic growth over the last few years and continues to grow at 25% per annum. Microfinance institutions (MFIs) serve over 100 million borrowers around the world. More than 1,200 MFIs, with assets surpassing $32 billion USD, report to the Microfinance Information eXchange (MIX). Although some thought that MFIs would be insulated from the global financial crisis, in fact the economic climate for microfinance has changed as the broader financial outlook has changed. Andrew Hilton, the Director of CSFI writes: “in the popular press, microfinance is still very much the developmental flavour of the month – and even the most battle-hardened aid veteran has to acknowledge its appeal as an alternative to the conventional ‘top-down’ model for wasting taxpayers’ money. But, as the final box in this report makes clear, microfinance currently faces serious challenges – challenges that have been exacerbated by the global crisis.”
The top microfinance banana skins are credit risk and liquidity. There is a fear that draining credit markets may expose “naked swimmers,” those institutions who were happily afloat when funding was overflowing. The economic crisis compounds weak credit quality inherent in the industry. With increasing competition among MFIs and commercial banks there is concern that standards are eroding as lenders clamour for market share. One of the looming concerns is the high level of indebtedness that already exists with borrowers. There are many juicy nuggets to take away from this report and not nearly enough space here to report on all of them.
To peel the bananas yourself see: www.csfi.org.uk