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
Trustees
Governing Council
Geoffrey Bell
Rudi Bogni
Philip Brown
Staff
Prof Charles Goodhart

Rene Karsenti
Belinda Richards
Carol Sergeant
Centre for the Study of Financial Innovation (CSFI)
CSFI / New York CSFI

NUMBER ONE HUNDRED AND FOURTEEN
JULY 2014
Preface
Banana Skins
microcredit
interesting challenges.
tour dhorizon
Andrew Hilton
CSFI
David Lascelles Sam Mendelson and Daniel Rozas
Sponsors foreword
technologies.
Citi Foundation
Center for Financial Inclusion
Contents
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Who said what...............................................................................................................................................................
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Abbreviations
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%

The breakdown by countries is as follows
Algeria
Germany
Palestinian Terrs.
Australia
Austria
Azerbaijan
Ghana
Paraguay
Guatemala
Peru
Honduras
Philippines
Bahamas
India
26
Poland
Bangladesh
Iraq
Romania
Belgium
Italy
Rwanda
Benin
Jordan
Senegal
Bolivia
Kazakhstan
South Africa
Bosnia & Herz.
Kenya
Spain
Brazil
Kosovo
Sri Lanka
Cameroon
Laos
Switzerland
Canada
Lebanon
Tajikistan
Chile
Luxembourg
Tanzania
Colombia
Madagascar
Togo
Congo, Rep. of
Mali
Cte d'Ivoire
Mexico
Dominican Rep.
Ecuador
Egypt
Ethiopia
France
Gabon
Georgia
Uganda
15
UAE
Morocco
UK
24
Mozambique
USA
61
Nepal
Uruguay
Netherlands
Venezuela
Niger
Vietnam
Nigeria
Pakistan
describes
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
Thesurvey,
survey,the
thefifth
fifthinina aseries
series
dating
datingback
backtoto2008,
2008,is isdesigned
designed
totoassess
assesstwo
twoclasses
classesofofrisk:
risk:
those
those that
that microfinance
microfinance has
has
faced
facedforforsome
someyears
years(i.e.
(i.e.quality
quality
ofof management,
management, governance,
governance,
funding,
funding,credit)
credit)and
andnewer
newerrisks
risks
associated
associated with
with itsits evolution:
evolution:
structure,
structure, strategy,
strategy, product
product
design
design and
and technological
technological
innovation.
innovation.InIna achange
changefrom
from
previous
previoussurveys,
surveys,it itrecognises
recognises
that
thatmicrofinance
microfinanceis isnonolonger
longer
the
the preserve
preserve ofof purpose-built
purpose-built
institutions,
institutions,but
butalso
alsoofofother
other
types
types ofof provider
provider such
such asas
commercial
commercial
banks,
banks, and
and
insurance,
insurance,payment
paymentservice
serviceand
and
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,ororBanana
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
We
Wehave
havesub-titled
sub-titledthis
thisreport
report
because
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.

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
urgentand
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
Marketsaturation
saturationwas
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

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
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.
'Many MFIs are

running without
strategies'
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
industrys 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

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.

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.

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 ofinstitutional
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.
6.4
6.1
Macroeconomy

5.8
Liquidity
5.8
Funding
Finance
interference
6.5
Financial
capability
6.2
6.0
Income
6.3
6.5
structure
Management
Client
6.1
indebtedness
7.5
Client capacity
6.7
Credit
risk
6.9
5.9
Transparency of
6.9
Strategy
6.7
6.8
Risk
management
6.0
management
6.2
Product risk
>55%
% correlated:

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 providers
the providers
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.

What keeps you up at night?
To gain a deeper insight into peoples 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 MFIsThis is going to be one of the grave risks
for the MF sector in India.
Dr. S. Santhanam, Consultant, Development Finance, India

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

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
wasthe
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
thatthe
the
main
mainrisksinclude
risksincludecompetition
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
thatmany
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
werevery
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.

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
thatin
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
Overindebtedness
7.6
7.6
Competition
2 2 Competition
7.3
7.3
Governance
3 3 Governance
6.9
6.9
4 4 Political
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
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
objectives 5.5
5.5
responsAbility
responsAbility Investments
Investments inin Switzerland
Switzerland 1818 Client
5.4
Clientrelationships
relationships
5.4
said
saidthat
thatpoliticians'
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
thatmany
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
thatthe
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.

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
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
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
objectives
6.1
6.1
1717 Technology
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
thatwhen
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
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.

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
6.4
10 Technology management
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.

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.

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
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
areare
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,
thethe
microfinance
microfinance
sector
sector
willwill
faceface
moremore
and and
tighter
tighter
regulations
regulations
in future.
in future.

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:
TheThe
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
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
richrich
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
peoples
peoples
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
thethe
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.

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 thatoverover- 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
thethe
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
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
thethe
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
thethe
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.

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.
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
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.

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
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
theas
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
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.

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
risksrisks
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.

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
16 Income
5.7
5.7
5.6
5.6
Respondents
Respondents
concernconcern
about about
institutional
institutional
17 Client
5.5
17relationships
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
saidthe
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.

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
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
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
saidmost
that most
MFIs are
MFIsmanaged
are managed
by
by
professionals
professionals
and have
andgood
havegovernance.
good governance.
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 industrys changing face
__________________________
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
of microfinances 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 microfinances product line. The focus on poverty
alleviation began to give way to a broader Financial Inclusion agenda whose purpose was to
deliver
New means of assessing the social impact of microfinance evolved to guide the industrys
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 Governments All-Party Parliamentary Group (APPG) on Microfinance in
2011 quoted Milford Bateman: The microfinance movementhas failed to provide robust evidence that it is meaningfully associated with
poverty reductionmany 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 years
,
, 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
report
,
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 sectors
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, Indias 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
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.
2006
2011
2005
2010
2012
2007
MF
2013
2008
2014
2009
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 worlds 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 industrys 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 microfinances
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 Banks 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
that on current
evidence, the best estimate of the average impact of micro
on the poverty of clients is
zero [emphasis ours].
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.
All this was not to say that the provision of financial services to underserved areas of the
population didnt 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 didnt discover that microfinance launches people
out of poverty, we did discover that its 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
survey, entitled
, 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
stay relevant today and tomorrow?
Another important study around this time,
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.
Much recent research has pointed to under-appreciated aspects of poor peoples lives. Being
poor and financially excluded is about more than lack of money; the high
of
peoples 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
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
of microfinance,
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
: 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
: 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
Leveraging
opportunities as they
arise
Asset, illness,
Asset
illness death
insurance
Fig 1: The Client Financial Lifecycle with thanks to Microsave
What products
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 persons life cycle, is illustrated in the figure above.
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 years 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 industrys 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
Management quality
Credit risk
Corporate governance
Liquidity
Inappropriate regulation
Macro-economic trends
Cost control
Management quality
Staffing
Refinancing
Interest rates
Too little funding
Competition
Managing technology
Foreign currency
Political interference
Competition
10
Credit risk
10
2011
2012
Losing its fairy dust
Staying relevant
Credit risk
Overindebtedness
Reputation
Competition
Management quality
Credit risk
Inappropriate regulation
Quality of risk mgt.
Management quality
Client management
Staffing
Competition
Mission drift
Regulation
10
Unrealisable expectations
10
Liquidity
2014
Facing reality
1
Overindebtedness
Credit risk
Competition
Risk management
Governance
Strategy
Management
Regulation
10
Staffing
Together, these products should deliver:

, which requires proximity to the MFI and user-friendly hours;
, which means local agents, ATM cards or mobile money to avoid having
to deal with crowded branches and complicated forms; and
, 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
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 managements 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.
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 worlds poor.
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.
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 Campaigns Client Protection Principles set out a basic list of do-no-harm standards
(including MFTransparency-based interest rate disclosures). The UN-PRIs 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 sectors 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.
Technologys 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
EUROPE AND
CENTRAL ASIA
MIDDLE EAST AND
NORTH AFRICA
179
EAST ASIA AND

PACIFIC
150
116
LATIN AMERICA
AND CARIBBEAN
100
64
50
0
SOUTH ASIA
38
1
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
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 UNs Year of Microcredit, the sector
also saw the emergence of a new source of funding: social investors seeking to make a
difference to poor peoples 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
$8
MF Portfolio
70
1.7
$6
1.7
60
1.8
$5
80
50
1.1
$4
40
0.8
6.2
$3
$2
$1
0.5
0.5
3.8
4.2
4.7
# of survey p
participants
Assets
ts (in USD
US billions)
1.9
Survey participants
$7
30
5.3
20
3.1
10
1.5
0.7
0
$0
2005
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. Its 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
yesterdays 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. Whats 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. Its 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 dont 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). Its likely to remain a high
concern for some time and it may well be that
still
includes it as
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, weve seen
overlending on a massive scale to consumers in the worlds 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 industrys 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
report has revealed an
industry which can still learn, innovate and adapt.
For West
ForEuropean
West European
respondents,
respondents,
the greatest
the greatest
risk facing
risk facing
the microfinance
the microfinance
industryindustry
is
is
overindebtedness
overindebtedness
and its
and financial
its financial
and and
reputational
reputational
fall-out.fall-out.
Daniel Daniel
Schriber,
Schriber,
director,
director,
investment
investment
operations
operations
at Symbiotics
at Symbiotics
in Switzerland,
in Switzerland,
said that
saidgrowth
that growth
has been
has been
globallyglobally
strong strong
and well
andmanaged
well managed
in mostin most
regionsregions
over the
over
pastthefew
pastyears.
few Regulation
years. Regulation
has improved
has improved
in mostin countries.
most countries.
However,
However,
risks linked
risks linked
to over-indebtedness
to over-indebtedness
in some
in some
countries
countries
remain remain
and as and
suchasI such
continue
I continue
to
to
think that
think
thisthat
is the
thislargest
is the largest
risk microfinance
risk microfinance
is facing
is in
facing
the coming
in the coming
years.years.
Respondents
Respondents
linked linked
these risks
these torisks
intense
to intense
competition
competition
in manyinmarkets
many markets
drivingdriving
MFIs toMFIs to
take greater
take greater
lendinglending
risks, and
risks,
to weakness
and to weakness
in
in
internalinternal
governance
governance
and controls.
and controls.
A
A
respondent
respondent
from afrom
leading
a leading
investment
investment
firm firm
was concerned
was concerned
that there
thathad
there
been
hadno
been
real
no real
progress
progress
in the in
improvement
the improvement
of governance
of governance
and good
andpractices.
good practices.
On the On
riskthe
management
risk management
front, there
front, was
thereconcern
was concern
that improvement
that improvement
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.

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
Fundacin
Fundacin
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.

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 isaaperennial
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
theSMART
SMARTCampaign
Campaign[is]
[is]raising
raisingawareness
awarenessininthis
thisarea.
area.Similarly,
Similarly,Rashmi
Rashmi
Singh
SinghofofSKS
SKSMicrofinance,
Microfinance,Indias
Indiaslargest
largestMFI,
MFI,said
saidthat
thatthe
theuse
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

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 sectors 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)
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.

oftenoften
identified
identified
as the
as the
chiefchief
culprit.
culprit.
Jessie
Jessie
Greene,
Greene,
senior
senior
investment
investment
officer
officer
at at
Dveloppement
Dveloppement
international
international
Desjardins
Desjardins
in Canada,
in Canada,
saidsaid
that that
newnew
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
thethe
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.
33

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,
dont stick
or dont
to industry
stick torules,
industry
makes
rules,
thismakes
competition
this competition
unfair unfair
in peoplesineyes.
peoples 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 hisfaces
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.
This surveys
This results
surveys
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.

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
thethe
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
riskrisk
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.

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
countrys
microfinance
performance
in
microfinance
performance
in
the
countrys
microfinance
performance in the countrys 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
10
20%
because
Peru
was
ranked
at
1010
20%
because
Peru
was
ranked
atat
20%
because
Peru
was
ranked
Profit
10
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 sectors malaise is the recent sale of MiBanco, the countrys largest
AAMFI.
symptom
the
sectors
malaise
isisthe
recent
sale main
of MiBanco,
the
countrys
symptom
of
sectors
malaise
recent
the
countrys
Besetofby
internal
liquidity
problems,
shareholder
put largest
itlargest
up
A symptom
of the
the
sectors
malaise
is the
the MiBanco's
recent sale
sale of
of MiBanco,
MiBanco,
the ACP,
countrys
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
nearly
half
commanded
bybyother
Peru When
MFIs in
thearecent
past, 7
valuation
was
nearly
that
other
in
recent
and not was
only
of that
MiBanco's
immediate
valuation
wasbecause
nearly half
half
that commanded
commanded
byproblems.
other Peru
Peru MFIs
MFIssuch
in the
the well-known
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 worlds largest microfinance market by assets8, and also its largest for
88
9
foreign
investment
. Put microfinance
together, the market
situationbyby
inassets
the country
worrying.
Yet for
there
Peru
is the
worlds largest
, and is
also
its largest
Peru
Peru is
is the
the worlds
worlds9 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
sectors
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
sectorsa highly
infrastructure and
regulation may
are
are also
also signs
signs of
of hope.
hope. The
The sectors
sectors 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
when Edyficar itself was
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

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
institutions
the
institutions
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.

6. 6.
Strategy:
Strategy:
TheThe
riskrisk
thatthat
microfinance
microfinance
service
service
providers
providers
willwill
fail fail
to to
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

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.
39

7.7.Political
Politicalinterference:
interference:The
Therisk
riskthat
thatintervention
interventionbybypoliticians
politicians
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
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
Economa
Popular
y Solidaria
(EPyS)
and
more
activities.
Today
wewe
have
a law
onon
Economa
Popular
y Solidaria
(EPyS)
and
more
than
than
five
five
committees
committees
and
and
institutions
institutions
to to
address
address
thethe
subsector,
subsector,
including
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
doesnt
doesnt
necessarily
necessarily
make
make
good
good
policy,
policy,
either.
either.
Government-sponsored
Government-sponsoredloan
loanprogrammes,
programmes,such
suchasasKenyas
KenyasUWEZO
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 yearsbut
5 yearsbut
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.

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.
8. Management:
Management: The
The risk
risk that
that poor
poor management
management in
in microfinance
microfinance
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.

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
microfinances
microfinancesrole.
role.More
MoreMFIs
MFIsare
arealso
alsoreaching
reachinga asize
sizewhere
whereprofessionalism
professionalismmust
must
replace
replacephilanthropy.
philanthropy.There
Thereare
aretoo
toomany
manydo-gooders
do-gooderssaid
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
werebalancing
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:ItItisisnot
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
thatmany
manyMFIs
MFIshave
haveexcellent
excellentmanagement
managementand
andprocedures.
procedures.
9.9.Regulation:
Regulation:The
Therisk
riskthat
thatmicrofinance
microfinanceservices
serviceswill
willnot
notdevelop
develop
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
thatthere
therewont
wontbebea 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

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:
InIn
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.

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
interference
7.0
7.0
6.5
6.5
2 2 Regulation
Regulation
6.6
6.6
6.4
6.4
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
governmenthas
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
providers

10. Staffing:
10. Staffing:
The risk
Thethat
riskmicrofinance
that microfinance
serviceservice
providers
providers
will failwill
to fail to
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).

11. 11.
Financial
Financial
capability:
capability:
The risk
The that
risk that
clients
clients
will not
will be
notable
be able
to to
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 borrowers
the borrowers
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
saidthere
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.

12.12.
Product
Product
risk:
risk:
TheThe
riskrisk
thatthat
microfinance
microfinance
service
service
providers
providers
will will
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
thethe
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.

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
risksAgricultural
risksAgricultural
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.

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

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
veryvery
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
failfail
to fully
to fully
embrace
embrace
technology.
technology.
It will
It will
disrupt
disrupt

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 borrowers
to a borrowers
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 clients
to a clients
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
comescomes
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.

17.17.
Transparency
Transparency
of objectives:
of objectives:
TheThe
riskrisk
thatthat
microfinance
microfinance
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 Fundacin
of Fundacin
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
10
In 2012,
In 2012,
this risk
thiswas
riskdefined
was defined
as Mission
as Mission
driftdrift

18.
18. Funding:
Funding: The
The risk
risk that
that microfinance
microfinance service
service providers
providers will
will fail
fail to
to
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.
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 problem
problem with
with
funding
funding is
is that
that
there
there may
may be
be too
too
much
much of
of itit
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
thatthe
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
lendersthats
thatsterrific,
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
thatthe
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
materializedyet.
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.

19.19.
Liquidity:
Liquidity:
TheThe
riskrisk
thatthat
microfinance
microfinance
service
service
providers
providers
will will
have
have
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

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.

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.

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 PUBLICATIONS
114. MICROFINANCE BANANA SKINS 2014: Facing reality
113. BANKING BANANA SKINS 2014: inching towards recovery
112. INSURANCE BANANA SKINS 2013: the CSFI survey of the risks facing insurers
111. CHINAS BANKS IN LONDON
110. BATTING FOR THE CITY: DO THE TRADE ASSOCIATIONS GET IT RIGHT?
109. INDEpENDENT RESEARCH: because theyre worth it?
108. COMBINING SAFETY, EFFICIENCY AND COMpETITION IN EUROpES pOST-TRADE MARKET
107. SEEDS OF CHANGE: Emerging sources of non-bank funding for Britain's SMEs
106.
105. GENERATION Y:
104. BANKING BANANA SKINS 2012: the system in peril

103. VIEwS ON VICKERS: responses to the ICB report
102. EVOLUTION AND MACRO-pRUDENTIAL REGULATION
101. HAS INDEpENDENT RESEARCH COME OF AGE?
100. INSURANCE BANANA SKINS 2011: the CSFI survey of the risks facing insurers
99. MICROFINANCE BANANA SKINS 2011:
98. INCLUDING AFRICA - BEYOND MICROFINANCE
97. GETTING BRUSSELS RIGHT:
96. pRIVATE EqUITY, pUBLIC LOSS?
95. SYSTEMIC pOLICY AND FINANCIAL STABILITY: a framework for delivery
94. STRUGGLING Up THE LEARNING CURVE: Solvency II and the insurance industry
93. INVESTING IN SOCIAL ENTERpRISE: the role of tax incentives
92. BANANA SKINS 2010: after the quake
91. FIXING REGULATION

90. CREDIT CRUNCH DIARIES
89. TwIN pEAKS REVISITED: a second chance for regulatory reform
88. NARROw BANKING: the reform of banking regulation
87. THE ROAD TO LONG FINANCE: a systems view of the credit scrunch
86. FAIR BANKING: the road to redemption for UK banks
Sponsorship
inter alia:
Ruffer
PwC
Citigroup
Fitch Ratings
Barclays
CGI
Chartered Insurance Institute
Endava
Eversheds
Prudential
Quiller Consultants
Fidelity International
Santander
Schroders
Standard Chartered
FRC
FTI Consulting
Brigade Electronics
CISI
TheCityUK
The Share Centre
Granularity
inter alia:
ifs University College
Financial Times
SWIFT
Citi and CFI (for

PwC (for Banking Banana Skins and Insurance Banana Skins
Euro IRP (for Independent Research: because theyre worth it?).
the PIC/CSFI fellowship in Pensions
UK 25
US $45
35
CSFI
CSFI

2014 Microfinance Banana Skins

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Microfinance

Centre for the Study of

C S F I / New York CSFI

Prof Charles Goodhart

Centre for the Study of Financial Innovation (CSFI)

CSFI / New York CSFI

CSFI / New York CSFI

C S F I / New York CSFI

C S F I / New York CSFI

David Lascelles Sam Mendelson and Daniel Rozas

CSFI / New York CSFI

C S F I / New York CSFI

CSFI / New York CSFI

C S F I / New York CSFI

CSFI / New York CSFI

C S F I / New York CSFI

About this survey

The breakdown by geography is as follows:

CSFI / New York CSFI

C S F I / New York CSFI

Bosnia & Herz.

CSFI / New York CSFI

C S F I / New York CSFI

CSFI / New York CSFI

C S F I / New York CSFI

CSFI / New York CSFI

C S F I / New York CSFI

'Many MFIs are

CSFI / New York CSFI

C S F I / New York CSFI

CSFI / New York CSFI

C S F I / New York CSFI

CSFI / New York CSFI

C S F I / New York CSFI

CSFI / New York CSFI

CSFI / New York CSFI

C S F I / New York CSFI

C S F I / New York CSFI

CSFI / New York CSFI

C S F I / New York CSFI

CSFI / New York CSFI

C S F I / New York CSFI

CSFI / New York CSFI

C S F I / New York CSFI

CSFI / New York CSFI

C S F I / New York CSFI

CSFI / New York CSFI

C S F I / New York CSFI

CSFI / New York CSFI

C S F I / New York CSFI

This group sees the threat of overindebtedness

CSFI / New York CSFI

C S F I / New York CSFI

CSFI / New York CSFI

C S F I / New York CSFI

CSFI / New York CSFI

C S F I / New York CSFI

CSFI / New York CSFI

C S F I / New York CSFI

CSFI / New York CSFI

C S F I / New York CSFI

CSFI / New York CSFI

C S F I / New York CSFI

CSFI / New York CSFI