The Wall Street Journal Online has reported on the comments of Robert Annibale, global director of Citi Microfinance, the arm of the financial services company dedicated to fostering microfinance through funding and support [1,2]. Mr. Annibale believes that more microfinance institutions (MIFs) will begin to “seek banking licenses to broaden their sources of funding” [1]. He sees the lack of liquidity caused by the financial crisis as creating a situation in which MFIs need “diversified funding” and that deposits are one source that MFIs should draw from. In Mr. Annibale’s opinion, deposits have more stable sources of funding in the financial crisis than “selling debt on the capital markets or loans from public and private sector banks” [1]. As debt and credit markets have slowed down during the financial crisis, these sources of funding have been more difficult to obtain, which Mr. Annibale says has not been the case with deposits [1]. He cites the trajectories of MFIs such as Peru’s MiBanco and Mexico’s Banco Compartamos SA, “which started as non-government organizations and later became banks in order to offer a wider range of products” as being indicative of a greater trend to come in microfinance [1,3,4,5,6].
However, the downfall of deposits was highlighted in a Microcapital Monitor “Paper Wrap-Up” in September of 2007. The paper covered, titled “MFI Capital Structure Decision Making: A Call for Greater Awareness,” brings up the point that MFIs often “fail to fully take into account the true cost of deposits” [7]. Although a large number of MFIs in a survey “said that deposits are the cheapest funding source and the easiest one to obtain,” there are also “hidden costs and fees” related to deposits that lead to MFIs “paying much more than they initially expected” [7]. One such cost is “reserves required by supervisory authorities” [8]. Additionally, the paper points out that “very small deposits are seldom profitable on a stand alone basis” [8]. Even Compartamos Banco, cited by Mr. Annibale as evidence of a transition to banking by MFIs, does not accept deposits “because its business model of operating through small offices and loan agents makes it very expensive or impractical” [9]. Liquidity risk is also an issue as “depositors have the right to withdraw savings at any time” [10]. Generally, the study cited finds deposits to be “the cheapest form of capital [only] under very specific circumstances” [7]. A statistical study by the MIX Market, the microfinance information clearinghouse, shows a small decrease in deposits as a percentage of assets for banks that report to the website from 42.1 percent in 2005 to 38.4 percent in 2007 [11].
Citi Microfinance was founded in 2005 with the intention of working “with leading microfinance institutions, microfinance networks, and investors as commercial partners and clients to expand access to financial products and services to individuals that are not currently reached or are underserved by financial institutions” [2]. They currently work with over 100 MFIs in over 40 countries [12]. Citi Microfinance does not report to the MIX Market.
Compartamos Banco was founded in 1990 as an NGO, then became “the first microcredit lender in the world to issue debt in the capital markets,” in 2001, and became a commercial bank in 2006 [5]. According to the MIX Market, Compartamos Banco has a gross loan portfolio of over USD 414.5 million and active borrowers totaling 1,155,850 [6]. As of December 31, 2008, it had a return on assets of 19.12 percent, a return on equity of 55.19 percent, and a debt to equity ratio of 1.85 [6].
MiBanco is a Lima-based “private bank committed to the development of small and micro-businesses” [4]. It was founded in 1998 starting with 13 branches and now has 25 in Peru [4]. According to the MIX Market, MiBanco has a gross loan portfolio of over USD 781 million and over 380,000 active borrowers [4]. As of December 31, 2008, it has a return on assets of 3.68 percent, a return on equity of 38.96 percent, and a debt to equit ratio of 10.8 [4]. They also had deposits totalling 60.19 percent of total assets [4].
By Christopher Maggio, Research Assistant
Bibliography
[1] Wall Street Journal Online article entitled ‘Citi Exec: Crisis To Spur Microfinance Move Toward Banking Model’: http://online.wsj.com/article/BT-CO-20090924-708974.html
[2] Citi Microfinance: http://www.citibank.com/citi/microfinance/about.htm
[3] MiBanco (in Spanish): http://www.mibanco.com.pe/
[4] MiBanco on the MIX Market: http://www.mixmarket.org/mfi/mibanco
[5] Compartamos Banco: http://www.compartamos.com/wps/portal
[6] Compartamos Banco on the MIX Market: http://www.mixmarket.org/mfi/compartamosbanco/data
[7] MICROCAPITAL MONITOR PAPER WRAP-UP: MFI Capital Structure Decision Making: A Call for Greater Awareness: http://microcapitalmonitor.com/cblog/index.php?/archives/1169-PAPER-WRAP-UP-MFI-Capital-Structure-Decision-Making-A-Call-for-Greater-Awareness.html
[8] CGAP Brief entitled ‘MFI Capital Structure Decision Making: A Call for Greater Awareness,’ published by CGAP and the Grameen Foundation: http://www.microfinanceregulationcenter.org/files/43635_file_CGAP_Brief_August2007.pdf
[9] India Microfinance article entitled ‘Compartamos Banco Reports 2Q09 Results – Net Profit up 31%’: http://www.indiamicrofinance.com/microfinance/listed-microfinance-companies/compartamos-banco-reports-2q09-results-net-profit-up-31.html
[10] MICROCAPITAL MONITOR PAPER WRAP-UP: ‘MFI Capital Structure Decision Making: A Call for Greater Awareness’: https://www.microcapital.org/microcapital-paper-wrap-up-asset-and-liability-management-for-deposit-taking-microfinance-institutions-kara-bloom/
[11] MIX Market study entitled ‘Trend Lines 2005 – 2007 MFI Benchmarks’: http://www.themix.org/publications/trend-lines-2005-2007-mfi-benchmarks
[12] OPIC press release entitled ‘OPIC Board Approves Participation in a $250 Million Global Microfinance Financing Program with Citi’: http://www.opic.gov/news/press-releases/2009/pr092309
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