MICROFINANCE PAPER WRAP-UP: Microfinance Banana Skins 2011, the CSFI Survey of Microfinance Risk, by David Lascelles and Sam Mendelson, Published by Centre for the Study of Financial Innovation (CSFI)

By David Lascelles and Sam Mendelson, published by the Centre for the Study of Financial Innovation, February 2011, 48 pages, available at: http://www.cgap.org/gm/document-1.9.49643/Microfinance_Banana_Skins_2011.pdf

Microfinance Banana Skins 2011, the third report of its kind to be published by the Centre for the Study of Financial Innovation (CSFI), examines the risks inherent to the global microfinance industry. The study was based on a survey conducted in November and December 2010, which resulted in responses from 533 microfinance professionals from approximately 86 countries.

Survey participants were given a questionnaire asking them to describe their concerns about the microfinance industry over the next two to three years, to rank potential risks and to rate how prepared they think microfinance institutions (MFIs) are to manage those risks. Respondents included practitioners, investors, analysts, regulators, aid officials, academics and consultants.

The report breaks down the survey results by listing the top 24 risks identified by respondents as well as a ranking of the fastest rising risks. The results are further examined by comparing the top 10 risks by geographical region and the top 10 risks identified by each of the following four groups of respondents: practitioners, investors, regulators and deposit takers.

Compared to the most recently preceding Banana Skins survey, dated 2009, the outcomes of the 2011 survey reveal that as the microfinance industry is maturing, it is beginning to experience challenges, such as competition, credit cycles and regulation, that are commonly faced by more mature sectors. Concerns about reputation, governance and management competency have also risen as the industry is subjected to increasing scrutiny. Compared to 2009, concern about the effects of the global economic downturn on microfinance has decreased significantly.

The report describes the top five risks as follows:

1. Credit risk: Credit risk remains the top concern as it was in 2009, but for different reasons. While in 2009 credit risk concerns were sparked by the global economic downturn, the current survey shows that overindebtedness, competition and political interference have become the driving forces. Overindebtedness is causing worry that MFIs will have to write off significant amounts of loans and thereby suffer large losses. Respondents cited competition as a primary cause for overindebtedness, as some MFIs focus on growth at the expense of good lending practices. Incidents of political interference that have led to standstills in debt repayment have also surfaced in India most notably, but also in Nicaragua and Rwanda.
2. Reputation: With the recent negative portrayals of microfinance in the press, respondents rated reputation risk second-highest, up from seventeenth in 2009. Bad publicity has focused on the commercialization of microfinance, which has led to the growing prioritization of profits. Furthermore the unethical loan recovery practices of some MFIs and the growing popularity of consumer lending products – relative to lending for income-generating activities – has raised the question of whether microfinance actually helps the poor. “If studies continue to show that microfinance is not working,” warned one respondent, “the industry will lose its moral high ground, and with it donors, investors and talent.”
3. Competition: Competition ranked third, up from ninth place in 2009. Although competition can benefit the customer by keeping prices low and improving service quality, it can also lead to tighter margins that may push MFIs to take on greater risks and resort to aggressive loan recovery practices. It is also a major cause of overindebtedness, as MFIs compete for business. Greater competition has resulted from readily available funding, the entrance of commercial banks into the microfinance industry and subsidized government lending programs.
4. Corporate governance: Respondents rated corporate governance fourth, up from seventh in 2009. They made a case for the importance of strong governance in an industry that is quickly evolving and facing more complex challenges. The litany of concerns included the quality of MFI boards, conflicts of interest, nepotism and lack of accountability and independence of directors.
5. Political interference: Political interference rose from the tenth position in 2009 to fifth in the current survey. Political interference includes regulations that limit the interest rates that MFIs can charge their customers and campaigns that encourage borrowers not to repay their loans, which could potentially destroy the industry altogether.

Overall, the survey highlighted significant concerns about the future of microfinance and the need for critical issues to be addressed in order to ensure the long-term survival of the industry. On a scale of one to five, where one equals poor and five equals good, respondents gave MFIs an average score of 2.7 for preparedness to handle risks.

Additional Resources:

MicroCapital.org Paper Wrap-Up, July 14, 2009: Microfinance Banana Skins 2009, Confronting Crisis and Change by David Lascelles and Sam Mendelson, https://www.microcapital.org/microfinanec-paper-wrap-up-microfinance-banana-skins-2009-confronting-crisis-and-change-by-david-lascelles-and-sam-mendelson/

MicroCapital.org Paper Wrap-Up, March 7, 2008: Microfinance Banana Skins 2008, Risk in a Booming Industry, by the Centre for the Study of Financial Innovation (CSFI), https://www.microcapital.org/microcapital-paper-wrap-up-microsoft-banana-skins-2008-risk-in-a-booming-industry-by-the-centre-for-the-study-of-financial-innovation/

MicroCapital.org News Wire, November 6, 2009: “No Payment Movement” Attacking Microfinance Industry, https://www.microcapital.org/news-wire-nicaragua-no-payment-movement-attacking-microfinance-industry/

MicroCapital.org Story, December 16, 2008: Rwanda’s Microfinance Industry Struggles with Low Portfolio Qualities, https://www.microcapital.org/microcapital-story-rwandas-microfinance-industry-struggles-with-low-portfolio-qualities/

MicroCapital.org Brief, November 15, 2010: India’s Microfinance Industry on Brink of “Collapse”Due to Credit Freeze in State of Andhra Pradesh, https://www.microcapital.org/microcapital-brief-indias-microfinance-industry-on-brink-of-collapse-due-to-credit-freeze-in-state-of-andhra-pradesh/

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