MICROFINANCE PAPER WRAP-UP: “Microfinance Banana Skins 2012: The CSFI Survey of Microfinance Risk;” by David Lascelles and Sam Mendelson; published by the Centre for the Study of Financial Innovation (CSFI)

By David Lascelles and Sam Mendelson, published by the Centre for the Study of Financial Innovation, July 2012, 50 pages, available at: http://www.citigroup.com/citi/microfinance/data/news120628.pdf

This survey, the fourth in the Banana Skins series since its launch in 2008, focuses on the theme of “staying relevant” by identifying the most pressing risks to the microfinance industry as described by approximately 360 sector practitioners, investors, regulators and observers in 79 countries. The survey asked respondents to explain their concerns for microfinance over the next few years, rate a list of “banana skins” – or potential risks, and assess the preparedness of microfinance institutions (MFIs) to deal with these risks. The survey results identify 20 risks to the sector, and the authors compare the changes in risk perception since 2008 as well as examining responses by region and type.

The greatest risk as perceived by survey respondents was borrower overindebtedness, and many respondents separately cited the potential subsequent financial and reputational damage to the industry as a whole. Several causes of overindebtedness are cited such as the rapid growth of lending capacity, a lack of professionalism and a shift towards emphasizing profit over social benefits. The second and third most highly rated risks are inadequate corporate governance and poor management quality, respectively, and number four is credit risk. Other top risks include quality of risk management, inadequate client management, political interference and sector regulation.

The authors characterize eight of the top 12 risks as “institutional risks,” problems that can be controlled internally by MFIs, which means that increased MFI professionalism could lead to decreased sector risks. However, the authors emphasize that many respondents believe many MFIs are well managed, but that those that are not tend to generate a disproportionate level of publicity and damage.

Breaking down the responses by respondent type, the authors find that microfinance practitioners are more concerned with overindebtedness and credit risk, while investors, regulators and observers are generally more concerned with corporate governance and management skills. Practitioners also find the intensity of competition to be a greater risk than do other respondents.

When analyzed by region, respondents from most regions saw a large risk in overindebtedness and credit risks except Asia, where stakeholders are largely concerned with political limits on access to MFI funding. Respondents from all regions are concerned with the image of the microfinance sector.

Regarding the preparedness of MFIs to handle risk, respondents gave an average rating of 5.49 on a scale of one to 10.

Practitioners were more confident than non-practitioners. Latin America was the most confident region and Western Europe was the least confident.

When compared to the previous years’ survey results, the levels of perceived risk have decreased slightly.

By Charlotte Newman, Research Associate

About the Centre for the Study of Financial Innovation
CSFI is a nonprofit think tank that was established in the United Kingdom in 1993. The center publishes reports and holds meetings on developments in the financial services sector. CSFI’s goals include identifying new business areas and risks as well as initiating conversation about financial issues. CSFI publishes annual “Microfinance Banana Skins” reports that evaluate risk in the microfinance sector.

Sources and Additional Resources:

MicroCapital.org story, February 22, 2011, “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),” https://www.microcapital.org/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/

MicroCapital.org story, July 9, 2012, “MICROFINANCE PUBLICATION ROUND-UP: Financial Advisors on Sustainable Investing; Risk Management in Microfinance; Supply-Side Financial Inclusion Data,” https://www.microcapital.org/microfinance-publication-round-up-financial-advisors-on-sustainable-investing-risk-management-in-microfinance-supply-side-financial-inclusion-data/

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