MICROFINANCE PUBLICATION ROUND-UP: Financing Necessary for SMEs to Grow; Microfinance Challenges in the Arab World; Incofin on MFIs’ Social Performance

“ADB Report: Asia SME Finance Monitor 2014;” by S. Shinozaki, T. Chaiken, S. Jain, K. Dorofev, C. T. Delos Santos and J. Bautista; published by the Asian Development Bank (ADB); September 2015; 318 pages; available at: http://www.adb.org/sites/default/files/publication/173205/asia-sme-finance-monitor2014.pdf

The authors of the SME Finance Monitor 2014 seek to identify the financial needs that small and medium-sized enterprises (SME) must meet to be able to grow[1].

In the 20 Asian countries assessed, SMEs account for 96 percent of registered firms and employ 62 percent of the labor force. However they only produce 42 percent of economic output. Furthermore, SME bank loans account for 18.7 percent of total bank lending [2] [3].

Hence, the report suggests that policy support is needed for SME finance in low-income and lower middle-income countries, as well as the creation of financial infrastructure in low-income countries. In addition, mobile technology is seen as a way to improve SME financing by lifting lending constraints, such as written documentation and collateral by improving the flow of information between borrower and lender [2][3].

“Voices: An Assessment of the Perceived Risks Facing the Microfinance Sector in the Arab World;” by M. Khaled and S. Tieby; published by the International Finance Corporation (IFC); December 2015; 29 pages; available at: http://www.ifc.org/wps/wcm/connect/703b6a004a7232b29eefdf9c54e94b00/Voices+MF+Sector+in+Arab+World.pdf?MOD=AJPERES

This report assesses 26 factors that can affect MFIs based on a risk rating schedule ranging from 0 to 100 percent, in which 0-25 percent is defined as low, 26-50 percent as middle, 51-75 as high and 76-100 as very high.

The survey respondents, all of whom operate in the Middle East or North Africa, do not perceive any of the risk factors as very high. Moreover, 22 of the 26 factors are rated at or below 50 percent. The following four factors are perceived as high risk: (i) general external risks, those beyond the control of microfinance providers, (ii) security concerns, the risks of deteriorations in law and order; (iii) over-indebtedness, the risk from customers borrowing beyond the capacity to repay; and (iv) macroeconomic risk, the risk of being affected by trends in the wider economy [4].

The survey was written in collaboration with Sanabel, an Egypt-based nonprofit network of microfinance institutions in Arab countries [4]. The report is intended to launch a periodic series of similar studies.

“Putting Responsible Investment Principles Into Practice;” by L. De Canniere; published by Incofin Investment Management (IM); November 2015; 40 pages; available at: https://www.incofin.com/sites/default/files/attachments/newsitems/SP%20Report%20Incofin%20IM%202015%20web.pdf

Incofin Investment Management (IM), a Belgium-based manager of microfinance investment funds, recently published its “Social Performance Management Report 2015”, a document that describes how the organization incorporates on social and financial performance into its investment decisions [5].

Incofin IM refers to its investment approach as “double bottom line”, meaning that financial and social performance are equally important. To measure the social performance of MFIs, Incofin IM developed a tool called ECHOS, built on 5 dimensions: (i) Environment, corporate social responsibility and impact; (ii) Customer service; (iii) Human resources; (iv) Outreach and access; and (v) Social mission management. MFIs that the tool gives a score below a certain level will not be funded by Incofin IM [5]. Results from the implementation of the ECHOS method show a positive correlation between financial and social performance.

In addition to the investment approach, the report shows the progress Incofin IM has made with regard to the Principles for Investors in Inclusive Finance (PIIF), of which it was one of the founding signatories in 2011. The seven principles are: (i) “Expanding the range of financial services available to low-income people”; (ii) “Integrating client protection into all their policies and practices”; (iii) “Treating investees fairly, with clear and balanced contracts, and dispute resolution procedures”; (iv) “Integration of ESG factors into policies and reporting”; (v) “Promoting transparency in all operations”; (vi) “Pursuing balanced long-term returns that reflect the interests of clients, retail providers and end investors”; (vii) “Work together to develop common investor standards on inclusive finance”.

By Kevin van den Brink, Research Associate

Sources and Additional Resources

[1] Talk Vietnam, News, “ADB Report: SMEs need finance to grow”

[2] ADB, Publications, “ADB Financial Report 2014”

[3] ADB, Publications, “Asia SME Finance Monitor”

[4] IFC, News, “New IFC Report Examines Challenges to Microfinance in the Arab World”

[5] Incofin IM, Publications, “Incofin IM: Putting Responsible Investment Principles Into Practice”

MicroCapital Universe Profile: ADB

MicroCapital Universe Profile: International Finance Corporation (IFC)

MicroCapital Universe Profile: Sanabel

MicroCapital Universe Profile: Incofin Investment Management (IM)

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