Published by Microfinance Information eXchange, Inc., November 2007. 16 pages, available at http://www.themix.org.
This annual report surveys 228 microfinance institutions (MFIs) in Latin America whose loan portfolios total to USD 9.7 billion with over 9 million borrowers. The first part of the report tracks the latest performance trends in the major regional markets, paying special attention to changes in the competitive environment. The latter part of the report details performances of three categories of microfinance institutions: consumer-lenders, microenterprise-focused lenders, and microenterprise-only lenders.
General observations for the major microfinance markets of the region included: “robust” but “lopsided” growth, lower interest rates, increases in average loan balance and average balance per borrower, lower ratios of operating expenses to gross portfolio, higher cost per borrower, declines in loan officer productivity, mild increases in profitability and delinquency, and trends of diversification among the three types of MFIs.
The first part of the report found that while growth was positive and strong in most major Latin American microfinance markets, it was lopsided in that many MFIs experienced accelerated growth in loan portfolio but slow growth in number of client. This was the result of a several factors. First, there was a significant increase in loan size, as MFIs took advantage of higher client demand to maximize portfolio growth. Another reason for the growth in loan portfolio can be attributed to repeat borrowers, especially in Bolivia, Columbia, and Peru, which raised the ratio of loans to borrowers. The report also observed that growth in individual markets did not necessarily depend on the competitive environment of each country, as exemplified by Bolivia who added 20 percent more loans in one of the most competitive and mature microfinance markets in the region.
These increases in average loan size and in average balance per borrower have several implications. First, because MFIs’ income and expenses are distributed over a larger asset base, they are able to lower cost and interest rates. Second, apparent improvements in efficiency may actually be due to scaling, rather than operational improvements in lending practices and technology. This second point is supported by the fact that even though the ratio of operating expenses to gross portfolio declined in the last three years, the cost per borrower has nevertheless increased. In addition, a decline of 10 percent in loan officer productivity is further evidence of a dearth of operational improvements. Third, expansion through larger and riskier loans, rather than through new clients, is a cause for concern as it could be an early sign of future indebtedness.
Another finding was a small increase in profitability, as measured by return on assets (ROA), with Peru in the lead. The report offers several reasons for this increase, including lower interest rates due to increasing competition, higher average loan balances, and a lower expense to income ratio. Because these factors are all closely correlated, the added profitability can be best explained by a lower net cost made possible by fewer and larger loans in an increasingly competitive environment.
The first part of the report concludes with the finding of a mild increase in delinquency that it attributes to several factors. First, the trend of increasing loan sizes is inherently associated with larger risk. Second, expansion into new markets is often risky and tends to trigger higher delinquency rates. Finally, the report observes an emerging over-indebtedness in some markets, which could also be contributing to the increase in delinquency. However, MFIs in Columbia and most Central American countries are actually experiencing lower rates of delinquency due to the ability of leading institutions to satisfy demand for larger loans in a less saturated market.
The second part of the report presents a new way of classifying MFIs based on their product focus. It divides the sample into consumer-lenders, whose mixed portfolio contains at least 50 percent consumer loans; microenterprise-lenders, whose mixed portfolio contains at least 50 percent microenterprise loans; and microenterprise-only lenders, who lend exclusively to microentrepreneurs. The report found that consumer-lenders tended to be larger institutions that mostly made individual loans. They tended to be more heavily leveraged and experienced positive and steady returns in 2006. Because these lenders were able to offer lower interest rates in a highly competitive environment and lower expense ratios through increasing individual loan size, they experienced the fastest growth in 2006 among the three types of MFIs. Other factors that fostered their growth included productive loan officers, voluntary savings, and repeat clients with known credit histories that reduced both risk and cost. However, consumer-lenders held the riskiest portfolios because their large loans were not backed by guaranties nor reliable income streams.
On the other hand, microenterprise-only lenders consisted mostly of small NGOs that made group loans to microentrepreneurs in niche markets. Even though they tended to have higher cost and income structures, they also experienced strong and steady growth with a significant increase in profitability. This is because in addition to larger average loan balances and lower interest rates, microenterprise-only lenders were able to make efficient use of loan portfolios assets. In 2006, they were the leaders in portfolio quality with a 50 percent decline in delinquency. These lenders also experienced a 30 percent increase in access to market-priced financing.
Finally, the majority of MFIs that were surveyed were microenterprise-lenders whose portfolios contained consumer loans, as well as individual and group microenterprise loans. Their performance was reflective of the Latin American region as a whole in that they also had lower interest rates, a 13 percent increase in average loan size, a mild increase in profitability and delinquency.
The report concludes with a note on the trend of diversification among all three types of MFIs. More specifically, those working mostly with consumer loans began to explore the microenterprise loan market and those who focused on making working capital loans to microentrepreneurs began to expand into home improvement, mortgages, and consumer loan products. Some advantages of this diversification include lower risk due to availability of products that are tailored to client needs, and acceleration of growth from cross-selling of products to known and trusted clients. Diversification also creates the potential for MFIs to develop monogamous relationships with clients as they become one-stop-shops for all financial needs. On the other hand, however, increasing loan balances per borrower, especially those without strong guaranties in the consumer loan market, places MFIs at higher risk for delinquency and over-indebtedness in saturated markets. Over-diversification may also cause mission drift from the MFI’s core social principles. Neverthless, the report predicts that increasingly similar performances can be seen in the future as all three types of MFIs continue to diversify their portfolios.
by Mary Fu
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