The current flood of investment into the microfinance industry could overwhelm those microfinance institutions (MFIs) that are not equipped to meet the pressures of rapid growth and rising competition. The high expectations that people have of microfinance both as a social movement and a financial investment could be disappointed as a result, says a new survey of the risks facing the industry.
Microfinance Banana Skins 2008, published at a time when the sector is undergoing dramatic changes, reveals strong doubts among microfinance practitioners, investors and observers about the ability of many MFIs to adapt to new demands while still retaining their social objectives. Current levels of management experience and financial skills are seen as a challenge for the industry, though these deficiencies are not universal, and are being addressed in many parts of the world.
The Banana Skins report reflects the views of more than 300 respondents from 74 countries, and is the most comprehensive survey undertaken of the risk outlook for microfinance. The survey focuses on MFIs with more than US$5m in assets which are profitable and capable of commercial growth. These number about 350 and account for the bulk of microfinance assets globally.
The survey was sponsored by Citi Foundation and CGAP (the Consultative Group to Assist the Poor) with support from the Council of Microfinance Equity Funds (CMEF) and the Microfinance Information eXchange (MIX).
"The views of the field come together in this report to highlight the most urgent need facing the industry," said Xavier Reille of CGAP. "And that is the need to strengthen institutions at the local level -- management, boards, as well as government regulation."
Microfinance Banana Skins
2008
Biggest risks Fastest risers
1 Management quality 1 Competition
2 Corporate governance 2 Staffing
3 Inappropriate regulation 3 Political interference
4 Cost control 4 Too much funding
5 Staffing 5 Credit risk
6 Interest rates 6 Strategy
7 Competition 7 Mission drift
8 Managing technology 8 Ownership
9 Political interference 9 Interest rates
10 Credit risk 10 Unrealisable expectations
11 Transparency 11 Reputation
12 Foreign exchange 12 Corporate governance
13 Unrealisable expectations 13 Managing technology
14 Mission drift 14 Fraud
15 Fraud 15 Natural catastrophes
16 Strategy 16 Cost control
17 Ownership 17 Management quality
18 Back office operations 18 Foreign exchange
19 Reputation 19 Product development
20 Liquidity 20 Profitability
21 Too much funding 21 Inappropriate regulation
22 Profitability 22 Distribution channels
23 Macro-economic trends 23 Liquidity
24 Product development 24 Macro-economic trends
25 Capital availability 25 Back office operations
26 Distribution channels 26 Transparency
27 Natural catastrophes 27 Refinancing
28 Refinancing 28 Capital availability
29 Too little funding 29 Too little funding
"Risks can only be understood with hindsight," said Philip Brown, Risk Director of Citi-Microfinance. "By pooling the different views of hundreds of sector participants, this report offers a broad overview of sector risk issues. We hope that it will inject a dose of realism by heightening awareness of current risks, raise debate and provide a view out of the windscreen of the perceived risks on the road ahead."
Of the 29 risks -- or "Banana Skins" -- identified by the survey, many of the top ones are linked to factors directly under MFIs' own control, such as the quality of management and corporate governance, rising costs, staffing, managing technology, and credit risk.
The main risks in the operating environment are bad regulation and political interference, though market risks such as interest rates and foreign exchange are growing as MFIs become more integrated with mainstream markets.
The fastest rising risk is identified as the growth of competition, driven by the appeal of microfinance to outside investors and commercial banks. Competitive pressures are seen to be undermining standards, cutting into profitability and aggravating staffing problems, though they are also spurring innovation and forcing down prices. Unless MFIs can manage these pressures, some could fail and damage the reputation of microfinance more widely.
The survey was carried out by the Centre for the Study of Financial Innovation, an independent not-for-profit think tank based in London which explores the future of financial services. The CSFI has been running regular "Banana Skins" surveys of the banking and insurance industries for more than ten years, and has taken a close interest in the prospects for microfinance.
David Lascelles, the survey editor, said: "The Banana Skins report paints a vivid picture of the risks faced by microfinance in its rapid evolution from NGO to commercial status. The scale and the speed of change are enormous and will need to be carefully managed."
The 40-page report provides a commentary on each of the 29 risks, and breaks down responses by type and region, providing a detailed view of the concerns by geography and different classes of respondent.
Microfinance Banana Skins 2008 is available from CSFI: info@csfi.org.uk.
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