E. European and Latin American microfinance could be hit by slowdown: Fitch

Microfinance Focus, Nov 21, 2009: Microfinance Institutions operating in Eastern Europe and Latin America could be hit by the economic slowdown in 2009-2010, said a special report “Microfinance through the crisis” released by Fitch Ratings. The timing and speed of MFIs’ recovery from the global economic downturn will vary depending on their operating and regulatory environment, but also institution-specific factors, said the report.

“Fitch-rated MFIs have reported much slower or even negative loan book growth, which is their main asset, and weakening asset quality in 2009, both of which are putting pressure on financial performance,” says Mark Young, Managing Director in Fitch’s Financial Institutions Group. “However, not all regions and not all MFIs have been affected equally by the global financial and economic crisis.”

Fitch’s special report includes short case studies on the microfinance sectors in Bolivia, Bosnia and Nicaragua to illustrate some country differences, and provides insight into the varied reasons for asset quality deterioration, in the context of a worsening operating environment.

The case of Bolivia illustrates that reported MFIs’ asset quality ratios often remain stronger than those in their respective banking sector. “Bolivian MFIs’ performance and asset quality indicators have held up better than the country’s wider banking system during 2009,” says Cecilia Perez, Senior Consultant at Fitch Bolivia. “The agency does not expect a further deterioration of the risk profile of Bolivian MFIs in the coming months.”

Fitch notes that the timing and speed of MFIs’ recovery from the crisis will depend not only on the operating environment, but also on the regulatory framework in which MFIs operate, which will either support their growth or restrict their development.

“An MFI’s institutional capacity, including quality of management and corporate governance, as well as its credit and operational risk management systems, will be crucial to recovery, as will potential sources of support from shareholders or international microfinance networks,” says Sandra Hamilton, Associate Director in Fitch’s Financial Institutions Group.

Fitch maintains public ratings for microfinance institutions and banks in Asia, Latin America and Emerging Europe.

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