Recent Microfinance crises, not because of financial crisis but rapid growth: CGAP Report
- Sunday, February 28, 2010, 14:34
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Microfinance Focus, Feb 28, 2010: “Recent repayment troubles in four rapidly-growing microfinance markets do not stem from the financial crisis but from the way that microfinance operates in fast-growth markets” said the report “Growth and Vulnerabilities in Microfinance” released by CGAP (The Consultative Group to Assist the Poor), a microfinance research and information group based at the World Bank.
Four Countries with Recent Microfinance Repayment Crises, Pic. : CGAP
The Report tried to examine recent repayment troubles in four rapidly-growing microfinance markets, Nicaragua, Bosnia and Herzegovina, Morocco, and Pakistan and conclude that the problems observed are closely associated with the growth phases each country experienced from 2004 to 2008. The report also observes that microfinance globally has weathered the difficulties of the financial crisis relatively well and has not contributed to the recent repayment problems.
The report finds that the Excessive lending concentration by MFIs and multiple borrowing by their clients, overstretched back-office capacity within the MFIs and a loss of credit discipline as MFIs pursued fast growth are the main reasons behind the repayment crisis.
“Experience shows that microfinance can maintain asset quality, and pay impressive returns, both in terms of profits to investors and as well as improvements in people lives,” says co-author Xavier Reille of CGAP. “Nevertheless, a few countries do show signs of stress and remind us of the need for a much stronger focus on sustainable growth and re-commitment to asset quality.”
Phenomenal increase of commercial funding to the sector and ambitious pursuit of scalability from many MFIs, the sector has witnessed a high growth trajectory over the Over the past 10 years. According to data from the Microfinance Information Exchange (MIX), the sector expanded at historic rates, with average annual asset growth of 39 percent, accumulating total assets of over US$60 billion by December 2008.
Commenting on what should be the MFIs strategies in coming years, “The next decade should focus on sustainable growth with renewed attention to client services and asset quality,” says Reille.
In order to sustain and healthy growth of microfinance, the report offers three specific recommendations:
- In an increasingly competitive environment, MFIs should balance their growth objectives with the need to improve the quality of client services and ensure the long-term sustainability of client relationships. More emphasis will be needed to regularly assess client satisfaction and the behavioral dynamics of markets.
- Credit information bureaus are an essential component of the market infrastructure for microfinance. CIBs alone will not prevent delinquency problems, but they are critical to improving credit risk management and to managing multiple borrowing. Their development and wide use should be accelerated on a global basis even before microfinance markets become highly competitive or over-concentrated.
- Financial access mapping through the provision of reliable information on the geographic and socioeconomic penetration of microfinance services would help identify both underserved and saturated markets. Such data provided on a regular, timely basis can help identify risks and opportunities in certain geographies, empowering MFI managers, investors, and regulators with useful information.
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Download the Full Report : Growth and Vulnerabilities in Microfinance
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4 Comments on “Recent Microfinance crises, not because of financial crisis but rapid growth: CGAP Report”
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Repayment troubles normally are attributed to four reasons.
1) Credit Pollution, which is multiple lending by more than one institution, rendering the borrower finally to be just a transporter of funds. But the difference is that apart from transporting funds between one organization to another s/he also has to pay interest / service charges / penalties etc.
2) Indiscriminate lending, where lending is more than the borrower’s absorption capacity and repayment capacity. This happens more where the borrowed funds are utilized for consumption and not for any income generation programme.
3) Systemic inefficiency, of the lending organization in credit assessment, disbursement methodology, irrelevant products and most importantly lack of proper follow-up.
4) Willful cheating / misappropriation / embezzlement of funds through fictitious / non-existing borrowers. Usually these are masterminded through inner sources within the organizations.
A prudent organization hence, has to take care of all these aspects and run the Microfinance also like an efficient business.
Like I always said, Microfinance should be a business where the thinking should be by the brain and delivering by the heart and both have to work together to attain the Social and Financial bottom-line.
Best wishes
Hemantha Kumar Pamarthy
I hundrad percent agreed with Hemantha Kumar Pamarthy. The matter of microfinance repayments crisis is not so simple. The MFIs played only credit, credit with the borrowers without fulfilling the vision and mission of poverty alleviation. There is not any kind of trust between the borrowers and the MFIs and a simple hate prevails. There is still a threat exists of delinquency or revolt from the client, particularly within the perspective of Pakistan at a large scale if the organization will not change their strategies. They would have to change their methodologies also, which have responded as non productive. Most of the leaders of microfinance in Pakistan need their swot analysis. Particularly the MFIs own by families or dictators are playing the very lethal role for the sector. The very fertile and a big potential market must not be ruined like that.
Another solution for MFIs is to be purely demand-driven, as pointed out by Yana Watson’s research paper titled, From Crisis to Catharsis: How Microfinance Can Make it Through the Global Recession. This will prevent indiscriminate lending. As for the problem of credit pollution, I believe regulatory frameworks should prevent MFIs from lending to clients who already have more than, say, 2 loans drawn at a time.
I also agree with the comments above, “It is not a very simple”. In this regard I would put the example of Bangladesh. In 2005 there were overlapping among the MFI clients: total number of clients were more than the number of families eligible for MF. Still in 2006, 2007 huge fund was allocated to MFIs for disbursement from different funding agencies.
As an obvious result, the borrowers became over ambitious (May be termed as greedy). At a point of time it was believed by the MFI leaders that 80% of the people had multiple loans from different MFIs. In an unpublished survey showed that about 30% of the people are overburdened with loans. The large MFIs started responding to the crisis from late 2008 but still the crisis is not in control.
Similar thing I have seen in Cambodia. The MFIs increased their loan size and overlapping put an extra pressure.
Last of all I would like to say the information system in MFIs are not well in placed. It is very difficult to deploy traditional information systems in MFIs. But we need to find a workable solution for them (now we are doing a research in Kyushu University Japan in this regard). Because of absence of such system, the management cannot response at an appropriate time and they cannot be proactive in responding the crisis.
Regards
Asifur Rahman
Research Fellow, SLRC, Kyushu University, Japan