Micro Finance Banana Skins 2011

Microfinance
Banana Skins
2011 The CSFI survey of
microfinance risk
Losing its fairy dust
Sponsored by CSFI
Centre for the Study of
Financial Innovation
C S F I / New York CSFI
The Centre for the Study of Financial Innovation is a non-profit think-tank, established in 1993
to look at future developments in the international financial field – particularly from the point of
view of practitioners. Its goals include identifying new areas of business, flagging areas of danger
and provoking a debate about key financial issues. The Centre has no ideological brief, beyond a
belief in open markets.
Trustees Governing Council
Minos Zombanakis (Chairman) Sir Brian Pearse (Chairman)
David Lascelles Sir David Bell
Sir David Bell Geoffrey Bell
Robin Monro-Davies Robert Bench
Sir Brian Pearse Rudi Bogni
Philip Brown
Staff Peter Cooke
Director – Andrew Hilton Bill Dalton
Co-Director – Jane Fuller Sir David Davies
Senior Fellow – David Lascelles Abdullah El-Kuwaiz
Programme Coordinator – Lisa Moyle Prof Charles Goodhart
John Heimann
John Hitchins
Rene Karsenti
Henry Kaufman
Angela Knight
Sir Andrew Large
David Lascelles
Robin Monro-Davies
Rick Murray
John Plender
David Potter
Mark Robson
David Rule
Sir Brian Williamson
Peter Wilson-Smith
Minos Zombanakis
CSFI publications can be purchased through our website www.bookstore.csfi.org.uk or

by calling the Centre on +44 (0) 207 493 0173
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CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk
NUMBER NINETY NINE FEBRUARY 2011



THIS is the third “Banana Skins” survey of the global microfinance industry that the CSFI – primarily in the form of its
Senior Fellow, David Lascelles with the assistance of Sam Mendelson – has prepared. Like its predecessors, it is

funded by Citi and the Consultative Group to Assist the Poor (CGAP); we are very grateful to all of them.
THIS is the third “Banana Skins” survey of the global microfinance industry that the CSFI – primarily in the form of its
In my opinion,
Senior this is Lascelles
Fellow, David by far thewith
mostthe interesting
assistance– and important
of Sam – of the
Mendelson series.
– has The reason
prepared. is simple:
Like its Until very
predecessors, it is
recently,
funded byscarcely
Citi and athevoice was raised
Consultative Group against microfinance.
to Assist It waswe
the Poor (CGAP); regarded
are veryby governments,
grateful by academics and,
to all of them.
increasingly, by the wider public as an unalloyed public good – and its most public face, Grameen’s Mohammed
Yunus, received this
In my opinion, a well-deserved
is by far theNobel
most for his efforts.
interesting – andTheimportant
only problem
– of was one of scale.
the series. How could
The reason the ‘bottom-up’
is simple: Until very
approach of microfinance (which depends on tiny loans to poor people in small communities)
recently, scarcely a voice was raised against microfinance. It was regarded by governments, by academics be replicated widely
and,
enough to make
increasingly, by athe
significant dent inastheanglobal
wider public problem
unalloyed of poverty?
public good – and its most public face, Grameen’s Mohammed
Yunus, received a well-deserved Nobel for his efforts. The only problem was one of scale. How could the ‘bottom-up’
Iapproach
still believe in microfinance
of microfinance – notdepends
(which least, because
on tinyit seems
loans to to me
poorunequivocally truecommunities)
people in small that the conventional top-down
be replicated aid
widely
model
enoughistobroken.
make a But things have
significant dent certainly
in the globalchanged
problemin the
of last couple of years.
poverty?
As thisbelieve
I still reportinmakes clear, a lot
microfinance of least,
– not peoplebecause it seems tothoughtful
– well-meaning, people, who
me unequivocally are in
true that theorconventional
close to the top-down
microfinance
aid
industry
model is –broken.
are nowBut worried
thingsthathavemicrofinance has taken
certainly changed a wrong
in the turn, of
last couple that it has drifted away from its original mission,
years.
that it has been co-opted (or even corrupted) by the pursuit of size and profitability, that it has become a political
plaything
As this reportetc etc.
makes This is new
clear, a lotand, as David’s
of people report makesthoughtful
– well-meaning, clear, it leaves
people, microfinance
who are in and individual
or close to the microfinance
institutions
industry – are at now
a ‘tipping
worried point’. Will the industry
that microfinance has takencontinue to evolve
a wrong - toit grow,
turn, that to offer
has drifted away new products,
from to move
its original up-
mission,
market
that it has– until
beenitco-opted
is essentially
(or even indistinguishable
corrupted) by from conventional
the pursuit of size financial institutions
and profitability, that (banks, consumer
it has become finance
a political
companies
plaything etc etc)?
etc. Or will
This is itnew
rediscover its rootsreport
and, as David’s as a more
makesmodest
clear, itsource
leavesofmicrofinance
small-scale credit to a relatively
and individual limited
microfinance
market amongst
institutions at a lower-income
‘tipping point’.groups Will inthe
generally
industrypoor countries?
continue to evolve - to grow, to offer new products, to move up-
market – until it is essentially indistinguishable from conventional financial institutions (banks, consumer finance
Inevitably,
companies some etc)? institutions will go oneitsway,
Or will it rediscover rootsandas others
a moreanother
modest– source
but it isofclear that the credit
small-scale sector to
as aa relatively
whole is coming
limited
under
marketmuchamongst harsher scrutiny. groups
lower-income After years in which,
in generally essentially,
poor countries?it got a ‘free pass’ from most donor governments and
agencies (as well as from the authorities in the countries in which microfinance institutions operate), the climate has
become
Inevitably, very
some different – and
institutions will agolot
oneless
way,forgiving.
and others As our –survey
another but it isresults show,
clear that concerns
the sector as aabout
wholereputation,
is coming
competitiveness, governance, management competence and politicisation abound,
under much harsher scrutiny. After years in which, essentially, it got a ‘free pass’ from most donor governments and there is a high degreeand of
cynicism
agencies (as aboutwellwhat
as motivates at least a sizeable
from the authorities chunk of the
in the countries industry.
in which microfinance institutions operate), the climate has
become very different – and a lot less forgiving. As our survey results show, concerns about reputation,
But don’t throw the
competitiveness, baby out with
governance, the bathwater.
management Many ofand
competence the politicisation
problems that abound,
the industry
andfaces
thereareis just the products
a high degree of
its success;
cynicism it iswhat
about no longer
motivates beneath thea radar,
at least sizeableeither
chunk domestically or internationally, and it must expect to be held to
of the industry.
higher standards than it was in its earlier days. It remains one of the most promising vehicles for getting money to
those people
But don’t whothe
throw need
babyit most
out withand who can use it most
the bathwater. Manyproductively.
of the problems that the industry faces are just the products of
its success; it is no longer beneath the radar, either domestically or internationally, and it must expect to be held to
So let’sstandards
higher hope that thanits current
it wasproblems can be
in its earlier overcome,
days. and that
It remains one the nextmost
of the survey paints a vehicles
promising much more for optimistic picture.
getting money to
In thepeople
those meantimewholet meitrestate
need most and my who
thankscantouse
ourit friends at Citi and CGAP for their sponsorship, to Deborah Drake of
most productively.
the Council of Microfinance Equity Funds (CMEF) for advice and support, to the MIX for the data and to Zach Grafe
whose
So let’smanagement
hope that its of the online
current problemsquestionnaire helped immeasurably
can be overcome, and that the next with what paints
survey has become
a muchfar andoptimistic
more away the picture.
biggest
survey of its kind.let me restate my thanks to our friends at Citi and CGAP for their sponsorship, to Deborah Drake of
In the meantime
the Council of Microfinance Equity Funds (CMEF) for advice and support, to the MIX for the data and to Zach Grafe
Andrew Hilton
whose management of the online questionnaire helped immeasurably with what has become far and away the biggest
Director,
survey of CSFI
its kind.
Andrew Hilton
Director, CSFI
This report was written by David Lascelles and Sam Mendelson

Cover by Joe Cummings
This report was written by David Lascelles and Sam Mendelson
CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk 1
Cover by Joe Cummings
��
The Microfinance Banana Skins report, now in its third year, reflects changing perceptions of risk in a dynamic and
fast-moving industry. This year’s report shows that microfinance has come of age, and with that, new issues have
arisen. In an increasing number of markets, the rapid rate of growth and outreach means that microfinance is
confronting the same forces of competition, credit cycles, and consolidation seen in other sectors.
The survey mirrors this evolution, highlighting the need for increased focus on clients’ needs and related credit risk, as
opposed to institutional risks such as funding and liquidity. Responses also reflect an industry that is at different stages
of development in different regions of the world. Microfinance is only reaching 150m borrowers worldwide - a fraction
of the global need. More than 2.7bn people still have no access to formal financial services that are cheaper and more
reliable than the informal alternatives.
In a few markets, particularly where many microfinance institutions serve the same communities, some respondents to
the survey expressed concern about an oversupply of credit and over-indebtedness. In other markets, we see the
emergence of deposit-taking institutions, credit bureaus, comprehensive regulatory oversight, and credit expansion
accompanied by savings, insurance, and other services.
Reputation risk and political risk are both placed more highly in the ratings this year. Notwithstanding recent
questioning of the ability of microfinance, and particularly microcredit, to lift millions out of poverty, microfinance
remains central to achieving financial inclusion, by enabling families to manage their household finances more
effectively - allowing them to build assets, smooth consumption, and insure against risk.
This year’s survey also reflects an evolving microfinance industry. The volume of concern may be amplified by recent
events in a few markets, notably in the Indian state of Andhra Pradesh. But the questioning is undoubtedly healthy, and
should lead microfinance practitioners to reassess the business models, and the practices and products that will most
effectively serve the needs of low income people.
In many markets, MFIs and investors have already taken notice of the changing risks. MFI growth has slowed, lending
standards have been strengthened, and more attention is being given to social performance. In several countries, the rate
of increase in non-performing loans at MFIs is easing and more sustainable growth models are emerging. Most
regulators now acknowledge the valuable contribution that the microfinance sector is making to financial inclusion, and
see it as part of their country’s financial infrastructure.
But more needs to be done. The industry needs to accelerate reform to shore up support in the face of growing
reputation risk. MFIs need to further strengthen their lending standards, particularly with regard to over-indebtedness
among borrowers. And in many countries, improved regulation will be essential to achieve financial inclusion.
A vision of financial inclusion that encompasses the majority of the world’s population goes well beyond what is
captured in this report. But it is clear from the survey that the landscape of access to finance will look significantly
different five years from now. As the microfinance industry continues to evolve, new players and new business models
are emerging. The opportunity - and the need - is immense.
We are grateful to the 533 participants from 86 countries who contributed to the survey. We would like to thank David
Lascelles and Sam Mendelson for distilling participants’ feedback and presenting it in such a cogent manner. We thank
Deborah Drake at the Council of Microfinance Equity Funds, Philip Brown at Citi Microfinance, and Xavier Reille at
CGAP for their contributions to the success of this survey.
Robert Annibale Tilman Ehrbeck

Global Director of Citi Microfinance CGAP CEO
2 CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

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Microfinance Banana Skins 2011 describes the risks facing the microfinance
industry as seen by an international sample of practitioners, investors, regulators and
observers. It updates previous surveys carried out in 2008 and 2009. This survey was
conducted in November and December 2010 and is based on 533 responses from 86
countries and multinational institutions.
The questionnaire (reproduced in the Appendix) was in three parts. In the first,
respondents were asked to describe, in their own words, their main concerns about
the microfinance sector over the next 2-3 years. In the second, they were asked to
rate a list of potential risks – or Banana Skins – both by severity and whether they
were rising, steady or falling. In the third, they were asked to rate the preparedness
of microfinance institutions to handle the risks they identified. Replies were
confidential, but respondents could choose to be named.
The views expressed in this survey are those of the respondents and do not
necessarily reflect those of the CSFI or its sponsors.
The breakdown by type of respondent was as follows:
Other
27%
Practitioners
37%
Regulators
3%
Analysts
13% Investors
20%
Just over half (55 per cent) of the practitioners represented deposit-taking
institutions. The “other” category included aid officials, academics, accountants,
lawyers, consultants etc..

The distribution of responses by region was as follows:
Multinational
Far East 2% North America
4% 16%
Asia
Latin America
20%
11%
MENA
7% Western Europe
Africa CEE 18%
19% 3%
The responses by country were as follows
North America Central & Eastern Europe Middle East & North
Africa
Canada 4 Azerbaijan 1 Egypt 8
US 89 Bosnia & Herzegov. 5 Iraq 2
Kazakhstan 1 Jordan 3
Latin America Poland 1 Lebanon 4
Bolivia 1 Romania 2 Morocco 6
Brazil 2 Russia 3 Palestine 2
Colombia 10 Tajikistan 2 Syria 1
Costa Rica 3 Tunisia 1
Dominican Rep. 1 Africa UAR 2
Ecuador 2 Benin 5 Yemen 5
El Salvador 2 Burkina Faso 4
Guatemala 1 Burundi 1 Asia
Haiti 3 Cameroon 13 Afghanistan 1
Mexico 14 Congo Brazzaville 1 Bangladesh 6
Nicaragua 2 Côte d'Ivoire 7 India 82
Paraguay 5 Ethiopia 2 Nepal 4
Peru 7 Gabon 2 Pakistan 13
Uruguay 1 Ghana 7 Sri Lanka 1
Venezuela 2 Guinea 1
Kenya 5 Far East
Western Europe Madagascar 3 Australia 3
Austria 1 Mali 6 Cambodia 2
Belgium 4 Mauritania 2 China 4
Finland 1 Niger 2 Fiji 1
France 16 Nigeria 5 Hong Kong 1
Germany 10 RD Congo 11 Laos 1
Italy 3 Rwanda 2 New Zealand 2
Luxembourg 4 Senegal 7 Philippines 8
Netherlands 21 South Africa 1 Vietnam 1
Spain 2 Tanzania 1
Sweden 1 The Gambia 1 Multinational 13
Switzerland 7 Togo 10
UK 17 Uganda 6

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
ThisThis survey
survey explores
explores the risks
the risks facing
facing the microfinance
the microfinance industry
industry at a at a time
time whenwhen
hardhard
questions
questions are being
are being askedasked
aboutabout its future,
its future, prompted
prompted by growing
by growing doubts
doubts aboutabout
its its
effectiveness
effectiveness as a as a source
source of small
of small scalescale finance
finance for poor.
for the the poor.
One One of respondents
of our our respondents
summed
summed up significance
up the the significance of these
of these doubts,
doubts, saying
saying theythey
couldcould “dissipate
“dissipate the fairy
the fairy
dust dust
that that has historically
has historically coated
coated everything
everything related
related to microfinance”.
to microfinance”. Many Many of the
of the
risksrisks explored
explored in this
in this report
report reachreach the heart
the heart of debate
of the the debate
aboutabout
wherewhere microfinance
microfinance
goesgoes
next.next.
Originally
Originally created
created as aasgrass-roots
a grass-roots movement
movement to provide
to provide credit
credit to neediest,
to the the neediest,
microfinance
microfinance has has grown
grown enormously
enormously overover
the the
last last 20 years
20 years and and is now
is now firmly
firmly
established
established as a as a major
major supplier
supplier of a of a wide
wide rangerange of financial
of financial services
services to millions
to millions of of
people
people in thein emerging
the emerging world.
world. The The
one one thousand-plus
thousand-plus microfinance
microfinance institutions
institutions
(MFIs)
(MFIs) that that report
report to Microfinance
to the the Microfinance Information
Information eXchange
eXchange (MIX)(MIX)
havehave
88m88m
borrowers
borrowers and 76m
and 76m savers,
savers, and numbers
and numbers are growing
are growing by 20byper
20 cent
per cent a year,
a year, moremore
in in
somesome
countries. TotalTotal
countries. assets of these
assets MFIsMFIs
of these amount to $60bn.
amount to $60bn.
However
However in last
in the the two
last two
years,years, microfinance
microfinance has found
has found its enviable
its enviable reputation
reputation under under
Many
Manyof the
of the
risks
risks attack
attack for afor a number
number of perceived
of perceived reasons:
reasons: its growing
its growing commercialism,
commercialism, as evidenced
as evidenced
by anbyincreasing
an increasing
focusfocus on size
on size and profitability,
and profitability, a decline
a decline in standards,
in standards, particularly
particularly in in
gogoto the
to the
heart
heart
of of the area
the area of lending,
of lending, and and a sense
a sense that that the industry
the industry maymay be drifting
be drifting awayaway
fromfrom
its its
thethe
microfinance
microfinance original
original “double
“double bottom
bottom line”line” purpose.
purpose. All have
All have combined
combined to cast
to cast microfinance
microfinance in a in a
new new and unflattering
and unflattering light,light, and have
and have raised
raised doubtsdoubts
aboutabout the continued
the continued willingness
willingness of of
debate
debate donors
donors and investors
and investors to provide
to provide the support
the support it crucially
it crucially needs.
needs.
HowHow serious
serious are these
are these developments?
developments? WhatWhat arenew
are the the new
risksrisks
that that the industry
the industry faces?
faces?
Is microfinance
Is microfinance coming
coming to a to a crossroads
crossroads in itsinevolution,
its evolution, and
and if so,ifwhat
so, what should
should be itsbe its
new new direction?
direction?
The The survey

survey results
results
ThisThis survey,
survey, the third
the third inseries,
in the the series,
was was conducted
conducted to seek
to seek answers
answers to these
to these questions
questions
and the
and put put risks
the risks
into into perspective.
perspective. Its focus
Its focus is onisMFIs
on MFIs
withwith
moremore
thanthan
$5m$5m in assets
in assets
which
which are profitable
are profitable and and capable
capable of commercial
of commercial growth.
growth. These
These number
number aboutabout
600,600,
according
according to estimates
to estimates fromfrom
MIX,MIX,
and and account
account for bulk
for the the bulk of microfinance
of microfinance assets
assets
globally.
globally.
The The survey

survey asked asked a series
a series of experts
of experts on microfinance
on microfinance (practitioners,
(practitioners, analysts,
analysts,
regulators,
regulators, investors
investors etc.)etc.) to identify
to identify and and comment
comment on biggest
on the the biggest
risks,risks, or “Banana
or “Banana
Skins”,
Skins”, which
which theythey
saw saw facing
facing the microfinance
the microfinance sector
sector overover the next
the next two two to three
to three
years.
years. OverOver
500 500 of them
of them fromfrom 86 countries
86 countries tooktook
part,part, the largest
the largest response
response to any
to any
Microfinance
Microfinance BananaBanana
SkinsSkins survey
survey so far.
so far. The The
tabletable
on p.6on p.6
shows shows
howhow theythey
responded:
responded: it ranks
it ranks theBanana
the 24 24 BananaSkinsSkins
theythey identified
identified bothboth
as toasseverity
to severity
and and
howhow
strongly
strongly theythey are seen
are seen to betorising.
be rising.
The The overall

overall message
message fromfrom the survey
the survey is that
is that the immediate
the immediate risksrisks posed
posed by the
by the
global
global economic
economic crisiscrisis
havehave receded
receded – but – but
havehave
beenbeen replaced
replaced by larger
by larger
concerns
concerns aboutabout the future
the future direction
direction of industry.
of the the industry.

Microfinance
MicrofinanceBanana
BananaSkins
Skins2011
2011
(2009
(2009
position
position
in brackets)
in brackets)
Biggest
Biggest
risks
risks Fastest
Fastest
risers
risers
1 1Credit
Credit risk
risk
(1)(1) 1 1Competition
Competition (3)(3)
2 2Reputation
Reputation (17)
(17) 2 2Credit
Credit risk
risk
(1)(1)
3 3Competition
Competition (9)(9) 3 3Reputation
Reputation (11)
(11)
4 4Corporate
Corporate governance
governance (7)(7) 4 4Political
Political interference
interference (7)(7)
5 5Political
interference (10)(10) 5 5Mission
Mission drift
drift
(13)
(13)
6 6Inappropriate
Inappropriate regulation
regulation (13)
(13) 6 6Strategy
Strategy (-)(-)
7 7Management
Management quality
quality (4)(4) 7 7Staffing
Staffing (20)
(20)
8 8Staffing
Staffing (14)
(14) 8 8Unrealisable
Unrealisable expectations
expectations (17)
(17)
9 9Mission
Mission drift
drift(19)
(19) 9 9Profitability
Profitability (9)(9)
1010Unrealisable
Unrealisable expectations
expectations (18)
(18) 1010Inappropriate
regulation (22)
(22)
1111Managing
Managing technology
technology (15)
(15) 1111Corporate
governance (12)
(12)
1212Profitability
Profitability (12)
(12) 1212Management
Management quality
quality (18)
(18)
1313Back
Back office
office(22)(22) 1313Ownership
Ownership (16)(16)
1414Transparency
Transparency (16)
(16) 1414Liquidity
Liquidity (5)(5)
1515Strategy
Strategy (-)(-) 1515Product
Product development
development (24)
(24)
1616Liquidity
Liquidity (2)(2) 1616Macro-economic
Macro-economic trends
trends (2)(2)
1717Macro-economic
trends (3)(3) 1717Managing
Managing technology
technology (23)
(23)
1818Fraud
Fraud (20)
(20) 1818Interest
Interest rates
rates(10)
(10)
1919Product
Product development
development (24)
(24) 1919Fraud
Fraud (14)
(14)
2020Ownership
Ownership (17)(17) 2020Transparency
Transparency (21)
(21)
2121Interest
Interest rates
rates(11)
(11) 2121Back
Back office
office(19)(19)
2222Too
Toomuch
much funding
funding (25)
(25) 2222Too
Toomuch
much funding
funding (25)
(25)
2323Too
Toolittle
little
funding
funding (6)(6) 2323Too
Toolittle
little
funding
funding (6)(6)
2424Foreign
Foreign exchange
exchange (8)(8) 2424Foreign
Foreign exchange
exchange (8)(8)
The key
The finding
key finding of of
thethe
survey
surveyis is
that credit
that creditrisk
risk
constitutes
constitutesthethe biggest threat
biggest to to
threat thethe
industry
industryover
overthis
thisturbulent
turbulentperiod.
period. Although
Althoughthis thisresult
resultis isunchanged
unchangedfrom
fromthethe
previous survey
previous surveyin in
2009,
2009,thethe
reasons
reasons behind
behindit have shifted
it have shiftedsharply.
sharply.
Credit
Creditriskriskisis TheTheearlier
earlier result
resultwaswaslargely
largely explained
explained byby
thethedifficulties
difficultiesfacing
facingborrowers
borrowers during
during
thethe
economic
economic crisis. This
crisis. Thistime,
time,thethereasons
reasonshave
have multiplied.
multiplied. There
There is is
still economic
still economic
still
stilltop
topofof stress,
stress,butbutalsoalsogrowing
growingevidence
evidenceof ofcompetitive
competitivepressures
pressuresin inthethemicrofinance
microfinance
the
thelist
list market,
market, of of poor
poor credit
credit management
management byby MFIs,
MFIs, of of greater
greater cynicism
cynicism among
among borrowers,
borrowers,
andandof ofincreasing
increasinginterference
interferencein inthethecredit
creditprocess
processbyby politicalforces.
political forces.Above
Aboveall,all,
credit risk
credit riskis is
seen
seento to
reflect
reflectthethefast-growing
fast-growing problem
problem overindebtedness
of of overindebtedness among
among
millions
millions of of microfinance
microfinance customers:
customers: poor
poor people
people whowho have
have accumulated
accumulated larger
larger debts
debts
thanthey
than theywillwillever
everbebeableableto torepay,
repay,often
oftenas asa result
a resultof ofpressure
pressurefromfrombusiness-
business-
hungry
hungry MFIs.The
MFIs. The potential
potential forfor large
large microfinance
microfinance loan
loan losses
losses is is seen
seen to to
bebe high
high in in
some
some markets,
markets, bringing
bringing a dramatic
a dramatic change
change to to
anan industry
industry which
which hashas always
always prided
prided
itself
itself onon itsits
“99“99perper cent”
cent” repayment
repayment record.
record.

Many
Many of of
thethetoptop
Banana
Banana Skins
Skins
arearelinked
linked to to
this
this
finding.
finding.TheThesurge
surge
in in
concern
concernabout
about
reputation
reputationrisk risk(up(upfrom
fromNo. No.1717to toNo. No.2) 2)directly
directlyreflects
reflectsview
viewthat
thatMFIs
MFIshave
have
brought
brought credit
creditrisk upon
risk upon themselves
themselves through
through their aggressive
their aggressive lending
lendingandandtheir desire
their desire
forforgrowth.
growth.ThisThisalso
alsoaccounts
accounts forforthetherise in in
rise thetherisk mission
of of
risk mission drift
drift(up(up
from
fromNo.No.
1919 to to
No.
No.9) 9)because
because of ofthethe
perception
perception that MFIs
that MFIs areare
abandoning
abandoning their
theircommitment
commitment
to to
poverty
poverty alleviation
alleviation in in
favour
favourof of
financial
financial profit.
profit.
Anotherlink
Another linkis iswith
withthetherise politicalinterference
riseof ofpolitical interference(from (fromNo.No.1010to toNo.
No.5) 5)as as
governmentsin insome
governments somecountries
countriesrespond
respondto tothethegrowing
growingunpopularity
unpopularityof ofMFIsMFIsbyby
imposing
imposing interest
interest rate
rate caps
caps andand encouraging
encouraging repayment
repayment strikes.
strikes. Although
Although thethe current
current
focus
focus is is
onon thethe Indian
Indian state
state of of Andhra
Andhra Pradesh
Pradesh where
where there
there have
have been
been severe
severe political
political
AAsurge
surgeinin tensions
tensions over
over thethe behaviour
behaviour of of MFIs,
MFIs, thethe concern
concern is is
thatthat political
political risk
risk is is spreading.
spreading.
concern
concernabout
about
reputation
reputation OneOneof ofthethemajor
majorreasons
reasonsbehind
behindMFIs’MFIs’more
moreaggressive
aggressiveapproach
approachto tobusiness
businessis is
widely
widely seen
seen to to
bebethethe intensity
intensity of of competition
competition in in
thethe microloan
microloan market
market (up(up from
from No. No.
risk
risk 9 9to toNo.
No.3) 3)caused
causedbyby thetheready
ready availability
availability of ofcapital
capitalforforMFI
MFIexpansion
expansionand andthethe
entry
entry of of well-heeled
well-heeled commercialbanks
commercial banksarmed
armed withwithmass
mass marketing
marketing skills
skills andandnewnew
banking
banking technology.
technology. AtAtthethe same
same time,
time, MFIs
MFIs areare seen
seen to to
bebe institutionally
institutionally weak
weak in in
thetheareas corporategovernance
areasof ofcorporate governance(No. managementquality
(No.4),4),management quality(no.(no.7) 7)andand
staffing
staffing (No.
(No. 8),8), meaning
meaning thatthat they
they maymay lack
lack thethe resource
resource and
and know-how
know-how to to handle
handle
competitive
competitive pressures.A A
pressures. further
further contributor
contributor is is inappropriate
inappropriate regulation
regulation (up(up from
from
No.No.1313to to
No. No.6) 6) which
which is is failing
failing to to provide
provide thethe right
right framework
framework to to keep
keep MFIs
MFIs onon
track.
track.
The
Thebig
bigmovers
movers
UPUP
Reputation:
Reputation: thethe
good
good
name
nameof of
microfinance
microfinance increasingly
increasingly
under
under
attack
attack
Competition:
Competition: undermining
underminingbusiness
business and
and
ethical
ethical
standards
standards
Corporate
Corporate governance:
governance:showing
showing weakness
weakness under
understress
stress
Political
Political
interference:
interference:
backlash
backlashagainst
against
MFI
MFIlending
lendingpractices
practices
Inappropriate
Inappropriate regulation:
regulation:
failing
failing
to to
provide
provide
a healthy
a healthyenvironment
environment
DOWN
DOWN
Macro-economy:
Macro-economy: ebbing
ebbing
concern
concernabout
aboutthethe
global
global
crisis
crisis
Liquidity:
Liquidity:cash
cash
shortages
shortageseasing
easing
Too
Too
little
little
funding:
funding:investors
investorsreturning
returningto to
thethe
market
market
Foreign
Foreignexchange:
exchange: “currency
“currencywars”
wars”
notnot
a major
a major
concern
concern
Interest
Interestrates:
rates:
lower
lowerandand
less
less
volatile
volatile
Other
Other areas
areas of of institutional
institutional weakness
weakness areare seen
seen to to
lielie
in in
thethe back
back office
office (up(up from
from No.No.
2222to to No.
No. 13)13)
and andthethe management
management of of technology
technology (up(up from
from No.
No. 1515
to to No.
No. 11),
11), both
both
of ofwhich
whichmay
maybebecontributing
contributingto tothetheproblem
problemof ofimprudent
imprudentlending
lendingthrough
throughpoorpoor
controls.
controls.
ButButa number
a numberof ofrisks risks– –mainly
mainly thosethrust
those thrustto tothethetoptopof ofthetherankings
rankingsin inthethe lastlast
survey
survey byby thethe global
global crisis
crisis – have
– have fallen
fallen away
away quite
quite sharply. Liquidity
sharply.Liquidity risk,
risk, which
which
came
came No.No. 2 last
2 last time
time because
because of of fears
fears that
that MFIs
MFIs would
would lose
lose their
their access
access to to working
working
funds,
funds, hashas slumped
slumped to to No.
No. 16.16.In In general
general MFIs,
MFIs, particularly
particularly thethe larger
larger andand healthier
healthier
ones,areareback
ones, backin infunds
fundsagain.
again. Similarly,
Similarly,concern
concernabout abouttootoolittlelittlefunding
fundinghashas
subsided,
subsided, down
down from
from No.No. 6 to
6 to No.No.23.23.In In fact,
fact, thethe only
only riser
riser in in
thisthis
setset
of of risks
risks tootoo
is is
much
much funding,
funding, marking
marking a return
a return of of concern
concern that
that anan over-supply
over-supply of of
cashcashmaymay fuel
fuel thethe
risksof ofcompetition
risks competitionand andoverlending.
overlending.Similarly,Similarly,concerns
concernsabout aboutthethestatestateof ofthethe
macro-economy,
macro-economy, interest
interest rates
rates andandthethe foreign
foreign exchange
exchange markets
markets remain
remain very
very low.low.

A Abreakdown
breakdownof ofresponses
responsesbybytype typeshows microfinancepractitioners
showsmicrofinance practitionersdeeply deeply
concerned
concernedaboutaboutthethegrowth
growthof ofcredit
creditand
andreputation
reputationriskriskwhich
whichtheytheyseeseemainly
mainly
caused
causedbyby“unfair”
“unfair” competition
competition andandpoor
poor regulation.Investors
regulation. Investors in in
thethe
microfinance
microfinance
industry
industryhavehavesimilar
similarconcerns,
concerns,though thoughthey theyarearealso
alsoworried
worriedaboutaboutpolitical
political
interference
interferencein inthetheindustry,
industry,and andweakness
weaknessin incorporate
corporategovernance.
governance. The Themain
main
concernsof ofregulators
concerns regulatorslieliein inthetheareas
areasof oftransparency,
transparency,internal
internalcontrols
controlsandandthethe
availabilityof offunding.
availability Geographically,credit
funding.Geographically, creditrisk,
risk,competition
competitionand andreputation
reputation
topped
topped thethe concerns
concerns of of most
most regions
regions with
with thethe exception
exception of of Asia
Asia where
where thethe focus
focus waswas
onon political
political risk.AsAs
risk. in in previous
previous surveys,
surveys, management
management issues
issues ranked
ranked high
high in in Africa.
Africa.
Globalversus
Global versuslocal.
local.This Thissurvey
surveyalso alsopoints
pointsupupa distinction
a distinctionbetween
betweenrisksrisksthat
that
apply
apply to to
thethe industry
industry in ingeneral,
general, andand those
those that
that arearemoremore localised.The
localised. The anecdotal
anecdotal
responses
responses show
show thatthat credit
credit risk
risk is is
veryvery widespread,
widespread, gaining
gaining a mention
a mention in in
7575
perper
centcent
of of respondent
respondent countries.
countries. TheThe impact
impact of of competition
competition is is more
more localised,
localised, though
though it it
can can
usually
usually bebe traced
traced to to similar
similar causes:
causes: excessive
excessive funding
funding andand pressure
pressure from
from commercial
commercial
banks.
banks. The
The risk
risk of of political
political interference
interference is is also
also local,
local, butbut
itsits impact
impact is is wide
wide because
because
of ofnegative
negativemediamediacoverage.
coverage.Regulatory
Regulatoryrisk riskis islocal,
local,though
thoughthetheindustry
industrysuffers
suffers
fromthethegeneralised
from generalisedperception
perceptionthat thatmicrofinance
microfinanceregulationregulationstill stillneeds
needsto tobebe
Some
Somerisks
risksare
are “fixed”.
“fixed”. Institutional
Institutional issues
issues suchsuchas as management
management and and staffing
staffing areare local.Risks
local. Risks
in in
thethe
local,
local, area
area of of funding
funding also
also depend
depend onon MFI MFI type
type andand location,
location, though
though there
there is is a new
a new concern
concern
that
that global
global reputation
reputation risk
risk could
could damage
damage thethe microfinance
microfinance “asset
“asset class”
class” more
more widely.
widely.
some
someglobal
global
How
How well
well prepared
prepared areare MFIs
MFIs to to handle
handle these
these risks?OnOn
risks? a scale
a scale of of 1 (poorly)
1 (poorly) to to
55
(well),
(well), respondents
respondents gave
gave a score
a score of of 2.7,
2.7, which
which is is slightly
slightly better
better than
than middling,
middling, with
with
Latin
Latin America
America seen
seen to to
bebethethe best
best prepared
prepared and
and Asia
Asia thethe worst.
worst. Among
Among respondent
respondent
types,
types, practitioners
practitioners were
were thethe most
most optimistic
optimistic and
and regulators
regulators thethe least.
least.
TheTheMicrofinance
MicrofinanceBanana BananaSkinsSkinsIndex
Indexprovides
providesa picture
a pictureof ofchanging
changing“anxiety
“anxiety
levels”
levels” in in
thethe microfinance
microfinance business.
business. TheThe
toptop line
line shows
shows thethe average
average score
score given
given to to
thethe
toptop risk
risk over
over thethe last
last three
three years,
years, andand
thethe bottom
bottom line
line thethe average
average of of
allall
thethe risks.
risks.
Bothlines
Both linesshow
showa aclear
clearworsening
worseningin insentiment
sentimentover overthat
thattime,
time,andandsuggest
suggestthatthat
anxietyover
anxiety overthethepresent
presentructions
ructionsin inmicrofinance
microfinanceis ishigher
higherthan
thanit itwas
wasoveroverthethe
global
global economic
economic crisis.
crisis.
4.54.5 Credit
Credit
Credit
Credit riskrisk
Management
Management riskrisk
4 4 quality
quality
3.53.5
Top
Top
riskrisk
Score
Score
Average score
Average score
3 3
2.52.5
2 2
2008
2008 2009
2009 2010
2010
Healthwarning.
Health warning.A Anumber numberof ofpoints
pointsshould
shouldbebeborne bornein inmind mindwhen whentaking
taking
messagesfrom
messages fromthis thisreport.
report.One
Oneis isthatthatthetheresults
resultsreflect
reflectthetheperceptions
perceptionsof of
respondents
respondents and and
areare
notnot forecasts
forecasts or or measures
measures of of likelihood.
likelihood. There
There is is
alsoalso a tendency,
a tendency,
in in surveys
surveys of of this
this sort,
sort, to to focus
focus ononthethe negative
negative andand overlook
overlook thethe positive,
positive, of of which
which
thereis isstill
there stilla alotlotin inmicrofinance.
microfinance.LinkedLinkedto tothisthisis isthetherisk
riskof ofgeneralisation:
generalisation:
microfinance
microfinance is is
anan enormously
enormously varied
varied business,
business, andanditsits condition
condition differs
differs greatly
greatly from
from
oneonemarket
marketto toanother.
another.Nonetheless,
Nonetheless, thethebroad
broadtrends
trendsthis thisreport
reportdescribes
describessuggest
suggest
that
that microfinance
microfinance faces
faces a very
a very testing
testing period.
period.




Practitioners
Practitioners–people
–people
who
who
run
run
oror
work
work
inin
MFIs
MFIs
Biggest
Biggest
risks
risks Fastest
Fastestrisers
risers
1 1 Credit
Credit
risk
risk 1 1 Competition
Competition
2 2 Competition
Competition 2 2 Credit
Credit
risk
risk
3 3 Reputation
Reputation 3 3 Reputation
Reputation
4 4 Inappropriate
regulation 4 4 Mission
Mission drift
drift
5 5 Staffing
Staffing 5 5 Political
Political
interference
interference
6 6 Corporate
governance 6 6 Staffing
Staffing
7 7 Mission
Mission drift
drift 7 7 Strategy
Strategy
8 8 Political
Political
interference
interference 8 8 Profitability
Profitability
9 9 Management
Management quality
quality 9 9 Liquidity
Liquidity
1010 Profitability
Profitability 1010 Macro-economic
trends
TheThemain
mainconcern
concernof of
practitioners
practitionersis is
with
with credit
credit
risk
risk
and
andthethe
pressing
pressing
problem
problem
of ofoverindebtedness
overindebtednesswhich whichthey theyseeseeresulting
resultingfrom
fromexcess
excesscapacity
capacityin inthethe
microlending
microlending market
marketand thethe
and intensity
intensity competition
of of competition from
fromcommercial
commercial banks.
banks.
They
They also
also seesee high
high risks
risks in in inappropriate
inappropriate regulation,
regulation, particularly
particularly where
where it it
is is
weak
weak and
and obstructive,
obstructive, andand hinders
hinders thethe healthy
healthy development
development of of
thethe industry.
industry.
Jose
Jose Ramon,
Ramon, finance
finance director
director at at Finca
Finca Perú,
Perú, anan MFI
MFI in in Peru,
Peru, said
said thethe greatest
greatest
riskfacing
risk facinghishisindustry
industrywaswasthethegrowth
growthof of“indebtedness
“indebtednessdue dueto tohigh
high
competition
competition in in
thethe market
market andand
thethe lack
lack of of regulation
regulation to to limit
limit this
this behaviour.”
behaviour.”
Practitioners
Practitioners However,
However, thethe
bigbig change
change in in practitioners’
practitioners’ perceptions
perceptions this
this year
year is is
thethe sharp
sharp rise
rise
worry
worryabout
about reputationrisk,
in inreputation risk,upupfromfromNo.No.1818to toNo.No.3, 3,a adirect
directconsequence
consequenceof ofthethe
mounting
mounting controversy
controversy over
over MFIs’
MFIs’ lending
lending practices.
practices. Linked
Linked to to this
this is is a stronger
a stronger
bad
baddebts
debts risk
risk mission
mission
of of drift
drift because
because of of commercialisation
commercialisation pressures,
pressures, andand thethe growth
growth
of of concern
concern about
about political
political interference.
interference. Competition
Competition is is seen
seen to to
bebe thethe fastest
fastest
rising
rising risk
risk facing
facing thethe industry,
industry, more
more urgent
urgent than
than credit
credit risk.
risk.
Thereis isalso
There alsostrong
strongconcern
concernamong
amongpractitioners
practitionersabout
aboutinternal
internalissues,
issues,
specifically
specifically corporate
corporate governance,
governance, management
management andand staffing.
staffing. This
This reflects
reflects a a
growingawareness
growing awarenesswithin
withinMFIs
MFIsthat
thattheir
theirinstitutional
institutionalstrength
strengthneeds
needscloser
closer
attention.
attention.
ByBy contrast,
contrast, many
many of of
thethe risks
risks which
which were
were driven
driven to to high
high levels
levels last
last time
time byby
thethe
financialcrisis
financial crisishave
haveebbedebbedaway.
away.Concerns
Concernsabout macro-economy,
aboutthethemacro-economy,
liquidityand
liquidity fundingareareoutoutof ofthetheTop
andfunding TopTen.
Ten.MoreMoreworryingly
worryinglypossibly,
possibly,
given
given thethe difficulties
difficulties facing
facing microfinance,
microfinance, strategic
strategic risk
risk is is seen
seen as as lower
lower order
order
(No.
(No. 12),
12), as as
areare looming
looming issues
issues in inthethe area
area of of technology
technology management
management (No.
(No.
13)13)
andand product
product development
development (No.
(No. 17).
17).

Investors – people who invest in MFIs

Biggest risks Fastest risers
1 Credit risk 1 Reputation
2 Reputation 2 Competition
3 Competition 3 Credit risk
4 Political interference 4 Political interference
5 Corporate governance 5 Inappropriate regulation
6 Inappropriate regulation 6 Mission drift
7 Management quality 7 Unrealisable expectations
8 Unrealisable expectations 8 Ownership
9 Mission drift 9 Strategy
10 Staffing 10 Staffing
The risk perceptions of investors in microfinance have changed sharply since

our last survey in 2009. Back then, their top concerns were linked to the impact
of the financial crisis: credit risk, funding, liquidity and the state of the global
economy.
Today, concern with credit risk remains high, but most of the other risks in the
Top Ten are linked to microfinance’s tarnished image and issues of
institutional strength. Investors are increasingly concerned about the industry’s
reputation and allegations that it may be failing in its mission to assist the
poor. They are also worried about bad regulation and political interference,
about the strength of management and corporate governance, all of which
directly affect the quality of the business.
A US investor said: “The main risk over the next 2-3 years appears to be the
state of the social compact between MFIs and clients. While growth of the
industry is good in terms of extending access and creating innovative products,
if it leads to overindebtedness via harassment, then microfinance is not
delivering on one of its main objectives: to create real and sustaining social and
economic value for low-income persons. There have been examples of this in
certain markets, most of which did not have the regulatory controls in place to
check the rapid growth of MFIs.”
In another big shift, investors increasingly see competition as a risk to the

industry (up from No. 15 to No. 3) where previously they saw it providing a
stimulus to efficiency and innovation. A US-based investor said that
competition “is likely to lead to poor management decisions. We see this as a
high risk.” On the other hand, investors’ earlier concerns with liquidity and
funding have eased with the passing of the crisis. Macro-economic risk has
slipped from No. 4 to No. 16. They are also less concerned with strategic
issues such as product development and technology.
But while investors are watching certain types of risk carefully, notably in the
areas of credit, reputation and management, there is little in their responses to
support fears that they are preparing to scale down their commitment to the
industry. This is reflected in the low position given to funding risk (No. 23).

Regulators – government officials and those who regulate MFIs

1 Transparency 1 Credit risk
2 Credit risk 2 Competition
3 Back office 3 Too little funding
4 Managing technology 4 Profitability
5 Too little funding 5 Interest rates
6 Profitability 6 Mission drift
7 Staffing 7 Strategy
8 Corporate governance 8 Managing technology
9 Management quality 9 Ownership
10 Reputation 10 Transparency
Regulators take a very different view of the risks from other respondent
groups. Their main concern is unchanged from our last survey: the lack of
transparency in the industry, both as to the quality of MFIs’ reporting and to
their openness about the terms and pricing of lending. Regulators worry that
inadequate disclosure could erode the confidence of investors and customers.
Their concern about credit risk is also strong: it stands at No. 2, and is also
their fastest-rising risk because of the problem of overindebtedness.
The inadequacy of funding for the industry is a growing worry. Their ranking
on this score has risen sharply (up from No. 18 to No. 5), mainly because of the
fall-out from the financial crisis, and is the highest of any respondent group.
Fatoum Deen-Touray, deputy director of the Central Bank of The Gambia, was
concerned about “the recapitalization of MFIs, especially as sources of funds
dwindle particularly from international funding agencies including donors,
banks, etc.”.
Another strong area of concern is operational risk: weakness in the back

office, the management of technology, and the quality of staff. Strategic
issues are also on their minds. Alexander G. Cera of the Central Bank of the
Philippines said that “regulated MFIs must contend with increasing
competition, and provide a wider scope and range of services while aiming for
sustainability. MFIs must deal with these issues with a long term perspective.”
Regulators tended to be less concerned than other groups about reputation

risk, and associated issues such a mission drift, focusing instead on the
potential consequences, particularly in the area of funding. Two issues where
they see less risk compared to other respondent groups are inappropriate
regulation and political interference.

Deposit-takers – people who run or work in deposit-taking MFIs

2 Reputation 2 Credit risk
3 Inappropriate regulation 3 Reputation
5 Competition 5 Macro-economic trends
6 Management quality 6 Staffing
7 Staffing 7 Strategy
8 Managing technology 8 Political interference
9 Mission drift 9 Profitability
10 Fraud 10 Liquidity
MFIs which take deposits share other MFIs’ concerns about the high level of
personal indebtedness among their customers and the consequent threat of
credit risk. They are also worried about the negative impact of competitive
pressures, and mounting attacks on the industry’s reputation over bad lending
practices. In Russia, the director of a deposit-taking MFI said that commercial
banks were “aggressively moving ‘down’ to increase margins, bringing with
them retail experience, instruments, and financial resources which
microfinance organisations cannot compete with”.
These MFIs see a high risk of inappropriate regulation: rules governing

deposit-takers are often tougher than those for non-deposit-taking institutions,
and can create a competitive handicap. This is seen as a sharply rising risk, up
from No. 19 to No. 3. They are also more concerned about the problem of
fraud. On the other hand, this group is less worried than the lending side
about the rise of political interference.
Among institutional risks, deposit-taking MFIs focus particularly on the

quality of management and staffing issues. One respondent said that there
was “a leadership deficit in this industry.” A special concern is the danger of a
flight of deposits in countries which lacked deposit insurance. An African
respondent said that a crisis “can create a systemic risk of no confidence with
massive withdrawals of deposits, reduced resources and a general slowdown in
the financial sector.”
Funding issues are relatively less pressing for deposit-takers so long as they
can tap people’s savings. However some respondents, particularly in Africa,
are worried that savings might decline as a consequence of the global
recession. A respondent from Côte d'Ivoire said that “poverty is gaining more
and more ground. This will result in shrinkage in the collection of deposits”.

North America
1 Corporate governance 1 Reputation
3 Credit risk 3 Political interference
4 Management quality 4 Strategy
5 Political interference 5 Credit risk
6 Competition 6 Unrealisable expectations
7 Staffing 7 Product development
8 Managing technology 8 Staffing
9 Back office 9 Management quality
10 Unrealisable expectations 10 Corporate governance
North American respondents were mostly investors and members of

microfinance networks.
There has been a dramatic turnaround in the risk perceptions of this group. Last
time their Top Ten was dominated by concerns about the crisis fall-out:
funding and liquidity risks, the state of the global economy, turmoil in the
financial markets. These have all disappeared except for credit risk. But even
this risk is seen to be less urgent than institutional risks such as governance
and reputation.
Peg Ross, director at the Human Capital Center of the Grameen Foundation,
saw “a lack of next generation leaders who can step into senior roles, and a
lack of focus on strategic human capital management practices. MFIs still
don’t uniformly understand the risk of not adopting these”.
The growing reputational controversy over microfinance is a top level concern,

with political risk seen to be fast-rising. A director of a US-based
microfinance network said that there was “a risk of mission drift as
microfinance institutions go for commercial sources of funding, with the
concomitant drive to push for profitability/high returns. This in turn could lead
to predatory practices, unfair treatment of clients, including exorbitant pricing.
This is a risk we will be very alert to for all our MFIs.”
Strategic issues are also on the up. A major US investor said: “Some of the
main risks in my view are managing increasing competition, introduction of
new products, and incorporation of new technologies, such as branchless
banking, that create opportunity but also new risks.”
The problem of poor regulation – a key concern for practitioner-dominated

regions – is seen as less pressing, though rising. Interestingly, North Americans
are much less concerned about financial issues such as the profitability of
MFIs, and their ability to access liquidity and funding. The view is that
funding will continue to be available to strong and well-managed MFIs.

Latin America
1 Competition 1 Competition
2 Credit risk 2 Credit risk
3 Political interference 3 Political interference
4 Staffing 4 Profitability
5 Inappropriate regulation 5 Reputation
7 Unrealisable expectations 7 Staffing
8 Reputation 8 Inappropriate regulation
9 Mission drift 9 Unrealisable expectations
10 Managing technology 10 Too much funding
Latin American respondents were mostly practitioners, which gave their

response a strong “front line” feel. As in previous Banana Skin surveys, their
greatest concern is with “external” issues, i.e. ones linked to the operating
environment.
Chief among these is the impact of competition and the resulting pressures on
profitability and credit standards. Many respondents said they faced “unfair
competition” from commercial banks armed with ample resources but lacking
“market knowledge”. Claudia Valladares, vice-president of community
banking at Banesco in Venezuela, said that “with the rise of microfinance in
many regions and countries, many MFIs tend to compete for the same
customers and that carries the risk of over-indebtedness if there is no effective
credit bureau”.
The other mounting risk is political interference, and the rise of populist
regimes with an anti-MFI agenda: interest rate caps and the “no pago”
movement in countries like Nicaragua. Marcelo A. Romero, a financial
controller at Banco Pichincha in Ecuador, said this posed a huge risk to MFIs
“because it completely changes [customers’] perceptions of their need to
comply with their obligations”.
These concerns are linked to the other major risk in the region,
overindebtedness which is widespread, and likely to throw up large loan
losses. This is also due to the inadequacy of regulation in some countries.
Frederic de Mariz, vice president of equity research at JPMorgan in Brazil, said
that “incomplete and/or unfriendly regulations are a key risk for the sector”.
A set of fast-rising concerns surrounds reputation risk: the problems of

mission drift and unrealisable expectations, all of which are up strongly.
Luis Fernando Sanabria, general manager of the Fundación Paraguaya in
Paraguay, said that “undoubtedly the main risk is mission drift. The average
size of credits continues to rise and the resulting reduction in margins will
increase this risk because institutions will be ‘tempted’ to solve their
profitability problems by serving customers in even larger amounts”.

Western Europe
4 Unrealisable expectations 4 Political interference
5 Management quality 5 Mission drift
7 Political interference 7 Ownership
8 Corporate governance 8 Strategy
9 Inappropriate regulation 9 Management quality
10 Staffing 10 Profitability
The Western European response was led by investors and groups supporting
MFIs, such as professional firms and NGO networks. One of their top
concerns is with the growth of overindebtedness and the impact of this on the
industry’s balance sheets and reputation.
Matthias Adler, principal sector economist at KfW, the German development

bank, said that “due to unhealthy competition and the impact of the financial
crisis, the problem of client overindebtedness in microfinance has become
virulent in a number of countries. While this is still limited to particular
submarkets and the overall sector remains robust in terms of shock resilience
and responsibility of service provision, this may develop into a series of
overreactions from the press, policy makers and, ultimately, from funders”.
There was a big rise in Western European concern with reputation risk (up
from No. 11 to No. 1) and the consequent risk of political interference (up
from No. 9 to No. 7). Dinos Constantinou, managing partner of the Swiss-
based consultancy Microfinance Strategy SARL, said that a worsening
reputation “could take away the basis on which much of the development of
the sector (at least in its early phases) has relied - namely the support of the
development community”.
Respondents see these developments stemming from overexpansion of

microfinance markets, leading to excess capacity, fierce competition and a
decline in lending standards. Linked to this is concern about the inadequacy of
management and corporate governance in MFIs, particularly in the area of
risk management. Lars-Olof Hellgren, CEO of Nordic Microcap Investment in
Sweden, saw “a lack of capability to assess risks and to have sufficient internal
control systems in place [because] MFIs tend to underestimate these aspects
when they grow to a size where they must rely on systems.”
Europeans are less concerned about funding issues such as access to liquidity
and capital. In fact, they see a greater risk in over-funding for the industry.
Strategic issues such as technology management and product development
are also seen as lower level risks.

Central and Eastern Europe

2 Macro-economic trends 2 Competition
3 Profitability 3 Inappropriate regulation
4 Reputation 4 Product development
5 Inappropriate regulation 5 Macro-economic trends
6 Managing technology 6 Unrealisable expectations
7 Competition 7 Management quality
8 Unrealisable expectations 8 Managing technology
9 Product development 9 Corporate governance
10 Foreign exchange 10 Ownership
Respondents from Central and Eastern Europe consisted mostly of practitioners

plus a number of analysts, investors and suppliers of services to the industry.
Their biggest concern is credit risk in the context of difficult economic
conditions. Several respondents pointed out that their economies were still in
recession, but competition was intensifying and profitability was under
pressure.
A respondent from Russia described the overall picture: “Crises will affect
microfinance markets in various countries - clients' overindebtedness, the lack
of consumer protection, high interest rates - which may result in
disappointment in microfinance among policy makers and the public”.
Reflecting fast-rising concern about reputation risk, she added that “there
needs to be more realisation that microfinance is not a magic wand, and its
potential to fight poverty or create jobs is limited”.
An additional problem in many countries is the absence of good microfinance

regulation, adding to what Andrew Pospielovsky, CEO of Accessbank in
Azerbaijan, described as “a challenging business environment for micro-
business”. Part of that challenge is dealing with competition from commercial
banks which are entering many markets in the region.
The Top Ten also reflect concern about the quality of management and
specific issues such as managing technology. Corporate governance was
seen to be a low but fast-rising risk. Sadina Bina, director of MCF EKI in
Bosnia and Herzegovina, said that MFIs had “weak risk departments, a narrow
range of products (more or less only loans) and weak internal controls”.
Strikingly absent from the high level risks – compared to other regions - is
concern about political interference, though this gets a strong score in specific
countries such as Bosnia and Herzegovina where political tensions run high.
Funding and liquidity risks ranked low.

Africa
2 Corporate governance 2 Credit risk
3 Managing technology 3 Reputation
4 Management quality 4 Mission drift
5 Reputation 5 Liquidity
6 Transparency 6 Strategy
7 Profitability 7 Managing technology
8 Staffing 8 Macro-economic trends
9 Back office 9 Staffing
10 Competition 10 Management quality
Respondents from Africa were mostly practitioners, plus some investors,

regulators and analysts.
As in other regions, the most pressing concern is on the credit front and the
rise of overindebtedness and delinquency. The failure of a number of MFIs in
Africa has added urgency to both these issues. This marks a change from the
last survey in 2009 when Africa was the only region which did not put credit
risk at the top of its concerns at the height of the financial crisis.
The bulk of Top Ten risks listed by African respondents this time centres on
internal issues at MFIs such as the strength of corporate governance and
management, and related issues such as staffing and the effectiveness of
control systems. This is in line with previous surveys which have shown
persistent concern about the robustness of African microfinance institutions.
A respondent from West Africa said: “The quality of governance and

management remains a key risk for the majority of microfinance institutions in
Africa. The failures of several deposit-taking institutions in Nigeria and
Cameroon have exemplified this pattern”.
The pressures of competition are relatively low at No. 10, but they are making
themselves increasingly felt, and scored top among rising risks. Many
respondents reported that commercial banks were moving aggressively into
their markets. Reputation risk has risen strongly since last time (from No. 20
to No. 5) but mission drift at No. 13 remains a lower issue than elsewhere, and
political interference at No. 22 scarcely puts in an appearance.
Concerns about access to funding have eased considerably. Too little funding
has slipped from No. 8 to No. 14, and liquidity risk from No. 6 to No. 12,
though the availability of funding is patchy: many of our respondents reported
difficulties. The same with inappropriate regulation: while scoring relatively
low at No. 15, it is plainly issue in particular markets.

Middle East and North Africa

2 Corporate governance 2 Mission drift
4 Unrealisable expectations 4 Reputation
5 Management quality 5 Staffing
6 Political interference 6 Corporate governance
8 Competition 8 Liquidity
9 Liquidity 9 Macro-economic trends
10 Staffing 10 Interest rates
Respondents from the Middle East and North Africa were mostly practitioners.
As in other regions, their top concern was with credit risk: the rise of personal
indebtedness and its wider consequences. Mohammed Khaled, CGAP’s
representative in the region, saw a “growing vulnerability of the
sector…because of repayment problems which are due not only to multiple
loans but to governance and internal control issues etc..” This raised questions
“about the whole future of the sector and the issue of access for the poor to
financial services”.
Much of respondents’ high level concern centred on the commercial pressures

confronting MFI management and the temptation to veer away from its social
mission. Many respondents thought that MFIs were expanding their loan
businesses dangerously fast under pressure from competition and hungry
investors. One said that loan officers were becoming “mere distributors of
funds” out to grab as many clients as possible. These trends are sharpening the
risk of political interference, up strongly from No. 18 to No. 6.
The weakness of management and corporate governance is another top level

concern. Yusef Yakubi, executive director of the Aden Microfinance
Foundation in the Yemen, said that “most MFI boards have no experience of
the microfinance industry and are usually appointed by influential bodies who
do not normally care whether these boards have had training or exposure to the
industry”.
The risks in liquidity (No. 9) and funding (No. 17) are seen to be quite
widespread, and higher than in many other regions. Amalik Aimane, internal
controller at INMAA in Morocco, said that “after the global crisis, lenders and
investors have lost confidence in the microfinance sector, so MFIs should
monitor very closely the quality of their portfolio and take whatever measures
are necessary”. Respondents from other countries such as Iraq, Egypt and Syria
said that funding difficulties were holding back the industry.
Compared to other regions, the quality of regulation (No. 13) emerged as less
of an issue.

Asia
1 Political interference 1 Credit risk
3 Credit risk 3 Political interference
4 Liquidity 4 Mission drift
5 Inappropriate regulation 5 Liquidity
6 Competition 6 Reputation
7 Mission drift 7 Inappropriate regulation
8 Corporate governance 8 Interest rates
10 Product development 10 Unrealisable expectations
About half the respondents from Asia were practitioners, the remainder being
analysts, investors and lenders to the industry. The bulk of the respondents
were from India and Pakistan with a sprinkling from Nepal, Sri Lanka and
Bangladesh.
With the turmoil sparked by events in Andhra Pradesh, it is no surprise that

political interference made it to the top of the list. Swapnil Kant Neeraj,
senior microfinance specialist at the International Finance Corporation in India,
said that “”overzealous local politicians have still to reconcile themselves with
the fact that microfinance can be done on a commercial basis. They will try to
capitalise on the smallest aberrations by MFIs and … generalise things instead
of taking a reasonable stand and isolating the rogue MFIs”.
Respondents are very concerned about the regulatory backlash and popular
discontent. Brij Mohan, chairman of Access Development Services, said that
local intervention “will cripple growth and hurt the poor”. The impact to the
industry’s reputation is also severe (up from No. 21 to No. 2). Respondents
see this damaging the business and frightening away investors, both of the
commercial and ethical kind. Although liquidity risk has fallen a few places, it
remains much higher in this region than elsewhere (No.4).
Risks of the political and reputational kind are seen as more severe than credit
risk which tops the ranking in most other regions. Even so, overindebtedness is
a major problem in this area, made worse by economic uncertainty, food price
inflation and, in a country like Pakistan, a difficult security situation.
There is also concern about the institutional strength of MFIs. Although these
risks have been edged out of the high positions they occupied last time, the
quality of management and corporate governance remain in the Top Ten. A
respondent in India said that “MFIs must juggle a significantly larger number
of tasks and expectations as compared to the past. This will require a much
higher level of management and leadership potential.”

Far East
3 Inappropriate regulation 3 Credit risk
4 Reputation 4 Mission drift
5 Corporate governance 5 Management quality
7 Mission drift 7 Managing technology
8 Unrealisable expectations 8 Political interference
9 Back office 9 Staffing
10 Political interference 10 Fraud
Respondents in the Far East included practitioners, investors, regulators and

support professionals.
The negative impact of competition remains much the most pressing concern
in the region. It is seen to be encouraging bad lending practices and declining
business ethics. In particular, it is contributing to the widespread problem of
overindebtedness, with the risk of potentially severe loan losses for MFIs.
Ruben C. De Lara, executive director of TSPI Development Corporation in the

Philippines, said that the market was characterised by “a lack of credit
discipline and an aggressiveness by some MFIs to grow their own business that
tends to sidestep the value of credit education among their staff and clients as
well”. A respondent from Laos said that the main risk in that market was “a
desire for fast big growth which is not managed properly”.
The growth in over-lending is already affecting the industry’s reputation (No.

2 among the rising risks), and leading to concerns about mission drift (up from
No. 20 to No. 7). This could affect funding prospects. In the Philippines, a
microfinance manager said that over-rapid growth “has caused traditional
lenders to take a wary look on the sector, and hence they are extending
financial support too cautiously.” This is also a risk singled out by respondents
from China.
Another of the region’s preoccupations is with the institutional strength of

MFIs. Management quality and corporate governance are both among Top
Ten risks. One respondent said “This is a sector that bleeds skills”. Another
high level institutional risk is the back office (up from No. 15 to No. 9)
because of the strain placed on systems by the hectic pace of growth.
However the region seemed more optimistic than most about its economic
prospects. Macro-economic risk was placed at the bottom of the list.

1. 1.
Credit
Credit
risk
risk
(1)(1)
A STARK
A STARK indication of the
indication oftests facing
the tests microfinance
facing is theistop
microfinance the position occupied
top position by by
occupied
credit
credit risk risk in this
in this survey.
survey. For For an industry
an industry whichwhich
onceonce
pridedprided
itselfitself onenviable
on its its enviable
loan loan repayment
repayment record,
record, the the strength
strength and and persistence
persistence of this
of this BananaBanana
SkinSkin
is a is a
worrying
worrying trend.
trend.
Credit
Credit risk risk
was was
top oftopthe
of list
the in
listour
in last
our survey
last survey conducted
conducted in depths
in the the depths of 2009
of the the 2009
economic
economic crisiscrisis
when,when, to some
to some extent,
extent, it could
it could be explained
be explained bydifficulties
by the the difficulties facing
facing
borrowers
borrowers in a inperiod
a period of economic
of economic stress.
stress. But But
this this
time,time, the reasons
the reasons for high
for its its high
position
position havehave multiplied.
multiplied. There There is still
is still economic
economic stress,
stress, but also
but also growing
growing evidence
evidence of of
competitive
competitive pressures,
pressures, of recklessness
of recklessness among among
MFIsMFIsand and
theirtheir borrowers,
borrowers, and and
of of
interference
interference incredit
in the the credit process
process by political
by political forces.
forces.
The The breadth

breadth of concern
of concern aboutabout
creditcredit
risk risk revealed
revealed by thisby this survey
survey is very
is very striking.
striking. It It
was was the 1No.
the No. 1 Banana
Banana SkinSkin fortypes
for all all types of respondents
of respondents except
except regulators
regulators whowho ranked
ranked
it 2.
it No. No.Geographically
2. Geographically it was
it was a higha high
levellevel
risk risk
in allinregions,
all regions, suggesting
suggesting that that similar
similar
forces
forces are endangering
are endangering microfinance
microfinance loanloan portfolios
portfolios in many
in many different
different markets.
markets.
Overindebtedness
Overindebtedness
is becoming
is becoming Of these,
Of these, muchmuch the most
the most prominent
prominent is problem
is the the problem of overindebtedness:
of overindebtedness: largelarge
numbers
numbers of poor
of poor peoplepeople
whowhohavehave accumulated
accumulated bigger
bigger debtsdebts
thanthan
theythey
will will
ever ever
be be
a bigger
a bigger able able to repay,
to repay, withwith the prospect
the prospect that that
MFIsMFIswill will
havehave to write
to write themthem off and
off and suffer
suffer
problem
problem heavyheavy
loanloan losses.ThisThis
losses. problem
problem is now
is now so broad
so broad that that it has
it has the makings
the makings of a of a
worldwide
worldwide social/economic
social/economic phenomenon.
phenomenon. Moses
Moses Ochieng,
Ochieng, regional
regional representative
representative
for CGAP/DFID
for CGAP/DFID in East
in East and and Southern
Southern Africa,
Africa, warnedwarned
of a of a possible
possible “implosion
“implosion of of
somesome of key
of the the players”
key players” unless
unless measures
measures werewere
takentaken to deal
to deal withwith
it. Ait.respondent
A respondent
fromfrom
one one
of theof the
largelarge European
European funding
funding banksbanks
said:said: “Increased
“Increased delinquencies,
delinquencies,
program
program deterioration,
deterioration, damage
damage to clients’
to clients’ well-being…We're
well-being…We're seeing
seeing this this
issueissue
cropcrop
up into
up into too many
too many markets.”
markets.”
Respondents
Respondents identified
identified manymany
causescauses of overindebtedness.
of overindebtedness. On theOn lending
the lending
side,side,
therethere
is theisintensity
the intensity of competition
of competition in a in a business
business where
where growth
growth is nowis now
a keya objective
key objective
for for
manymanyMFIs. MFIs. Elissa
Elissa McCarter,
McCarter, director
director of development
of development finance
finance at CHF
at CHF International
International
in thein US,
the US,
said said
that that
“the “the tendency
tendency to focus
to focus on growth
on growth alonealone to generate
to generate the profits
the profits
that that shareholders
shareholders anticipate
anticipate has hasled led
to atoweakening
a weakening of microloan
of microloan underwriting
underwriting
standards
standards and and greater
greater risk risk of delinquency,
of delinquency, fraud,
fraud, and and undercapitalised
undercapitalised institutions
institutions
that that
becomebecome exposed
exposed during
during crises”.
crises”.
ThisThis is leading
is leading to problem
to the the problem of multiple
of multiple lending
lending (or, (or,
moremore strictly,
strictly, multiple
multiple
borrowing)
borrowing) whenwhen microfinance
microfinance customers
customers take take advantage
advantage of competition
of competition amongamong
lenders
lenders and lack
and the the lack of centralised
of centralised credit
credit information
information to tapto many
tap many lenders
lenders at once.
at once. In In
Colombia,
Colombia, the managing
the managing director
director of anof MFI
an MFI reported
reported that that the number
the number of micro-
of micro-
lenders
lenders to thetoaverage
the average
MFIMFI customer
customer had grown
had grown fromfrom
1.5 to1.54,toand
4, that
and that 75 cent
75 per per cent
of of
MFIMFI customers
customers werewere borrowing
borrowing fromfrom
otherother institutions,
institutions, mostlymostly commercial
commercial banksbanks
which
which had entered
had entered the field.
the field.
Another
Another reason
reason is the
is the weakness
weakness of internal
of internal controls
controls at MFIs,
at MFIs, poorpoor incentive
incentive
structures
structures for loan
for loan officers,
officers, and and misdirected
misdirected management
management objectives.
objectives. EdmondEdmond
Atangana
Atangana EvinaEvina of ministry
of the the ministry of finance
of finance in Cameroon
in Cameroon said said
that that in many
in many casescases
“the “the
failure
failure of MFIs
of MFIs can becantraced
be traced to enormous
to enormous loansloans granted
granted to clients,
to clients, in breach
in breach of theof the
checks
checks and and balances
balances necessary
necessary to those
to those institutions’
institutions’ survival”.
survival”. The Theneedneed to know
to know
youryour
clientclient
is anisassociated
an associated
issue.issue.
Many Many respondents
respondents reported
reported that that
loansloans
werewere
beingbeing
mademade without
without properproper credit
credit checks
checks or client
or client information
information – and – and deliberately
deliberately in order
in order

to meet
to meet
business
business
targets.
targets.
A UK-based
A UK-based
consultant
consultant
said that
said“many
that “many
MFIsMFIs
do not
dohave
not have
a good understanding
a good of theofborrowers’
understanding financial
the borrowers’ position
financial and repayment
position capacity.”
and repayment capacity.”
ThenThen is political
therethere interference
is political interference
in countries wherewhere
in countries the lending practices
the lending of MFIs
practices of MFIs
have have
comecome
underunder
publicpublic
scrutiny, leading
scrutiny, to officially
leading inspired
to officially borrowing
inspired binges
borrowing and and
binges
repayment strikes.
repayment Although
strikes. the Indian
Although state state
the Indian of Andhra Pradesh
of Andhra is theisspecific
Pradesh focusfocus
the specific
of concern,
of this this concern, respondents
respondents identified
identified manymany countries
countries wherewhere this awas
this was a problem,
problem,
including
including Nicaragua,
Nicaragua, Azerbaijan,
Azerbaijan, and Bosnia
and Bosnia and Herzegovina.
and Herzegovina. In Rwanda,
In Rwanda, a a
banking
banking regulator
regulator saidborrowers
said that that borrowers
were were developing
developing “a culture
“a culture of non-repayment”.
of non-repayment”.
Although
Although somesome respondents
respondents stressed
stressed thatseverity
that the the severity of credit
of credit risk differed
risk differed greatly
greatly
among among institutions
institutions and markets,
and markets, this Banana
this Banana Skin Skin
lookslooks
set toset
beto thebedominant
the dominant
issue issue
forindustry
for the the industry overnext
over the the few
nextyears.
few years.
HowHow
a borrower
a borrower
thinks…
thinks…
P.N. Vasudevan,
P.N. Vasudevan, managing
managing
director
director
of Equitas
of Equitas
MicroMicro
FinanceFinance
in India,
in India,
described
described
the the
mindset
mindset of manyof many overindebted
overindebted borrowers:
borrowers: “With“With
more more
MFIs MFIs in operation,
in operation, clientsclients
are are
getting more more
getting options to borrow,
options and since
to borrow, loans loans
and since are unsecured, the tendency
are unsecured, of most
the tendency of most
people is to borrow
people more more
is to borrow than their
than immediate need need
their immediate and toand
justify it by saying
to justify that they
it by saying that they
will use
willituse
for some 'good''good'
it for some purpose, and that
purpose, andthey
that cannot be sure
they cannot beitsure
will itbewill
available later later
be available
whenwhen
they might reallyreally
they might need need
it. This
it. can
Thisdestroy the borrower's
can destroy familyfamily
the borrower's peacepeace
whichwhich
is is
what what
MFIs areMFIs supposed to promote!”
are supposed to promote!”
2. Reputation
2. Reputation
(17)
(17)
NO SURPRISE
NO SURPRISE that this
that Banana
this BananaSkin Skin
has soared
has soared
after after
the torrent
the torrent
of bad
of publicity
bad publicity
surrounding
surrounding microfinance
microfinance in theinworld’s
the world’s
media,media, and events
and events in Andhra
in Andhra Pradesh
Pradesh in in
particular.
particular. Reputation
Reputation risk isrisk
up is15upplaces
15 places
from from thesurvey
the last last survey
whenwhen
only only
a fewafar-
few far-
sighted
sighted respondents
respondents waved waved
a red aflag
redabout
flag about the dangers
the dangers of growing
of growing commercialism.
commercialism.
Microfinance’s
Microfinance’s Microfinance
Microfinance is becoming
is becoming a punch
a punch bag from
bag from all sides
all sides – accused
– accused of exploiting
of exploiting the the
poor poor
with with burdensome
burdensome debt, debt, of losing
of losing sight sight
of itsofsocial
its social mission,
mission, of putting
of putting profits
profits
reputation
reputation before
before poverty
poverty reduction,
reduction, and inand
APinmost
AP most notably
notably - though
- though elsewhere
elsewhere too - too - of driving
of driving
‘will‘will
never
never
be be people
people to suicide
to suicide through
through toughtough loan terms
loan terms and strong-arm
and strong-arm debt collection
debt collection practices.
practices.
thethesame’
same’ Gil Lacson,
Gil Lacson, relationship
relationship manager manager at Women’s
at Women’s World World Banking,
Banking, said said
that that
“the “the
industry
industry will aface
will face hugea huge reputational
reputational risk with
risk with the growing
the growing clashclash between
between opposing
opposing
ideology
ideology and expectations.
and expectations. Is microfinance
Is microfinance primarily
primarily aboutabout financial
financial inclusion
inclusion or or
poverty
poverty alleviation?
alleviation? Is microfinance
Is microfinance primarily
primarily a business
a business opportunity
opportunity or aor a
development
development intervention?
intervention? DoesDoes microfinance
microfinance reallyreally
meet meet
both both financial
financial and social
and social
returnreturn expectations?
expectations? Is it‘either
Is it an an ‘either or’?has
or’? Or Ormicrofinance
has microfinance
manymanyfaces?faces? Whatever
Whatever
the answers,
the answers, the industry's
the industry's reputation
reputation will never
will never be thebesame”.
the same”.
Reputation
Reputation riskmany
risk has has many angles.
angles. For some
For some respondents,
respondents, it is the the commercialisation
it iscommercialisation
of microfinance,
of microfinance, as in
as seen seen
theingrowing
the growing importance
importance of profit
of profit as a goal,
as a goal, and theandhigh-
the high-
valuevalue flotation
flotation of MFIs
of MFIs on theonstock
the stock market.
market. Last year’s
Last year’s IPO of IPO of SKS,
SKS, India’sIndia’s largest
largest
MFI,MFI,
was awas a ready
ready themetheme for respondents
for respondents the world
the world over.over.
SomeSomesaw itsawas ait watershed,
as a watershed,
drawing
drawing popularpopular attention
attention to thetoprofits
the profits now being
now being extracted
extracted from from microfinance.
microfinance.
For For others,

others, is unethical
it is it unethical practices
practices as evidenced
as evidenced by huge
by the the huge growth
growth in in
indebtedness
indebtedness among among
MFI MFI customers,
customers, muchmuch
of it of
theitresult
the result of aggressive
of aggressive marketing
marketing
of loans
of loans whose whose true is
true cost costobscured.
is obscured. Michaël
Michaël de Groot,
de Groot, regional
regional director
director of theof the

Rabobank
RabobankFoundation
Foundationin The in The
Netherlands,
Netherlands,said said
that that
“top-end,
“top-end,
commercially-driven
commercially-driven
MFIsMFIsand andbanksbanks
are are
becoming
becomingthe the
new newloanloansharks”.
sharks”.
Raksa Raksa
Pheng,Pheng,
business
business
development
development manager
manager at Visionfund
at Visionfund in Cambodia,
in Cambodia, said said
that that
defaulters
defaulters
tooktook
to to
“running
“running
awayawayfromfrom
theirtheir
homes.homes.
In some
In some
cases,
cases,
I could
I could
see that
see that
theythey
reduced
reduced
theirtheir
foodfood
to save
to save
money money
to repay
to repay
theirtheir
debts,debts,
or inorothers,
in others,
theythey
forcedforced
theirtheir
children
children
to to
dropdrop
out from
out fromschool
school
to findto find
jobs jobs
to earn
to earn
moremoreincomeincome
to support
to supportthe repaying
the repayingof of
debts”.
debts”.
 
Another symptom
Another symptom is theis emergence
the emergence of “consumer
of “consumer lending”
lending”as a asprime product
a prime to to
product
replace the business
replace lending
the business for which
lending microfinance
for which microfinance was wasoriginally devised.
originally Xavier
devised. Xavier
Reille, manager
Reille, managerat CGAP
at CGAP in France, said said
in France, that that
“previously, microcredit
“previously, was was
microcredit seenseen
as a as a
goodgood
thingthing
and andmoneymoney lending
lending as a as a bad
bad thing.thing.
WithWith the increased
the increased focusfocus on short
on short
termterm
profitprofit
in several markets,
in several the lines
markets, are blurring
the lines and and
are blurring the reputation
the reputationof the
of sector
the sector
is tarnished.
is tarnished. The Theonusonusis onis MFIs
on MFIs to show
to show that that
theythey are following
are following responsible
responsible
practices”.
practices”.
For others
For others still still
it is ittheis exposure
the exposure of microfinance
of microfinance as “aassham”,
“a sham”,
withwith its social
its social bonabona
fidesfides no longer
no longer a given.
a given. Joachim
Joachim Bald,Bald, a senior
a senior consultant
consultant at theatFrankfurt
the Frankfurt
SchoolSchool
of of
TheThe
industry
industry Finance and and
Finance Management,
Management, said said
that that
a backlash was was
a backlash nownowon theon cards. “We“We
the cards. tendtend
to to
celebrate
celebrate everyevery overpriced
overpriced smallsmall
loanloan
to poorto poor people
people as a as a life-changing
life-changing breakthrough
breakthrough
faces
faces
thethe in access
in access to finance.
to finance. But where
But where is theis evidence
the evidence
that that microfinance
microfinance borrowers
borrowers on their
on their
backlash
backlash tenthtenth
cyclecycle
are better off than
are better theirtheir
off than peerspeers
whowhodid not
didhave access
not have to microcredit?”
access to microcredit?”
The The
consequences of reputation
consequences risk risk
of reputation are potentially severe.
are potentially A US
severe. A investor warned
US investor warned
that that
“if studies continue
“if studies to show
continue to showthat that
microfinance is ‘not
microfinance working’
is ‘not and and
working’ if news
if news
stories of overindebtedness,
stories of overindebtedness,clientclient
harassment, excessive
harassment, excessiveriches and and
riches otherother
bad bad
behaviour
behaviour continue
continue to make
to make headlines,
headlines, the industry
the industry will will
lose lose the moral
the moral highhigh ground,
ground,
and with it donors,
and with investors
it donors, and talent”.
investors and talent”.
TheThe
consumer
consumer
lending
lending
boom
boom
A bigAconcern in theinindustry
big concern is microfinance’s
the industry shift shift
is microfinance’s fromfrom
tiny, tiny,
uncollateralised business
uncollateralised business
loansloans
for micro-entrepreneurs
for micro-entrepreneurs - “microenterprise
- “microenterprisefinance” - to general
finance” lending
- to general to the
lending to the
unbanked for consumption
unbanked for consumptionpurposes. This This
purposes. is widely seenseen
is widely as evidence of “mission
as evidence drift”,drift”,
of “mission
and and
couldcould
harmharmthe industry’s reputation
the industry’s for poverty
reputation alleviation.
for poverty It’s happening
alleviation. for for
It’s happening
several reasons:
several competition
reasons: competitionfromfrom commercial
commercialbanks, pressure
banks, for for
pressure short-term
short-term
profitability, and the
profitability, andfrequently voiced
the frequently needneed
voiced for “product development”.
for “product development”.
Chikako Kuno,
Chikako director
Kuno, of capital
director markets
of capital at FINCA
markets International,
at FINCA said:said:
International, “There are are
“There
reputational risks risks
reputational as new commercial
as new entrants,
commercial attracted
entrants, by the
attracted byvolume and profitability
the volume and profitability
of microfinance,
of microfinance,comecomein without a clear
in without double
a clear bottom-line
double objective
bottom-line and and
objective blur blur
the the
boundary between
boundary between predatory consumer
predatory consumerfinance and and
finance true true
microfinance”.
microfinance”. Daniel
Daniel
Schriber, director
Schriber, of investment
director analysis
of investment at Symbiotics
analysis in Switzerland,
at Symbiotics thought
in Switzerland, that that
thought the the
movemove
towards consumer
towards lending
consumer constituted
lending “a huge
constituted reputational
“a huge risk for
reputational riskthe
for whole
the whole
industry”.
industry”.

3. 3.Competition
Competition(9)(9)
ALTHOUGH
ALTHOUGH competition
competitionin the microfinance
in the microfinance market can can
market deliver benefits
deliver to to
benefits
customers
customers in form
in the the form of keener
of keener pricing
pricing and and better
better service,
service, it is itmore
is more
oftenoften
seenseen
as as
something
something bad, bad, creating
creating instability
instability and and encouraging
encouraging dubious
dubious practices.
practices. In line
In line withwith
earlier
earlier surveys,
surveys, this this Banana
Banana SkinSkin is high
is high on list
on the the this
list this
year,year,
and and is seen
is seen as a as a rising
rising
problem
problem because
because ofproliferation
of the the proliferation of microfinance
of microfinance providers
providers in mostin most markets.
markets.
Geographically,
Geographically, this this
is a is a widespread
widespread concern:
concern: it gotit agot a high
high ranking
ranking in most
in most regions,
regions,
and was
and was also also
seenseen
as a as
topalevel
top level riskrespondent
risk by by respondent
types, types, practitioners
practitioners in particular.
in particular.
Competition
Competition is seen
is seen as dangerous
as dangerous because
because it can
it can causecause market
market disruption,
disruption, squeeze
squeeze
margins,
margins, and and
spurspur
MFIsMFIs to take
to take greater
greater risks.risks. Several
Several respondents
respondents referred
referred to to
competition
competition as “unhealthy”
as “unhealthy” and “unfair”.
and “unfair”. In particular,
In particular, competition
competition is widely
is widely seenseen
as as
the prime
the prime causecause of irresponsible
of irresponsible lending
lending and and overindebtedness.
overindebtedness. A respondent
A respondent fromfrom
the Philippines
the Philippines said said
that that
“the “the presence
presence of many
of too too many competitors
competitors encourages
encourages somesome
MFIMFI
staffstaff to become
to become laximplementing
lax in in implementing policies
policies rather
rather thanthan
take take
it as ita as a challenge
challenge to to
improve
improve products
products and services”.
and services”.
Competition
Competition is also
is also squeezing
squeezing margins.
margins. A microfinance
A microfinance banker
banker in Ecuador
in Ecuador
Competition
Competitionis is complained
complained that that “prices
“prices are going
are going downdown everyevery
year year and everywhere”,
and everywhere”, driven
driven by new
by new
eroding
eroding competitors
competitors “without
“without knowledge”.
knowledge”. Jaime Jaime Nieto,
Nieto, director
director of treasury
of treasury at Camesa
at Camesa in in
Mexico,
Mexico, said said
that that markets
markets in accessible
in accessible areasareas
werewere all “saturated”
all “saturated” and and suffering
suffering a a
business
businessand
and “rate“rate
war”.war”. Others
Others saw saw competition
competition driving
driving MFIsMFIs to reach
to reach into into
new new
and and riskier
riskier
ethical
ethical
standards
standards markets
markets in search
in search of business.
of business. A respondent
A respondent fromfrom Tanzania
Tanzania said said
that that “as more
“as more
players
players suchsuch as banks
as banks enterenter the industry,
the industry, the tendency
the tendency is toismove
to move towards
towards untapped
untapped
market
market segments
segments aboutabout
whichwhich is little
is little is known”.
is known”.
Respondents
Respondents also also regretted
regretted that that competition
competition was was encouraging
encouraging MFIsMFIs to adopt
to adopt
unethical
unethical practices
practices suchsuch as loan
as loan pushing,
pushing, poaching
poaching clients
clients and and
staff,staff,
and and deceptive
deceptive
advertising.
advertising. Vaidyanath
Vaidyanath Yerraguntla,
Yerraguntla, a consultant
a consultant at Coromandel
at Coromandel Infotech
Infotech in India,
in India,
said said
therethere
was was
“very“very
highhigh pressures
pressures on field
on the the field collection
collection teamsteams translating
translating into into
'loan-sharking'
'loan-sharking' behaviour
behaviour withwith the borrower/s”.
the borrower/s”.
A feature
A feature of competition
of competition is that
is that it pushes
it pushes MFIsMFIs to focus
to focus on parts
on parts of market
of the the market
that that
are already
are already wellwell served
served and and
ignoreignore
thosethose
that that are not,
are not, usually
usually the neediest
the neediest and those
and those
outthe
out in in country.
the country. A respondent
A respondent fromfrom Colombia
Colombia said said banks
banks werewere exhibiting
exhibiting “herd“herd
behaviour”
behaviour” and and concentrating
concentrating “on “onareasareas
withwith
goodgood economic
economic performance
performance withwith
aggressive
aggressive credit
credit offers”.
offers”.
The The reasons

reasons for greater
for greater competition
competition include
include the ready
the ready availability
availability of funding
of funding to to
expand
expand capacity,
capacity, and the the downscaling
anddownscaling by large
by large banksbanks
into into the microfinance
the microfinance market,
market,
a trend
a trend that that is visible
is visible in most
in most regions.
regions. Other Other competitive
competitive threats
threats comecome
fromfrom
subsidised
subsidised government
government lending
lending programmes
programmes and, and, increasingly,
increasingly, fromfrom telecoms
telecoms
companies
companies able able to access
to access the the market
market through
through branchless
branchless banking.
banking. HansHans
Boon,Boon,
managing
managing director
director at Postfinance
at Postfinance International
International Development
Development in The
in The Netherlands,
Netherlands,
said said
that that
“new“new scenarios
scenarios of ‘branchless’
of ‘branchless’ banking
banking withwith
largerlarger banks
banks downscaling
downscaling via via
mobile
mobile and and internet
internet technology
technology and and franchise
franchise formulas
formulas for agents
for agents couldcould heavily
heavily
impact
impact existing
existing MFIs”.MFIs”.
But But others

others saw saw competition
competition as a as a good
good thingthing because
because it putit MFIs
put MFIs on their
on their mettle.
mettle. A A
US consultant
US consultant said said
that that competition
competition “could
“could be a be
netapositive
net positive as MFIs
as MFIs are forced
are forced to beto be
moremore innovative
innovative and and provide
provide higher
higher customer
customer service.
service. MostMostMFIsMFIs
knowknow
howhowto to
handle
handle this Ibut
this but amIsure
am sure
somesome markets
markets will will be overheated
be overheated andcarried
and get get carried away”.
away”.

4. 4.
Corporate
Corporate
governance
governance
(7)(7)
CONCERN
CONCERN aboutabout
the the
quality of corporate
quality governance
of corporate governance in MFIs
in MFIsis growing,
is growing,
reflecting
reflecting the the
viewview – seen
– seen in earlier
in earlier Banana
Banana SkinSkin surveys
surveys – that– that
this this
risk risk
is is
fundamental
fundamental to business,
to the the business,
and and
one one which
which onlyonly the MFIs
the MFIs themselves
themselves can address.
can address.
However
However the ranking
the ranking of this
of this risk risk
was was generally
generally higher
higher among amongthosethose outside
outside the the
industry
industry (investors
(investors and and analysts)
analysts) thanthan among
among microfinance
microfinance practitioners
practitioners who who tended
tended
to play
to play it down.
it down. For For example,
example, North North American
American respondents
respondents – investors
– investors mainly
mainly – –
ranked
ranked it No.it No. 1 while
1 while Central
Central and and Eastern
Eastern European
European respondents
respondents – mostly
– mostly
practitioners
practitioners in well-established
in well-established and commercial
and commercial MFIsMFIs
– put–itput it a lowly
a lowly No. 21.
No. 21.
Weak
Weakgovernance
governance One One region
region where where concern
concern aboutabout corporate
corporate governance
governance was was particularly
particularly strong
strong was was
is making
is making
thethe Africa,
Africa, wherewhere it ranked
it ranked No. No. 2. Marie-Jose
2. Marie-Jose Ndaya
Ndaya Ilunga,
Ilunga, deputy
deputy director
director of the
of the
credit
credit
crisis
crisis central
central bankbank of RD
of the the RD Congo,
Congo, said said
that that “poor
“poor governance
governance creates
creates management
management
problems,
problems, mainly
mainly in area
in the the area of lending.
of lending. MostMost
MFIsMFIs
whichwhich
closeclose
downdown in RDC
in the the RDC
worse
worse havehave run into
run into governance
governance problems”.
problems”.
The The
focusfocus of concern
of concern is only
is not not only the quality
the quality of MFI
of MFI boards,
boards, but risk
but the the risk of conflicts
of conflicts
of interest,
of interest, of lackof lack of independence
of independence and poor
and poor accountability,
accountability, and other
and other issues
issues suchsuch
as as
nepotism,
nepotism, cronyism,
cronyism, domineering
domineering personalities...
personalities... Although
Although the the passing
passing of the
of the
economic
economic crisiscrisis has taken
has taken immediate
immediate pressure
pressure off MFIs,
off MFIs, the new
the new difficulties
difficulties facing
facing
themthem
on theon reputational
the reputational
and and credit
credit fronts
fronts couldcould
makemake strong
strong corporate
governance
eveneven
moremore crucial.
crucial. BrianBrian Slocum,
Slocum, regional
regional coordinator
coordinator for Middle
for the the MiddleEast East
and and
Africa
Africa at theat Grameen
the Grameen Foundation,
Foundation, said said
that that
“weak“weak corporate
governance has been
has been a a
key key factor
factor in existing
in existing portfolio
portfolio crises,
crises, and and it will
it will likely
likely be one
be one in future
in future crises
crises as as
well.”
well.”
One One concern

concern is that
is that MFIsMFIs themselves
themselves do not
do not
One
One
reason
reason
whywhy devote
devote enoughenough attention
attention to to governance
governance
governance
governance
is weak
is weak because
because theythey are dominated
are dominated by self-interested
by self-interested
directors
directors or view
or view it asit inconvenient.
as inconvenient.DiegoDiego
“Too“Toomanymanyconferences
conferences
whichwhich Guzman,
Guzman, regional
regional director
director for for
Latin Latin America
America
take take
the best MFI MFI
the best leaders
leaders at ACCION
awayawayat ACCION International
International in Colombia,
in Colombia, said said
fromfrom
theirtheir
desks”.
desks”. that that
“MFIs“MFIs believe
believe this this
is a is a game
game and and
you you
do do
not need
not need to invest
to invest in field”.
in this this field”.
Project leader
Project leader
Microfinance network
Microfinance network Several
Several respondents
respondents said said
that that
it is itnot
is enough
not enough
The Netherlands
The Netherlands for governance
for governance standards
standards merelymerely to remain
to remain
staticstatic because
because the evolution
the evolution of theof sector
the sector
will will
require
require boards
boards of ever
of ever higher
higher calibre.
calibre. Many Many referred
referred to “the
to “the moremore challenging
challenging
environment”,
environment”, “the “the exposure
exposure of sector
of the the sector to media”
to the the media” and and “growing
“growing industry
industry
complexity”.
complexity”.
However,
However, it is itwrong
is wrong to generalize
to generalize aboutabout
this this particular
particular risk,risk,
and and
somesome respondents
respondents
saw saw
moremore positive
positive trendstrends emerging.
emerging. MoreMore professionals
professionals werewere becoming
becoming involved,
involved,
investors
investors werewere pressing
pressing for higher
for higher standards,
standards, and and regulators
regulators werewere taking
taking a closer
a closer
interest
interest in thein problem.
the problem. Santhanam
Santhanam Srinivasan,
Srinivasan, a development
a development finance
finance consultant
consultant in in
India,
India, said said
that that
“with“with stricter
stricter regulation,
regulation, this area
this area will will improve”.
improve”.

5.5.Political
Politicalinterference
interference(10)
(10)
The
Theturmoil
turmoilin inAndhra
AndhraPradesh
Pradeshpropelled
propelledthis
thisBanana
BananaSkin
Skinto toa new
a newhigh
highin inthethe
rankings
rankings as as
thethe microfinance
microfinance sector
sector assessed
assessed a whole
a whole new
new setset
of of risks
risks coming
coming from
from a a
direction
direction that
that waswas previously
previously benign.
benign.
However
However thethe response
response waswas very
very varied.
varied. Asians,
Asians, notnot surprisingly,
surprisingly, putput
it it
toptop overall,
overall,
andLatin
and LatinAmericans
Americansat atNo.
No.3. 3.But
ButAfricans
AfricansandandCentral
Centraland
andEastern
EasternEuropeans
Europeans
ranked
ranked it it
wayway down
down at at
No.No.
22.22.Among
Among respondent
respondent types
types thethe most
most concerned
concerned were
were
investors
investors andand analysts
analysts (No.
(No. 4),4),
butbutforfor regulators
regulators it was
it was No.No.
22.22.
Although
Although severe
severe political
political interference
interference hashas only
only affected
affected a few
a few countries
countries directly,
directly, it is
it is
nonethelesscausing
nonetheless causinghugehugedamage
damageto tothetheindustry
industryworldwide
worldwidebecausebecauseof ofintense
intense
media
media coverage.
coverage. Almost
Almost allall
ourour respondents
respondents commented
commented onon it itone
one way
way or or another.
another.
AnAninternational
internationalinvestor
investorfrom
fromEgypt
Egyptsaidsaidthat
that“political
“politicalinterference
interferencein inseveral
several
Interference
Interferenceby by markets
markets is is turning
turning thethe public
public against
against microfinance
microfinance industry
industry in in general.”
general.”
politicians
politiciansisis Political
interference takes
takes many
many forms.
forms. The
The most
most widespread
widespread is is usury
usury laws
laws capping
capping
growing
growing thethe interest
interest rates
rates that
that MFIs
MFIs cancan charge
charge their
their borrowers.Previously
borrowers. Previously in in decline,
decline, these
these
areare now
now ononthethe increase
increase again
again in in
thethe Indian
Indian sub-continent,
sub-continent, Latin
Latin America,
America, Africa
Africa andand
CentralEurope,
Central Europe,and andpose
posea direct
a directthreat
threatto toMFI
MFIprofitability.
profitability.But Butwhile
whilerate
ratecaps
caps
benefitMFI
benefit MFIborrowers
borrowersin inthetheshortshortrun,run,they
theymay
mayalsoalsodamage
damagethethemicrolending
microlending
marketfurther
market furtherout.out.Pierre-Marie
Pierre-MarieBoisson,
Boisson,chairman
chairmanof ofSogesol
Sogesolin inHaiti,
Haiti,said
saidthey
they
“could
“could reverse
reverse 3030 years
years of of progress
progress byby driving
driving MFIs
MFIs to to
cutcut millions
millions outout
of of access
access to to
credit,
credit, forcing
forcing thethe majority
majority to to
useuse moneylenders
moneylenders at at a higher
a higher interest
interest rate”.
rate”.
Moreimmediately
More immediatelydamaging
damagingarearethethepopulistic
populistic“no “nopago”
pago”campaigns
campaignsseen
seenin in
countries
countries like
like Nicaragua,
Nicaragua, Pakistan
Pakistan andand India
India where
where governments
governments have
have told
told borrowers
borrowers
notnotto torepay
repaytheir
theirloans
loansbecause
becausetheir
theirinterest
interestrates
ratesareareextortionate.
extortionate.These
Thesecould
could
drive
drive MFIsMFIsoutout
of of business
business altogether.
altogether.
Politicalinterference
Political interferencecan cantake
takeother
otherforms
formsas aswell:
well:product
productlimitations,
limitations,directed
directed
lendingto to“priority
lending “prioritysectors”
sectors”and andsubsidised
subsidisedcompetition
competitionfromfromgovernment
governmentloan loan
programmes
programmes and
and state-supported
state-supported banks.A A
banks. respondent
respondent from
from Mali
Mali said
said that
that thethe state
state
was“directing
was “directingresources
resourcestowards…high-risk
towards…high-riskcustomers
customersthrough
throughthethedisposition
dispositionof of
public
public funds
funds with
with little
little technical
technical selection
selection criteria”.
criteria”.
TheTherisks
risksin inpolitical
politicalinterference
interferenceareareseenseento tolieliemainly
mainlyononthethefunding
fundingside:
side:thethe
concern
concern that
that investorswill
investors will
bebe frightenedoffoffbyby
frightened allallthethe bad
bad publicity.Eric
publicity. Eric Savage,
Savage,
president
president of of Unitus
Unitus Capital
Capital in in India,
India, wrote
wrote that
that “there
“there is is a very
a very realreal risk
risk that
that many
many of of
thethe largestMFIs
largest MFIsin in India
India could
could begin
begin defaulting
defaulting onon their
their debt
debt in in
thethe coming
coming days,
days,
weeks
weeks andand months…Political
months…Political risk
risk hashas made
made it more
it more challenging
challenging to to attract
attract funding
funding at at
reasonable
reasonable rates,
rates, or or
in in some
some cases,
cases, at at all”.
all”.
ButButit it could
could also
also threaten
threaten MFIs
MFIs byby squeezing
squeezing margins,
margins, taking
taking away
away their
their business,
business,
andandhalting
haltingtheir
theirgrowth.
growth.AsAsone
onerespondent
respondentsaid:
said:“A“Apersistent
persistentnon-profit,
non-profit,credit-
credit-
only
only (or(or overly
overly politicised
politicised self-help
self-help group)
group) sector
sector will
will simply
simply stop
stop thethe industry
industry where
where
it is
it is now”.
now”.
Many
Many respondentssaid
respondents saidthat
thatpolitical
politicalrisk
riskresulted
resultedfrom
froma failure
a failure of ofunderstanding,
understanding,
wilful
wilful or or otherwise,
otherwise, about
about thethe value
value of of microfinance.AsAs
microfinance. oneone respondent
respondent said:
said: “We
“We
arearenotnotwinning
winningthethewar
warof ofideas”.
ideas”.Risk
Riskmitigation
mitigationmust
mustlieliein ingetting
gettinga abetter
better
message
message across
across about
about thethe benefits
benefits of of microfinance.But
microfinance. But many
many respondents
respondents thought
thought
that
that thethe industry
industry hadhad brought
brought this
this risk
risk upon
upon itself
itself through
through itsits aggressive
aggressive lending
lending and
and

IPOs:
IPOs:
good
good
or greedy?
or greedy?
FEWFEW EVENTSEVENTS
havehave
turned
turned
public
public
opinion
opinion
against
against
microfinance
microfinance
moremore
than than
the lucrative
the lucrative
InitialInitial
Public Offerings
Public (IPOs)
Offerings of MFI
(IPOs) of shares on the
MFI shares onstock market.
the stock The resulting
market. “windfall”
The resulting “windfall”
gainsgains
reaped by shareholders
reaped seemseem
by shareholders inappropriate for anfor
inappropriate industry with with
an industry a social purpose.
a social purpose.
ManyMany
respondents
respondentssaid that IPOsIPOs
said that werewere
adding to the
adding topolitical
the politicaland reputation risks risks
and reputation in thein the
industry, and would
industry, and would hasten a regulatory
hasten crackdown.
a regulatory crackdown. Gert Gertvan Maanen, chairman
van Maanen, chairmanof of
Microfinance Centre
Microfinance in Poland,
Centre said said
in Poland, that that
microfinance’s
microfinance’s“original concept
“original of ‘How
concept to to
of ‘How
enable poorpoor
enable people to earn
people a living'
to earn is moving
a living' towards
is moving towards‘How‘How to accommodate
to accommodate investors
investors
in their wish wish
in their to earn an attractive
to earn dividend
an attractive and -and
dividend if an- ifIPO
an isIPOfeasible - a windfall
is feasible - a windfall
profit’.
profit’.
MostMost
popular
popular
support
support
for microfinance
for microfinance is based
is based
on its onsocial
its social
relevance,
relevance,
not onnottheon the
earnings it brings
earnings to investors.
it brings IPOsIPOs
to investors. implyimply
that that
investment
investment considerations are taking
considerations are taking
over over
and calling the shots”.
and calling the shots”.
Marcus Fedder,
Marcus managing
Fedder, managingpartner of Agora
partner Microfinance
of Agora Partners
Microfinance in thein UK,
Partners the said
UK, saidthat that
IPOsIPOs
also also
risked attracting
risked the wrong
attracting sort sort
the wrong of people into into
of people microfinance,
microfinance,“…people
“…people who who
are driven moremore
are driven by the
by business model
the business of fast
model of growth and big
fast growth andbucks through
big bucks an early
through an early
IPO than by sustainable,
IPO than client-driven
by sustainable, services
client-driven for the
services forpoor. In theInlong
the poor. run, this
the long run, isthis
likely
is likely
to (a)tolead to a sub-prime
(a) lead like bubble,
to a sub-prime (b) give
like bubble, a bada name
(b) give to the
bad name towhole industry
the whole and (c)
industry and (c)
probably deterdeter
probably socially-minded investors”.
socially-minded investors”.
But some respondents

But some saw good
respondents in stock
saw good market
in stock flotations.
market Shadab
flotations. Rizvi,Rizvi,
Shadab who whoruns runs
the the
microfinance business
microfinance unit unit
business at Darashaw & Co.,
at Darashaw an Indian
& Co., investment
an Indian house,
investment said said
house, that that
MFI owners werewere
MFI owners “incapable of mobilising
“incapable hugehuge
of mobilising sumssums
of equity on their
of equity own.own.
on their Gradually
Gradually
we'll we'll
see private equity
see private investors
equity becoming
investors owners
becoming of many
owners MFIs,MFIs,
of many especially if theifMFI
especially the isMFI is
IPO-bound”.
IPO-bound”.
highhigh
profile
profile
IPOs.
IPOs.
For them,
For them,
the risk
the risk
needed
needed
to betomanaged
be managed
by halting
by halting
mission
mission
driftdrift
and refocusing
and refocusing the business
the business on itsonphilanthropic
its philanthropic goals.
goals.
ThereThere
was was
littlelittle
sensesense
that that this risk
this risk will will subside.
subside. It may
It may eveneven grow.
grow. One One respondent
respondent
said said gloomily:
gloomily: “I fear
“I fear this this misinformed
misinformed boycott
boycott will will spread
spread outside
outside of Andhra
of Andhra
Pradesh
Pradesh and India
and India to thetorest
the of
restthe
ofworld.”
the world.”
6. 6.Inappropriate
Inappropriate
regulation
regulation
(13)
(13)
THETHE QUALITY
QUALITY of regulatory
of the the regulatory environment
environment for microfinance
for microfinance is a rapidly
is a rapidly rising
rising
concern, up seven
concern, places
up seven sincesince
places the last
the survey. The The
last survey. problem varies
problem greatly
varies fromfrom
greatly one one
region
region to another:
to another: somesome countries
countries havehavegoodgood regulation,
regulation, others
others havehave
poorpoor
or or
obstructive
obstructive regulation.
regulation. But But the general
the general sensesense is that
is that the problem
the problem is growing
is growing rather
rather
Many
Many countries
countries than than shrinking.
shrinking.
stillstill
lacklack
good
good
microfinance
microfinance Regulation
Regulation was was
highhigh on list
on the the for
list practitioners,
for practitioners, particularly
particularly in Latin
in Latin America,
America, the the
CEE,CEE,
AsiaAsia
and and
the the
Far Far
EastEastwherewhere fast-growing
fast-growing microfinance
microfinance industries
industries are are
regulation
regulation increasingly
increasingly running
running into into regulatory
regulatory obstacles.
obstacles.
In a In a typical
typical comment,
comment, ScottScott Richards,
Richards, an associate
an associate at Developing
at Developing WorldWorld Markets,
Markets, a a
US US microfinance
microfinance investment
investment firm,firm,
said said
that that
“many“many countries
countries lack lack microfinance-
microfinance-
specific
specific regulations,
regulations, andour
and in in experience,
our experience, the regulatory
the regulatory regimes
regimes in place
in place to govern
to govern
deposit-taking
deposit-taking banks
banks and and
otherother financial
financial institutions
institutions do not
do not fullyfully or effectively
or effectively
address
address the specific
the specific regulatory
regulatory needs needs ofmicrofinance
of the the microfinance industry.”
industry.”

Many
Many respondents
respondentssaw sawregulation
regulationfailing
failing
to to
take
takeaccount
accountof of
microfinance’s
microfinance’sspecial
special
character:
character: itsits
social role,
social itsits
role, ownership
ownership structure, itsits
structure, different cost
different base.
cost base.Bad
Bador or
non-
non-
existent
existentregulation
regulationwaswashindering
hinderingthethe
growth
growth and profitability
and of of
profitability microfinance, it was
microfinance, it was
stifling
stiflingMFIs,
MFIs,holding
holdingbackbackinnovation,
innovation,preventing
preventingit itfrom
fromcompeting
competingwithwithnewnew
entrants
entrantslike commercial
like commercial banks
bankswhere
where regulation
regulationwaswasmore
morehighly
highlydeveloped.
developed.
AA respondent
respondent from
from East
East Africa
Africa said
said that
that poor
poor regulation
regulation “is“is already
already taking
taking itsits
tolltoll
onon
regulatedMFIs
regulated MFIsin inmanymanycountries
countriesand andis isdiscouraging
discouragingmovement
movementtowardstowards[a [a
regulated
regulated industry]
industry] in in others”.Bassem
others”. Bassem Khanfar,
Khanfar, CEOCEO of of
thethe National
National Microfinance
Microfinance
Bank
Bank in in Jordan,
Jordan, said
said that
that unclear
unclear legislation
legislation andand lack
lack of of professionalism
professionalism could
could “put“put
thethe industry
industry underconstraints
under constraints andandeliminate
eliminate itsitsgrowth”,
growth”, andandthat
that
it itwas
was“better
“better to to
live
live without
without a law
a law rather
rather than
than to tolive
live with
with a bad
a bad law”.
law”. SomeSome respondents
respondents said
said that
that
poorregulation
poor regulationwaswasundermining
underminingconfidence
confidencein inmicrofinance,
microfinance,which whichwould
wouldaffect
affect
clients
clients and and investors.It was
investors. It was also
also driving
driving smaller
smaller MFIsMFIsoutoutof of business.
business.
Muchinappropriate
Much inappropriateregulation,
regulation,such suchas asinterest
interestrate
ratecaps,
caps,springs
springsfromfrompolitical
political
interference.But
interference. But respondents
respondents also
also sawsawbadbad regulation
regulation jeopardising
jeopardising MFIs
MFIs byby making
making
it itdifficult
difficultforforthem
themto todiversify
diversifyaway awayfrom fromthetheincreasingly
increasinglyrisky riskybusiness
businessof of
lending,
lending, forforexample
example byby offering
offering newnewproducts
productsor oraccessing
accessing people’ssavings.
people’s savings.The
The
CEOCEO of of
ananMFI MFIin in Pakistan
Pakistan said
said that
that microfinance
microfinance was
was stagnating
stagnating there
there because
because half
half
thetheindustry
industry wasnotnotallowed
was allowedto totake
takedeposits.
deposits.“The “Theindustry
industry cannotand
cannot andwill
willnotnot
grow
grow unless
unless a window
a window is is made
made available
available fromfrom thethe regulator
regulator at at commercial
commercial rates.The
rates. The
industry
industry potential
potential is is circa
circa 30m
30m while
while thethe current
current outreach
outreach is is less
less than
than 2m”.
2m”.
The
Therisks
risksininregulation
regulation
Microfinance
Microfinance needs
needs to to
find
find
itsits
place
placein in
thethe
global
globalfinancial
financial
system.
system. Either
Either
there
there
hashas
to to
bebe
a clear
a clear regulatory
regulatory environment
environment distinguishing
distinguishing and and recognising
recognising thethe microfinance
microfinance sector,
sector,
or orthethe
industry
industryneeds
needsto tomainstream
mainstreamitself itselfas aspart
partof of
thethe banking
banking or or
non-banking
non-banking
segment
segmentas asthethecasecasemaymaybebein ineach eachcountry.
country.The Theriskriskof ofananunclear
unclearregulatory
regulatory
environment
environment is probably
is probably thethe
main
mainriskrisk
at at
thethe
moment.
moment.
Prashant
Prashant
Thakker
Thakker
Global business
Global head
business – microfinance
head – microfinance
Standard Chartered
Standard Bank
Chartered Bank
The
Theproblem
problemofof
AnAn increasingly
increasingly pressing
pressing regulatory
regulatory question
question is is
thethe creation
creation of of a level
a level playing
playing field
field
‘unfair’
‘unfair’ betweenMFIs
between MFIsand andcommercial
commercialbanks banksto todealdealwithwiththetheproblem “unfair”
problemof of“unfair”
competition
competition competition.
competition. Many
Many respondents
respondents feltfelt that
that poor
poor MFI MFI regulation
regulation waswas putting
putting themthem at at
a a
disadvantage
disadvantage vis-à-vis
vis-à-vis these
these new
new entrants,
entrants, forfor example
example in in
thethe range
range of of products
products they
they
could
could offer
offer and
and in in their
their access
access to to funding,
funding, and
and even
even their
their ability
ability to to move
move intointo
newnew
areaslike
areas likemobile
mobilebanking.
banking.Godwin
GodwinKihuguru,
Kihuguru,microfinance
microfinancespecialist
specialistin inUganda,
Uganda,
saidthat
said thatregulators
regulatorswere were“finding
“findingit itdifficult
difficultto tokeep
keeppacepacewithwithadvances
advancesin in
microfinanceservice
microfinance servicedelivery”.
delivery”. In Insome somecountries
countriestherethereis isa areverse
reverseproblem:
problem:
regulators
regulators over-protecting
over-protecting thethe microfinance
microfinance against
against newnew competition,
competition, andand causing
causing it it
to to stultify.
stultify.
AA different
different sort
sort of of regulatory
regulatory risk
risk was was raised
raised byby somesome respondents:
respondents: thethe absence
absence of of
good
good consumer
consumer protection
protection legislation
legislation in in many
many markets.This
markets. This
is is allowing
allowing thethe growth
growth
of of overindebtedness
overindebtedness andand increasing
increasing thethe risk
risk of of reputation
reputation damage
damage to to
thethe microfinance
microfinance
industry.The
industry. The growing
growing number
number of of
loanloan defaults
defaults is is also
also exposing
exposing thethe inadequacy
inadequacy of of
many
many legalsystems
legal systemsin inthetheareaareaof ofloan
loanrecovery
recovery and andliquidation.
liquidation.A Amicrofinance
microfinance
practitioner
practitioner in inthethe Côte
Côte d'Ivoire
d'Ivoire saidthat
said thatin in
herhercountry
country “apartfrom
“apart from calling
calling in in
thethe
bailiffs,
bailiffs, there
there is is
nonolawlaw that
that obliges
obliges borrowers
borrowers to to repay
repay their
their loans”.
loans”.

However
However thethe
patchiness
patchiness
of of
regulatory
regulatoryrisk
risk
was
was
highlighted
highlighted byby
a number
a number
of of
dissenting
dissenting
views
viewswhich
which gave a more
gave a morepositive picture.
positive picture.AnAn MFI
MFI respondent
respondentfrom Peru
from Peru said that
said that
regulation
regulationthere
therewas
wasencouraging
encouragingbetter
bettercontrols
controlsand
andrisk
riskmanagement,
management,and andothers
others
said that
said regulators
that were
regulators increasingly
were increasinglyprofessional
professionaland constructive.
and constructive.
7.7.Management
Managementquality
quality(4)
(4)
CONCERN
CONCERN about
about thethe quality
quality of of management
management in in MFIs
MFIs hashas eased
eased a bit,
a bit, butbut
is is still
still in in
thetheTop
TopTen.
Ten.It Itwas wasa aleading
leadingproblem
problemforformost
mostrespondent
respondenttypes,
types,though
though
practitioners tended
practitioners tended to to
rank it less
rank high
it less than
high outsiders.
than outsiders.Geographically,
Geographically, concern
concern waswas
strongest
strongestamong
amonginvestor
investorcountries
countriesin inNorth
NorthAmerica
Americaand andWestern
WesternEurope,
Europe,and and
lowestamong
lowest amongpractitioner
practitionercountries
countries(Latin
(LatinAmerica
Americaplaced
placedit itNo.
No.18)18)except
exceptforfor
Africa
Africa where
where it ranked
it ranked No.
No. 4. 4.
AsAsin inearlier
earliersurveys,
surveys,thethefocus remainsononthethelack
focusremains lackof ofprofessionalism
professionalismand and
technical
technical expertise
expertise in in MFIs,
MFIs, leading
leading to to poor
poor internal
internal controls,
controls, ineffective
ineffective strategies,
strategies,
Still
Stilltoo
toomany
many andandpoor
poormanagement
managementof ofincreasingly
increasinglyimportant
importantareasareassuchsuchas asrisk,
risk,product
product
‘will-do-good’
‘will-do-good’ developmentand
development andtechnology.
technology.AsAsone onerespondent
respondentsaid:said:“There
“Therearearestill
stilltootoomany
many
‘will-do-good’people
‘will-do-good’ peoplewith
withnonoreal
realmanagement
managementskills”.
skills”.Essma
EssmaBen BenHamida,
Hamida,co-co-
people
peopleinin founder
founder and
and executive
executive director
director of of Enda
Enda Inter-Arabe
Inter-Arabe in in Tunisia,
Tunisia, said
said there
there was was“a“a lack
lack
microfinance
microfinance of of local
local skills
skills forfor working
working in in MFIs,
MFIs, particularly
particularly at at senior
senior levels
levels with
with experience
experience of of
financeand
finance andbanking
bankingto toensure
ensurestrong
strongmanagement
managementand andsuccession
successionto tothetheolderolder
generation”.
generation”.
In Inthethe African
African market,
market, where
where managementcapacity
management capacityis is seen
seen to to
bebe most
most stretched,
stretched, a a
respondentfrom
respondent fromGhana
Ghanasaid saidthat
that“the
“thequality
qualityof ofgovernance
governanceand andmanagement
management
remains
remains a key
a key risk
risk forfor
thethe majority
majority of of microfinance
institutions in in Africa.The
Africa. The failure
failure
of of several
several deposit-taking
deposit-taking institutions
institutions in in Nigeria
Nigeria and
and Cameroon
Cameroon have
have exemplified
exemplified this
this
pattern.Regulators
pattern. Regulators areare
notnot doing
doing enough
enough to to hold
hold managers
managers accountable,
accountable, especially
especially
forfor insider
insider lending.This
lending. This could
could damage
damage thethe credibility
credibility of of microfinance
institutions
among
among depositors”.
depositors”.
Growing
Growingpains
pains
ForFor
many
many respondents,
respondents, thetherisks
risks
facing
facingmicrofinance
microfinance could
could
bebesummed
summed upupin in
oneoneword:
word:
growth.The
growth. The hectic
hectic pace
pace at at which
which microfinance
microfinance hashas grown
grown over
over recent
recent years
years is arguably
is arguably
thethe
cause
causeof of
manymany of of
thethedifficulties
difficultiesit now
it nowfaces: anan
faces: overindebted
overindebted clientele,
clientele,stressed
stressed
management
management and andback
backoffice,
office,loss
lossof of
sense
senseof of
mission,
mission,andand anan increasingly
increasingly uneven
uneven
distribution
distributionof ofresources
resources within
within thetheindustry.
industry. AsAs one
onerespondent
respondent said: “Managing
said: “Managing
growth
growthhashas
proven
proven to to
bebea risk
a riskarea.
area.AtAtone end,
one you
end, have
you institutions
have institutions in in
specific
specificcountry
country
contexts
contextsthat areare
that growing
growing in in
ananunsustainable
unsustainable fashion and
fashion andwillwill
overheat.
overheat.AtAtthethe
other
other
end, you
end, have
you have institutions
institutionsin in
other
other country
country contexts
contextswhere
wheregrowth
growth hashas
been
beenvery
veryslow
slow
relative to to
relative thethe
business
businessopportunity
opportunity and andthethe
development
development need.”
need.”
But
Buta agrowing
growingconcern
concernis isthat thatas asbusiness
businessbecomesbecomesmore moredifficult
difficultandandthetheMFIs
MFIs
themselvesbecome
themselves becomemore morecomplex,
complex,management
managementwill willincreasingly
increasinglyfailfailto tocutcutthethe
mustard.
mustard.A A respondent
respondentfrom fromone oneof ofthethelarge
largeinternational
internationalinvestor
investornetworks
networkssaid said
thatgood
that goodmanagement
management“is“isgoing goingto tobecome
becomemuch muchmoremoreimportant.
important. MFIs MFIsmust must
jugglea significantly
juggle a significantly largernumber
larger numberof oftasks tasksand andexpectations
expectationsas ascompared
comparedto tothethe
past.This
past. This will
will require
require a much
a much higher
higher level
level of of management
management and
and leadership
leadership potential.”
potential.”
A Aconsequence
consequence of of theserising
these rising demands
demands is isthat
that skills,
skills, already
already in inshort
shortsupply,
supply,willwill
becomeharder
become harderto tofind
findandandmore
moreexpensive.
expensive.A AUSUSrespondent
respondentexpected
expectedto toseesee“a“a

dramatic
dramatic
increase
increase
in competition
in competitionfor good
for good
quality
quality
people,
people,
potentially
potentially
leading
leading
to to
increased staffstaff
increased acquisition costs”.
acquisition Linked
costs”. to this
Linked is the
to this is fear, expressed
the fear, by Eric
expressed by Eric
Duflos, senior
Duflos, microfinance
senior specialist
microfinance at CGAP
specialist in France,
at CGAP that that
in France, “many institutions
“many institutions
will will not have
not have the capacity
the capacity internally
internally to deliver
to deliver the growth
the growth ratesrates
theythey
havehave promised
promised
to their boards
to their and their
boards investors,
and their and thus
investors, will will
and thus fail”.fail”.
WithWith credit
credit and and reputation
reputation risk risk
bothboth growing,
growing, skillsskills
will will
also also be needed
be needed in risk
in risk
management,
management, particularly
particularly in lending,
in lending, and and public
public relations,
relations, a relatively
a relatively new new
area area
for for
MFIs.MFIs. A risk
A risk manager
manager at one
at one of large
of the the large microfinance
investment companies
companies said said
that that “in stressful
“in stressful situations,
situations, we have
we have seenseen management
management incapable
incapable of addressing
of addressing
problems”.
problems”.
However
However somesome respondents
respondents felt felt
that that things
things werewere improving
improving on management
on the the management
front,front,
which which
maymay be why
be why it hasit fallen
has fallen
a fewa few notches
notches in rankings.
in the the rankings.
As oneAs of
onethem
of them
said,said,
this this is an
is not notarea
an area
where where generalisation
generalisation is possible:
is possible: “This“This is primarily
is primarily an MFI
an MFI
specific
specific risk risk - although
- although the economic
the economic pressures
pressures and and over-indebtedness
over-indebtedness in mature
in mature
microfinance
microfinance markets
markets will will
imposeimpose
muchmuch greater
greater pressures”.
pressures”.
8. 8.Staffing
Staffing
(14)
(14)
A wider
A widerrange
range STAFFING
STAFFING risksrisks
are on
are the
on rise
the rise
againagain
afterafter
falling
falling
in earlier
in earlier
surveys,
surveys,
perhaps
perhaps
because
because the crisis-related
the crisis-related Banana
Banana SkinsSkinswhich which displaced
displaced themthem in 2009
in the the 2009 survey
survey
of skills
of skills
is is havehave receded.
receded. ThisThis risk was
risk was ranked
ranked highhigh by practitioners,
by practitioners, regulators,
regulators, LatinLatin American
American
nownow
required
required and African
and African respondents,
respondents, suggesting
suggesting it is it is more
more of a of a concern
concern to those
to those closely
closely involved
involved
inmanagement
in the the management of MFIs
of MFIs than than to investors
to investors and analysts.
and analysts.
Perceptions
Perceptions of this
of this risk risk varied.
varied. StaffStaff capability
capability was was a recurring
a recurring theme,theme,
withwith several
several
respondents bemoaning
respondents bemoaningthe scarcity of good
the scarcity people
of good withwith
people expertise in microfinance.
expertise in microfinance.
The The
lack lack of “talent”
of “talent” and and “competent
“competent manpower”
manpower” camecame up frequently.
up frequently. DiegoDiego
Villalobos,
Villalobos, an analyst
an analyst withwith ACCION
ACCION in thein US,
the US,
said said
that that “finding
“finding the right
the right people
people to to
promote
promote the growth
the growth and and sustainability
sustainability of anofMFIan MFI is very
is very difficult.
difficult. FromFrom consultants
consultants
to managers,
to managers, MFIsMFIs
havehave a very
a very smallsmall
sourcesource to choose
to choose from.”
from.” As microfinance
As microfinance
becomes
becomes moremore commercialised,
commercialised, therethere is also
is also a growing
a growing needneed to balance
to balance different
different
typestypes of skills:
of skills: social
social and business.
and business.
On On skillsskills
the the front,front,
the the growing
growing role role of technology
of technology is creating
is creating new new demands.
demands.
Mayuni
Mayuni Ozaki,Ozaki, a finance
a finance specialist
specialist at theat the Asian
Asian Development
Development BankBank in the
in the
Philippines,
Philippines, said said
that that technology-based
technology-based branchless
branchless or mobile
or mobile banking
banking will will expand
expand
rapidly
rapidly overover the coming
the coming years,years, however
however “many“many MFIs,
MFIs, regulators,
regulators, and policy-makers
and policy-makers
don’tdon’t
havehave the sufficient
the sufficient skillsskills and capacity”.
and capacity”.
For For
othersothers the problem
the problem staffstaff
was was retention.
retention. A respondent
A respondent at National
at the the NationalBankBank
of of
Rwanda
Rwanda pointed
pointed to low
to low pay pay as reason
as the the reason
MFIsMFIs cannot
cannot recruit
recruit and and
retainretain qualified
qualified
staff.staff. Poaching
Poaching is another
is another problem
problem created
created by rising
by rising competition. Another
competition. Another
respondent
respondent said:said: “In Afghanistan
“In Afghanistan theythey
jokejoke
that that
a joba as
joba as a loan
loan officer
officer leadsleads to being
to being
a branch
a branch manager
manager leadsleads
to a to a bank
bank job then
job and and then to Canada.
to Canada. ThisThis is extreme,
is extreme, but not
but not
by much”.
by much”.
Other
Other risksrisks
whichwhich respondents
respondents associated
associated withwith staffing
staffing werewere
fraud,fraud, credit
credit risk risk
(undertrained
(undertrained loanloan officers
officers not understanding
not understanding theirtheir borrowers),
borrowers), and and regulation
regulation as ill-
as ill-
equipped
equipped staffstaff grapple
grapple withwith increasingly
increasingly complex
complex microfinance
microfinance legislation.
legislation.

9.9.Mission
Missiondrift
drift(19)
(19)
THE
THE RISK
RISKof of mission drift
mission is is
drift upupsharply, in in
sharply, line with
line other
with otherrisks in in
risks this area
this such
area suchas as
Reputation.
Reputation.It Itranked
rankedhigh
highin in
most
mostsectors
sectorsexcept
except Africa
Africawhere
whereit it
was wasNo.
No.13,13,
and and
Central
Centraland Eastern
and EasternEurope
Europe where
where it came down
it came down at at
No. 19.19.
No.
TheTheissue
issuein inthis
thisrisk
riskis isthethegrowing
growingconflict
conflictbetween
betweenthethesocial
socialand andcommercial
commercial
goals
goals of of microfinance,
microfinance, andand thethe risk
risk to to MFIs
MFIs if they
if they switch
switch their
their focus
focus from
from thethe first
first to to
thethe second
second or,or,
as as
somesome putput it, it, from
from a double
a double to to a single
a single “bottom
“bottom line”.
line”. ButButforfor
manymany
people,
people, mission
mission drift
drift is is about
about more
more than
than focusing
focusing onon profit
profit rather
rather than
than poverty.It It
poverty. is is
also
also structural,
structural, epitomised
epitomised byby thethe shift
shift from
from “good”
“good” microlending
microlending to to “bad”
“bad” consumer
consumer
finance,
finance,andandthethehuge hugegrowthgrowthin inpersonal
personalindebtedness
indebtednessthat thatthis
thisis isseen
seento tohavehave
caused.The
caused. The“rapid
“rapid rise
rise of of consumer
consumer finance,
finance, whether
whether disguised
disguised as as housing
housing loans,
loans,
education
education loans,
loans, or or loans
loans forfor whatever
whatever ‘funder-fashionable’
‘funder-fashionable’ purpose”,
purpose”, is is pulling
pulling thethe
sector from
sector from itsits
purpose
purpose of ofpoverty
poverty alleviation
alleviation and financial
and financialinclusion,
inclusion, according
according to to
a a
microfinance
microfinance advisor
advisor in in
thethe Netherlands.
Netherlands.
AA further
further shift
shift is is from
from thethe rural
rural poor
poor to to
thethe already
already well-served
well-served urban
urban masses.
masses. Jeffrey
Jeffrey
Ashe,director
Ashe, directorof ofcommunity
communityfinancefinanceat atOxfam
OxfamAmerica,
America,saidsaidthat
that“the“themajor
major
challengefaced
challenge facedbyby commercialmicrofinance
commercial microfinanceis…theis…theongoing
ongoingissue
issueof ofleaving
leavingoutout
approximately
approximately 8080 perper cent
cent of of
thethe market,
market, essentially
essentially thethe rural
rural poor,
poor, andand developing
developing
effective
effective tools
tools forfor mobilising
mobilising savings”.
savings”.
Mission
Missiondrift
driftisis Butthethenotion
But notionof ofmission
missiondrift
driftbegs
begsthethe question:from
question: fromwhat
whatmission
missionis isthethesector
sector
drifting?AsAsone
drifting? onerespondent
respondentputputit, it,“One
“Oneperson’s
person’s‘mission
‘missiondrift’
drift’is isanother’s
another’s
a arisk
riskthat
thatneeds
needs ‘productline
‘product lineextension’.
extension’.The
The key
key is isto toensure
ensure that
that valuesareare
values reflected
reflected in in strategy,
strategy,
totobebeactively
actively operations,
operations, management
management and
and governance”.
governance”.
managed
managed The
The consequences
consequences of of mission
mission drift
drift areare already
already
AAsimple
simpleguide
guidetoto plain to to see:
plain see: political
political backlash,
backlash,
mission
missiondrift
drift disillusionment among
disillusionment among supporters,
supporters, severe
severe
reputationdamage
reputation damage– –and andconfusion
confusionamong among
“The
“Thebigger;
bigger;thethemore microfinance’s investors.
commer- microfinance’s
morecommer- investors. Paul Paul DiLeo,
DiLeo,
cial;
cial;
thethe
more
more
mission
missiondrift”.
drift”. presidentof ofGrassroots
president GrassrootsCapital
CapitalManagement,
Management,
wondered whether
wondered whether thethe purpose purpose of of
Microfinance
Microfinance policy
policy
adviser
adviser microfinancewas
microfinance was“social
“socialimpact
impactand andsocial
social
TheTheNetherlands
Netherlands change,or orfinancial
change, financialreturn
returnto toinvestors?
investors?The The
two
two aren’t
aren’t mutually
mutually exclusive,
exclusive, and
and some
some maymay
prioritise
prioritise one
one overoverthethe other.
other. But
But practitioners
practitioners need
need to to
bebe clear
clear where
where their
their priority
priority
lies”.
lies”.
Many
Many respondents
respondents feltfelt that
that thethe risk
risk of of mission
mission drift
drift required
required active
active management,
management, like
like
any
any other
other risk.A A
risk. respondent
respondent from
from a major
a major Western
Western European
European microfinance
microfinance investor
investor
thoughtthat
thought thatthethe testforforMFIs
test MFIsnow nowlaylay
in in“social
“socialperformance
performancemanagement
managementrather
rather
than
than in in institutional
institutional and and financial
financial sustainability”.
sustainability”.
But,like
But, likemany
manyBanana
BananaSkins,
Skins,this
thisis isone
onewhere
wheregeneralisation
generalisationshould
shouldbeberesisted.
resisted.
Theamount
The amountof ofmission
missiondrift
driftvaries
variesgreatly
greatly fromcountry
from country to tocountry.
country.A Arespondent
respondent
from
from oneoneof of
thethe largest
largest Mexican
Mexican MFIs
MFIs said
said that
that cases
cases of of mission
mission drift
drift were
were “isolated;
“isolated;
moreoverwewehave
moreover havea alarge
largenumber
numberof ofintermediaries
intermediariesthatthatmaintain
maintaintheir
theiroriginal
original
mission”.
mission”.

10. Unrealisable expectations (18)

This Banana Skin is sharply up on last time, like the related risks of mission drift and
reputation, reflecting a fundamental theme of this survey: doubts about
microfinance’s effectiveness. But there was no clear pattern to the responses:
Western Europeans ranked it No. 4, Africans No. 19.
This Banana Skin isn’t about microfinance performing poorly. It is about its failure
to meet expectations – both social and financial. So the risk lies in the perceptions
that people have of microfinance, and the gap between these and reality: if people
conclude that microfinance is not meeting expectations, it is judged a failure.
Microfinance is
no magic wand Several respondents expressed frustration. “Yes, MFIs can't end world poverty;
they’re a piece of the puzzle only!” wrote one US respondent, and a practitioner in
Tanzania complained: “People's expectations of MFIs are normally beyond their
ability to deliver and the situation will persist until such a time when people's
perspectives on MFIs become more realistic”.
But for others, the “myth” of microfinance as a panacea for poverty alleviation is
being exposed. It is, as this report noted in 2009, “an industry surrounded by hype”,
with a permanent risk of disappointment, of expectations remaining unfulfilled.
“Given all the growing momentum, interest, and attention to the topic of financial
inclusion”, one CGAP analyst wrote this year, “will microfinance live up to the
hype? We need to temper expectations, to be clear about what microfinance is and is
not, and continue to explore new ways of delivering financial services to poor
people”.
Many respondents said it was up to the industry to communicate its message better
to ensure that expectations did not become excessive. Nigel Biggar, senior advisor
at the Grameen Foundation in the US, said that “MFIs need to be able to defend their
work not only from a financial perspective but, critically, from a social perspective.
To do this, social performance management is the key: understanding and
documenting the extent to which MFIs are reaching their target population - the
poor, the very poor, the unbanked, marginalised, etc. and documenting how
organisations manage their social performance to enable welfare gains for their
target populations. This would not only deflect criticism, it would strengthen how
microfinance delivers on its social objectives of poverty alleviation”.
11. Managing technology (15)

THE PROBLEM of getting technology right is moving up the risk scale. MFIs face
tough decisions on the management of their IT systems and their delivery strategies
in the near future. Do they have the know-how and the resources to get them right?
Some of our respondents thought these were among the most difficult issues facing
MFIs today: failure could put an MFI out of business. A microfinance analyst said it
was a case of “Invest in technology or cease to exist in five years”. Concerns about
this Banana Skin were strongest in Africa and the CEE.
Respondents identified several areas where MFIs needed to do better on technology.

One was internal systems, given the need to reduce costs and tighten up
management controls, for example in the area of credit. An Indian respondent said
that “a significant ramp up is required”.

Another was business strategy at a time when technology is bringing dramatic new
forms of mobile banking which could be crucial to an MFI’s ability to deliver the
service and remain competitive against commercial rivals. A US microfinance
consultant said there was a risk that the microfinance industry “won't position itself
aggressively enough to take advantage of branchless banking services, and will be
overtaken by mobile network operators and large banks who figure out how to get
into rural areas and go down-scale”.
A lack of IT skills was another concern. Many respondents feared that MFIs would
be pressed to manage technology successfully, given the scarcity and cost of experts,
and the high level of investment needed. A US policy adviser said that “all eyes are
on mobile banking, but it has only been proven at scale in a very few institutions.
The institutional capacity of the financial institution and the mobile phone provider
and the quality of the partnership will be critical to more success stories”.
12. Profitability (12)

ALTHOUGH concern about profitability has remained level, perception of this risk
is shifting. It used to be that profits were seen as a good thing, an indication of the
health and success of the microfinance industry. Increasingly, they are seen as bad, a
symptom of the unwelcome commercialisation of the sector. The risk is therefore
switching from finance to reputation.
Beth Porter, policy advisor to UNCDF, said it is “important for the industry to be
profitable - and to be seen as a good and sound investment. But the returns to
investors in IPOs should return to earth. Otherwise the backlash from politicians and
the public may lead regulators to put in place draconian measures, and investors to
move their support from innovation that is helping poorer and more vulnerable
populations to less controversial investments”.
An Indian respondent saw the risk to the industry lying in its “inability to address the
issue of profits and profiteering”.
Nonetheless, there is concern about the pressures on MFI profitability, and about the
risks these pose to the sustainability of the industry. Sebastien Duquet, a director of
Planis, a microfinance investor, said that profitability was shrinking on all
continents. “Competition is finally playing its part. But it is weakening certain
players, particularly the small ones.” Some respondents feared that, by squeezing
profitability, competition would spur MFIs to take greater risks, for example with
their lending.
Are profits
a good or a A further threat to profitability comes from political interference, in particular rate
bad thing? capping. Some respondents feared that MFIs might even have to reduce their
profitability to protect themselves from political and media attacks. A Mexican
respondent said that profits should come from “administrative efficiencies, and not
higher interest rates”.
But many respondents also emphasised that profits were healthy: it was a matter of
how they were shared out between many stakeholders, not just investors. One US
investor believed that “the commercial sector, funded in domestic markets, will lead
an expansion of the industry with more stable institutions, with a wider range of
services, and with less political interference.”

13.
13. Back
Backoffice
office(22)
(22)
THETHE ABILITY
ABILITY of of
MFIs
MFIs to to
keep
keepeffective
effectivecontrol of of
control their
theiroperations
operations as as
they evolve
they evolve
is is becoming
becoming a rising
a rising risk
risk issue.Many
issue. Many respondents
respondents said
said thatthat MFIs
MFIs were
were growing
growing at at
a a
faster
faster pace
pace than
than their
their back
back office
office systems
systems could
could handle,
handle, and and
thisthis
waswas exposing
exposing them
them
to tocredit
creditrisk
riskandandother
otherdangers.
dangers.A Arespondent
respondentfrom
fromPeruPerusaidsaidthat
thatthethetwotwomost
most
urgentrisk
urgent riskissues
issuesfacing
facingMFIsMFIswerewere“the“theabsence
absenceof ofinternal
internalcontrols
controlsto toensure
ensure
quality
quality growthportfolios,
growth portfolios,and andthethe risksassociated
risks associatedwith
withthethelack
lackof oftechnology
technology forfor
monitoring
monitoring multiple
multiple credits…”
credits…”
But
But concern
concern about
about this
this risk
risk varied
varied greatly:
greatly: it was
it was high
high in in Africa
Africa and
and thethe
FarFar East
East butbut
lowin inthetheCEE
low CEEand
andthetheMiddle
MiddleEast.
East.It Itwas
wasalso
alsohigh
highamong
amongregulators
regulatorsbutbutlow
low
amongpractitioners.
among practitioners.Philippe
PhilippeNsenga,
Nsenga,inspector
inspectorof ofmicrofinance
microfinanceat atthetheNational
National
Bankof ofRwanda,
Bank Rwanda,said
saidthat
thatMFIs
MFIssuffered
sufferedfromfromoperational
operationalrisk
riskbecause
becauseof of“ever
“ever
growing
growing operations
operations and
and products
products versus
versus poor
poor management
management information
information systems”.
systems”.
Respondentssaw
Respondents sawa anumber
numberof ofreasons
reasonsforforthetherise
risein inthis
thisrisk:
risk:thethepressures
pressuresof of
competition,thetheneed
competition, needto toexpand
expandthethebusiness
businessto tomeetmeetinvestor
investorexpectations,
expectations,poor
poor
strategic
strategic planning,
planning, andand a culture
a culture which
which treated
treated thethe back
back office
office as as boring.
boring. High
High cost
cost
waswas also
also a deterrent
a deterrent to to adequate
adequate investment
investment in in control
control systems.
systems.
However,thetherisks
However, riskswere
wereclear.
clear.Sanjay
SanjaySinha,
Sinha,managing
managingdirector
directorof ofMicro-Credit
Micro-Credit
RatingsInternational
Ratings Internationalin inIndia,
India,sawsawexcessive
excessivegrowth
growth“leading
“leadingto toa aloosening
looseningof of
control
control systems
systems which
which results
results in in portfolio
portfolio delinquency
delinquency and/or
and/or customer
customer abuse
abuse and
and a a
rising
rising level
level of of loan
loan losses…”
losses…”
Weak
Weakinternal
internal Respondents
Respondents said
said that
that badly
badly managed
managed MFIs
MFIs were
were losing
losing track
track of of their
their borrowers
borrowers and
and
thethe status
status of of their
their loans.This
loans. Thiswaswas exposing
exposing them
them to to
thethe additional
additional risks
risks of of multiple
multiple
controls
controlsare
are borrowing,delinquency
borrowing, delinquency andfraud.
and fraud.One
OneEuropean
Europeaninvestor
investorsaidsaidthat
that“in“inworkouts,
workouts,
hurting
hurtingMFIs
MFIs lenders
lenders often
often realise
realise that
that portfolio
portfolio data
data is is inaccurate”.
inaccurate”. Poor
Poor management
management information
information
systems
systems lead
lead to toill-informed
ill-informed decisions,and
decisions, andcontribute
contribute to toanother
anothersetsetof of risks:poor
risks: poor
accountability
accountability and and transparency.
transparency.
But
But some
some respondents
respondents sawsaw improvements
improvements in in this
this area,
area, under
under pressure
pressure from
from investors
investors
and
and regulators
regulators who
who areare concerned
concerned about
about mounting
mounting loan
loan losses.A A
losses. respondent
respondent from
from
Tanzaniasaid
Tanzania saidthat
thatMFIs
MFIs“are
“aremoving
movingmoremoreand andmore
moreinto
intoacquiring
acquiringaffordable
affordable
advancedtechnologies,
advanced technologies,and andbuilding
buildinginternal
internalcapacities
capacitiesto tohandle
handleback
backoffice
office
operations”, and
operations”, andananEgyptian
Egyptianinvestor
investorsaid
saidthat
that“best
“bestpractices
practicesarearenow
nowwidely
widely
shared
shared and
and applied”.
applied”.
14.
14.Transparency
Transparency(16)
(16)
TRANSPARENCY
TRANSPARENCYis isa risk forfor
a risk MFIs
MFIsif if
they dodonotnot
they disclose
discloseenough
enough information
information
abouttheir
about theirbusiness
businessand andservices
servicesto topreserve
preservethetheconfidence
confidenceof ofinvestors
investorsand and
customers.Although
customers. AlthoughMFIs MFIsarearedoing
doing betterononthis
better thisfront
frontthrough
throughfuller
fuller reporting,
reporting,
they
they maymay still
still bebe falling
falling behind
behind thethe rapid
rapid growth
growth of of investor
investor and
and media
media interest
interest in in
thethe
business.
business. This
This Banana
Banana Skin
Skin was
was a particular
a particular concern
concern to to regulators
regulators who
who putput
it it
at at
thethe
toptop
of of their
their list.
list.
AA respondent
respondent from
from ananMFIMFI rating
rating agency
agency said
said that
that risk
risk was
was rising
rising “because
“because more
more and
and
moretransparency
more transparencyis isexpected
expectedwith
withthetheincreasing
increasingattention
attentionof ofthetheinternational
international
media.”
media.”

Although
Although manymany
countries
countries now nowrequire
require
audited
audited
accounts,
accounts,there
there
is still
is stillscepticism
scepticism
about thethe
about quality of of
quality thethe
numbers,
numbers, particularly thethe
particularly reporting of bad
reporting of badloans.
loans. A ratings
A ratings
analyst in the
analyst Philippines
in the Philippines saidsaid
thatthat
“although
“althoughthere areare
there MFIs
MFIswho whostillstill
report a one
report a one
digit PAR,
digit PAR,if we carefully
if we carefullyexamine
examine their portfolio
their andand
portfolio how
howthey report
they reportPAR, PAR,wewecancan
seesee
thatthat
delinquency
delinquency is still major
is still problem
major problemamong
amongMFIs”.
MFIs”.
ButBut
thethe greater
greater riskrisk
maymaylie lie
on on
thethe social
social sideside where
where MFIs
MFIs cancan
no no longer
longer taketake their
their
charmed
charmed status
status forfor granted. AnAn
granted. investor
investor in inTheThe Netherlands
Netherlands saidsaidthatthat“the“the
microfinance
microfinance industry
industry willwill increasingly
increasingly havehaveto to prove
prove thethe effect
effect of of
its its activities.
activities.
Moretransparency
More transparencywillwillbe beneeded neededtowards
towardsMFI MFIclients
clients(about
(aboutpricing
pricingandand
conditions),
conditions), towards
towards investors
investors (about
(about potential
potential returns)
returns) andand towards
towards thethe outside
outside
world
world (about
(about thethe image
image of exploiting
of exploiting people)”.This
people)”. This calls
calls forfor communication
communication skills
skills
to be
to be added
added to an
to an MFI’s
MFI’s expertise.
expertise.
Khaled
Khaled Al-Gazawi,
Al-Gazawi, chief
chief executive
executive officer
officer of The
of The FirstFirst Microfinance
Microfinance Foundation
Foundation in in
Egypt,
Egypt, saidsaid
thatthat “with
“with more
more MFIs
MFIs being
being created
created everyeveryday,day,
andand with
with moremore clients
clients
being
being served,
served, transparency
transparency with
with clients
clients on on interest
interest rates
rates andand hidden
hidden costs
costs willwill
be be
a a
challenge.Investors
challenge. Investorsarearein inmicrofinance
microfinanceforforprofit,profit,andandthethesocial
socialgoals
goalsof of
microfinance
microfinance might
might notnot
comecomeon on
thethetoptop
of of
thethe
list.list. Regulatory
Regulatory frameworks
frameworks should
should
aimaim to balance
to balance a double
a double bottom
bottom lineline
andand guarantee
guarantee thatthatthethe client
client knows
knows thethe basis
basis on on
which
which he/she
he/she willwill borrow”.
borrow”.
15.
15.Strategy
Strategy(-)(-)
THE THEABILITY
ABILITY of MFIs
of MFIsto develop andand
to develop implement
implement a successful
a successful business
businessstrategy is is
strategy
becoming
becoming more
moreurgent in in
urgent these difficult
these times.
difficult times.ForFor
thethe
firstfirst
time thisthis
time year wewe
year
included Strategy
included among
Strategy amongourour
Banana Skins;
Banana it received
Skins; a middling
it received a middling ranking,
ranking,butbut
waswas
alsoalso
seen to to
seen be be
oneoneof of
thethe
faster-rising risks
faster-rising at No.
risks 6 because
at No. 6 because of of
thethe
bigbig
strategic
strategic
issues facing
issues MFIs.
facing MFIs.
A priori, MFIs
A priori, need
MFIs to have
need thethe
to have skills to manage
skills to managestrategy. Some
strategy. of our
Some respondents
of our respondents
feltfelt
these were
these absent
were absentfrom
fromthethe
governance
governance structure
structureof of
many MFIs.
many MFIs.AnAn MFI MFI
director in in
director East Africa
East Africasaidsaid
thatthat
successful
successfulstrategy
strategy“will depend
“will dependon on
quality
quality
management,
management, which is not
which abundantly
is not abundantly available”.
available”.
Respondents
Respondentsidentified
identifiedseveral
severalaspects
aspectsto tostrategic
strategicrisk:
risk:scaling,
scaling,profitability,
profitability,
funding, stakeholder
funding, stakeholderconfidence
confidenceetc..
etc..ButBut
thethemost
mostdifficult willwill
difficult be be
thethe
need
needto to
balance business
balance businessandand
social objectives
social so so
objectives as as
to deliver sustainability
to deliver sustainabilityas as
well as as
well thethe
microfinance
microfinanceservice. (See
service. Box)
(See Box)
TheThe
consequences
consequencesof of
poor strategic
poor planning
strategic planningcould be be
could severe.
severe.Some
Somerespondents
respondents
MFIs
MFIswith
withweak
weak expected thatthat
expected MFIs without
MFIs without effective strategies
effective would
strategies wouldfailfail
or or
be be
taken over.
taken over.AnAn
strategies
strategies Egyptian respondent
Egyptian saidsaid
respondent thatthat
“badly managed
“badly managedMFIs willwill
MFIs feelfeel
more challenged,
more andand
challenged,
could
couldfail
fail mergers might
mergers be be
might more andand
more more common
more common in the market.”
in the market.”
Julie
Julie Abrams,
Abrams, a consultant
a consultant at Microfinance
at Microfinance Analytics
Analytics in the
in the US,US,saidsaid
thatthat “this
“this nextnext
phase could
phase well
could become
well become thethe
years of the
years microfinance
of the microfinanceminefields.
minefields.MFIsMFIswillwill
have to to
have
be be impeccably
impeccably run,run, laser-focused
laser-focused andand strategically
strategically sound
sound to thrive.
to thrive. There
There willwill
be be
no no
room
room forfor sloth
sloth or or sloppiness
sloppiness in in operations,
operations, governance,
governance, riskrisk management,
management, andand
customer
customerfocus; being
focus; proactive
being in all
proactive of these
in all willwill
of these be be
key. MFIs
key. MFIscancanno no
longer grow
longer grow
themselves
themselvesintointo
sustainability andand
sustainability profits, as some
profits, have
as some in the
have past”.
in the past”.

Is the business model broken?

The air of crisis surrounding microfinance raises the question whether the business
model is in need of a makeover.
Far from depicting a thriving industry motivated by worthy social goals, one set of
respondents to this survey painted microfinance as driven by greed, sustained by
subsidised funds or profit-hungry investors, failing its clients by deserting the most
needy or driving them into debt, with only a veneer of ethics and philanthropy. In a
comment typical of very many in this vein, one of them observed: “Microfinance is
slowly but surely losing what made it special and successful”.
Another set of respondents portrayed MFIs as stuck in the past, lacking the resources to
scale up or improve the service, self-pitying, and probably doomed to be wiped out by
the first set. A microfinance analyst said that “MFIs, particularly small, local institutions,
have not delivered scale in most countries and are not likely to do so alone. As new
providers and delivery channels move in, what will happen to these organisations?” A
Mexican respondent said that “the model is becoming eroded and many institutions are
not doing anything to adopt a different one.”
Both sets may be an exaggeration. But there is no mistaking the unease that exists
about the traditional microfinance model at this possibly crucial stage in its evolution.
Many of our respondents felt that microfinance needed to re-engineer itself to take
account of new realities: the demands created by commercial investment, competition
from powerful new entrants, the uncertain future for small MFIs, particularly those in
rural areas, and the need, despite all these things, to keep sight of philanthropic
objectives.
Philip Brown, managing director of microfinance risk at Citi, said that “strategy and
business models have constantly to evolve to address changing client needs and market
parameters. Learning from the past and recent history demonstrates that failure to
adapt can lead to institutional stress and demise”.
A re-think on group lending

Some respondents even wondered whether there was any future for the traditional
“Grameen group lending model”. A respondent from Peru said it was time to question
the notion that "the group approach is the only way to reach microentrepreneurs lower
down the pyramid. There are other ways of getting credits into rural areas at reasonable
costs”. Mahesh Mani, vice-president at Citibank in India, said there was an increasing
need “to improve and innovate the product offering and re-look at the classical
‘Grameen model’ and make it more flexible and customised with respect to local
conditions and the needs of the target market …This is because the so-called biggest
strength of the ‘joint liability group’ model can also become its biggest weakness”.
Many respondents felt that the industry was coming to the end of a period of rapid and
easy growth, and would have to restructure to survive: consolidation among small MFIs,
specialisation among larger ones, with a focus on quality rather than quantity, on
meeting demand rather than just supplying what they could. Alex Pollock, director of
microfinance at UNRWA, said: “The ability to continue to grow and maintain
profitability is limited by competition and national markets, and MFIs must recognise
that at some point their operations will reach an optimal level, at which point they will
need to concentrate more clearly on maintaining their edge through customer service
and improvements in their business processes that they may have neglected because of
the openness of the market”.

16.16.Liquidity
Liquidity
(2)(2)
LIQUIDITY
LIQUIDITY is noislonger the concern
no longer it was
the concern in 2009
it was at the
in 2009 at height of the
the height of financial
the financial
crisis.
crisis. The The
sharpsharp downward
downward change
change in position
in position reflects
reflects the return
the return to more
to more normal
normal
conditions
conditions in global
in global finance.
finance.
Nonetheless,
Nonetheless, the availability
the availability of liquidity
of liquidity clearly
clearly differs
differs veryvery
muchmuch fromfrom
one one market
market
to another,
to another, and and among
among different
different typestypes of MFI.
of MFI. Many Many respondents
respondents saw saw liquidity
liquidity
flooding
flooding into into the more
the more dynamic
dynamic emerging
emerging markets
markets as lending
as lending banks banks re-opened
re-opened lineslines
theythey
had had closed
closed during
during the crisis.
the crisis. An Egyptian
An Egyptian respondent
respondent said said
that that “liquidity
“liquidity for for
goodgood
MFIsMFIs should
should notanbeissue
not be an issue as there
as there are more
are more sources
sources of cash
of cash now now
thanthan ever”.
ever”.
But But though

though this this
was was welcome,
welcome, it could
it could also also contain
contain the seeds
the seeds of newof new
risksrisks
suchsuch
as a as a
resumption
resumption of poorly
of poorly managed
managed growth.
growth. WilsonWilson
Castro,Castro, director
director of small
of small business
business
lending
lending at Banco
at Banco Familiar
Familiar in Paraguay,
in Paraguay, said said
that that
“high“high levels
levels of global
of global liquidity
liquidity are are
moving
moving towards
towards emerging
emerging markets,
markets, especially
especially where where
therethere are many
are many MFIs,MFIs,
whichwhich
increases
increases the the
levellevel of liquidity
of liquidity and and sharpens
sharpens the the risk risk of overindebtedness”.
of overindebtedness”. A A
respondent
respondent fromfrom onethe
one of of state
the state development
development banksbanks in Mexico
in Mexico said said
that that
MFIsMFIs
therethere
“suffer
“suffer fromfrom
excessexcess liquidity
liquidity andchallenge
and the the challenge
is to isincrease
to increase lending,
lending, but carefully”.
but carefully”.
A sharp
A sharpdrop
drop
But But conditions
conditions in other
in other markets
markets can can be very
be very different.
different. Roshaneh
Roshaneh Zafar,
Zafar, managing
managing
in liquidity
in liquidity director
director of theof Kashf
the Kashf Foundation
Foundation in Pakistan,
in Pakistan, said said
that that a combination
a combination of a of a strained
strained
risk
risk fiscalfiscal environment
environment and and caution
caution amongamong lending
lending banks banks
was was squeezing
squeezing MFIs.MFIs.
She She
added:
added: “Given“Given the increased
the increased credit
credit risk risk
and and constraints
constraints on liquidity,
on liquidity, MFIsMFIswill will
continue
continue to have
to have difficulties
difficulties in being
in being operationally
operationally and and financially
financially self-sustainable.”
self-sustainable.”
respondents in Africa
in Africa and Asia
and Asia reported
reported liquidity
liquidity problems.
problems.
The The markets

markets are also
are also discriminating
discriminating in favour
in favour of theof more
the more robust
robust MFIs.MFIs.L.B.L.B.
Prakash,
Prakash, a practitioner
a practitioner withwith Development
Development Capital
Capital in India,
in India, said said
that that
mostmost
banksbanks
werewere
playing
playing it safe
it safe by lending
by lending onlyonly to large
to large MFIs.MFIs.
“It is“Itironical
is ironical
that that the microfinance
the microfinance
sector
sector started
started off small
off for for small loans,
loans, but does
but does not small
not get get small borrowings”.
borrowings”. MFIsMFIswithwith
access
access to local
to local deposits
deposits are also
are also better
better placed,
placed, thoughthough
therethere is concern
is concern in some
in some areasareas
that that the economic
the economic crisiscrisis
and and overindebtedness
overindebtedness will will deplete
deplete savings.
savings. KebeKebe Fodie,
Fodie,
director
director of Union
of Union MecapMecap in Burkina
in Burkina Faso,Faso,
said said
that that
“the “the
levellevel of savings
of savings is stagnating
is stagnating
or decreasing”.
or decreasing”.
But But
eveneven if conditions
if conditions are improving,
are improving, MFIsMFIshavehave learnt
learnt lessons
lessons aboutabout the fickleness
the fickleness
of liquidity.
of liquidity. An Indian
An Indian respondent
that that “in case
“in the the case
of a ofrepayment
a repayment
crisiscrisis
or or
regulatory
regulatory changes,
changes, liquidity
liquidity risk risk is high.”
is high.”
17.17.Macro-economic
Macro-economictrends
trends
(3)(3)
CONCERN
CONCERN aboutabout
the impact of the
the impact of global economy
the global economyon microfinance has has
on microfinance fallen
fallen
sharply
sharply withwith the resumption
the resumption of growth
of growth in major
in the the major nations.
nations. However
However views
views differdiffer
widely
widely overover
whatwhat lessons
lessons havehave
beenbeen learnt
learnt fromfrom the crisis.
the crisis.

respondents felt felt
that that
the the stresses
stresses of theof the
last last
2-3 2-3
yearsyears
had had shown
shown that that
microfinance
microfinance cannot
cannot escape
escape international
international shocks.
shocks. The The
impactimpact
camecame in many
in many forms: forms:
in weaker
in weaker economic
economic growth,
growth, in disruptions
in disruptions to world
to world commodity
commodity markets,
markets, in lower
in lower
remittances,
remittances, in funding
in funding difficulties
difficulties and inandrising
in rising indebtedness.
indebtedness. HannsHanns Martin
Martin Hagen,Hagen,
chiefchief financial
financial sector
sector economist
economist at Germany’s
at Germany’s KfWKfW development
development bankbank
said:said:
“The“The

financial
financial
crisiscrisis
is notis over
not over
yet. For
yet. the
Fornext
the next
one or
onetwo
or two
years,
years,
a large
a large
number
number
of MFIs
of MFIs
will will
havehave
to work withwith
to work theirtheir
clients to preserve
clients the quality
to preserve of their
the quality portfolios”.
of their portfolios”.
Many respondents
Many respondentsgavegaveaccounts of local
accounts impacts,
of local particularly
impacts, in CEE
particularly in CEE wherewhere
concern on this
concern frontfront
on this was wasstrongest.
strongest.A microlender
A microlender in Tajikistan
in Tajikistan said said
that that
“microfinance
“microfinanceis not
is immune
not immunefromfrom
the problems of the
the problems of overall world
the overall economy,
world and and
economy,
Tajikistan
Tajikistan in particular
in particular is very
is very vulnerable
vulnerable to shocks
to shocks in Russian
in the the Russian economy
economy as soas so
muchmuch of local
of local GDPGDP is dependent
is dependent on theon remittances
the remittances of Tajik
of Tajik workers
workers in Russia.”
in Russia.” A A
manager
manager in Syria
in Syria commented
commented that that
“with“with continued
continued recession,
recession, we fear
we fear that that the rate
the rate of of
success
success of small
of small and and
mediummediumsize size enterprises
enterprises will will be negatively
be negatively affected”.
affected”. Con Con
Keating,
Keating, a specialist
a specialist on theon UK
the UK
creditcredit
union union movement,
movement, said said
that that “in recessionary,
“in recessionary,
highhigh unemployment
unemployment times,times, our membership
our membership is that
is that mostmost
hurt.hurt.
The The
creditcredit standing
standing of of
our membership
our membership is lower,
is lower, muchmuch lower.”
lower.”
One One concern

concern is that
is that economic
economic stressstress
will will
undoundo microfinance’s
microfinance’s goodgood
workwork
at a at
timea time
whenwhen its reputation
its reputation is under
is under question.
question. A UK-based
A UK-based consultant
consultant said said
that that
“any“any levelling
levelling
or reduction
or reduction in microfinance
in microfinance lending
lending within
within a locality
a locality will will impact
impact market
market liquidity
liquidity
and and
be abefurther
a further adverse
adverse impact
impact uponuponlocallocal purchasing
purchasing capacity
capacity and and the levels
the levels of of
locallocal
tradetrade
– and – and
thus thus aggravate
aggravate the credit
the credit quality
quality situation”.
situation”. A USA respondent
US respondent
feared
feared that that “resource
“resource limitations
limitations and and a challenging
a challenging macromacro environment
environment will will
lead lead
MFIsMFIs
to cuttodown
cut down on their
on their expansion
expansion plans,
plans, in-country
in-country and globally.”
and globally.”
MFIs
MFIs
areare
notnot
all all But But a number
a number of respondents
of respondents tooktook
a morea more upbeat
upbeat view.view.US US lawyer
lawyer Howard
Howard J. J.
immune
immune to the
to the Finkelstein
Finkelstein said said
that that microfinance
microfinance had had
shownshown
that that
it was it was strong
strong enough
enough to survive
to survive
globalglobal shocks.“Did“Did
shocks. the the
crisiscrisis
havehave its victims
its victims in thein the microfinance
microfinance world?world?
global
global
economy
economy Absolutely.
Absolutely. Buta as
But as a whole
whole it claimed
it claimed fewerfewer victims
victims in the in microfinance
the microfinance sector
sector thanthan
it didit in
didthe
in commercial
the commercial banking
banking sector.”
sector.” Many Many
otherother respondents
commented on on
the “resilience”
the “resilience” of microfinance
of microfinance institutions.
institutions. A respondent
LatinLatin America
America said said
that that “in countries
“in countries like like Venezuela,
Venezuela, withwith inflation
inflation ratesrates
above above 20 cent,
20 per per cent, this not
this has has not
beenbeen an impediment
an impediment to a flourishing
to a flourishing microfinance
microfinance industry”.
industry”.
18.18.Fraud
Fraud
(20)
(20)
THETHEOVERALL
OVERALL levellevel
of concern aboutabout
of concern fraudfraud
is little changed
is little fromfrom
changed last time, but but
last time,
withwith
sharply contrasting
sharply attitudes.
contrasting The The
attitudes. regions of the
regions of world where
the world this this
where risk risk
was was
ranked highest
ranked werewere
highest Central and Eastern
Central Europe,
and Eastern and Africa.
Europe, and Africa.
Some of our
Some of respondents felt the
our respondents feltrisk was was
the risk getting worse
getting because
worse of the
because ofmore stressful
the more stressful
environment
environmentand anddeclining standards
declining in the
standards industry,
in the aidedaided
industry, by the growing
by the growing
sophistication of fraudsters,
sophistication particularly
of fraudsters, in the
particularly inarea of technology.
the area of technology.
Mounkaila Garba,
Mounkaila director
Garba, of Recherche-
director of Recherche-
How
How
to deal
to deal
withwith
fraud
fraud Action in Niger,
Action said said
in Niger, that that
“whatever the level
“whatever the level
of control, it is itdifficult
of control, to avoid
is difficult this problem.
to avoid this problem.
“Train
“Train
well,well,
pay well,
pay well,
and punish”.
and punish”. People
People
whowho commit
commit thesethese offences
offences understand
understand
MFI manager
MFI manager control
control systems
systems and and
howhowto getto round
get round them”.
them”.
RD Congo
RD Congo An AnEastEast African
African respondent
that that
“this“this
couldcould
be a be a major
major area area of risk
of risk and
and if if unchecked
unchecked
couldcould be detrimental
be detrimental to industry
to the the industry in future”.
in the the future”. Several
Several MFIsMFIs reported
reported a growth
a growth
in fictitious
in fictitious loanloan accounts
accounts as loan
as loan officers
officers strove
strove to meet
to meet lending
lending targets.
targets. Fictitious
Fictitious
business
business “failures”
“failures” werewere
also also
beingbeing
usedused by customers
by customers to gettoout
get of
outtheir
of their
loans.loans.

AndAnd fraudfraud
is not
is the
not only
the only
problem.
problem.Respondents
Respondentsmentioned
mentioned
money
money
laundering,
laundering,
terrorterror
finance and identity
finance fraudfraud
and identity as further rising
as further crime
rising areas.
crime areas.
But But
otherother
respondents felt that
respondents MFIsMFIs
felt that werewere
doing better
doing against
better fraud,
against by tightening
fraud, by tightening
up internal controls,
up internal centralising
controls, staffstaff
centralising records, and and
records, installing stronger
installing systems.
stronger An An
systems.
Egyptian respondent
Egyptian said said
respondent that that
this this
was was
“always a risk,
“always but it
a risk, butshould be managed
it should be managed
better
better withwith changing
changing technology
technology and know-how”.
and know-how”. A respondent
A respondent fromfrom Pakistan
Pakistan notednoted
that that a staff
a staff reference
reference bureau
bureau had been
had been setfor
set up upthe
forindustry
the industry
there.there.
19.19.Product
Product
development
development
(24)
(24)
THETHE ABILITY
ABILITY of MFIs
of MFIs to raise
to raise theirtheir
gamegame by developing
by developing new new and better
and better products
products
is becoming moremore
is becoming of anofissue. The The
an issue. majority of our
majority respondents
of our felt that,
respondents without
felt that, without
product innovation,
product somesome
innovation, MFIsMFIs
risked failing
risked in their
failing mission
in their and and
mission beingbeing
overtaken
overtaken
by more
by more aggressive
aggressive competitors.
competitors.
Stephanie
Stephanie Dolan,Dolan, principal
principal specialist
specialist at ACCION
at ACCION International,
International, said said
that that
therethere
has has
beenbeen “increasing
“increasing discussion
discussion aboutabout
howhow microfinance
microfinance in many
in many regions
regions and and
institutions
institutions is still
is still reallyreally mono-product,
mono-product, focused
focused primarily
primarily on provision
on the the provision of credit
of credit
services.
services. In order
In order for microfinance
for microfinance to truly
to truly makemake a difference
a difference and and maximize
maximize its its
potential,
potential, it will
it will needneed to offer
to offer a full
a full rangerange of quality,
of quality, affordable,
affordable, relevant,
relevant, and and
accessible
accessible financial
financial services
services to clients”.
to clients”. SomeSome respondents
respondents werewere
moremore forthright:
forthright:
one one
said said
that that
MFIsMFIs which which offered
offered a comprehensive
a comprehensive product
product suitesuite
“are “are
aboutabout
as as
TheThe
need
need
to to common
common as unicorns”.
as unicorns”.
expand
expand
beyond
beyond
Beyond
Beyond credit.
credit. Many Many respondents
respondents werewere concerned
concerned that that
MFIsMFIsfocusedfocused too much
too much on on
credit
credit credit
credit products
products and services.
and services. ThisThis limited
limited theirtheir business
business prospects
prospects and created
and created over-over-
reliance
reliance on an on increasingly
an increasinglyriskyrisky
area area
of theof market.
the market. Diversification
Diversification was wasgoodgood
to to
spread
spread risk.risk. A respondent
one one of large
of the the large US funding
US funding organisations
organisations said said
that that
“the “the industry
industry - meaning
- meaning MFIsMFIs and those
and those whowho support
support themthem - needs
- needs to betomuch
be much
moremore
innovative
innovative and and forward-thinking
forward-thinking aboutabout a range
a range of financial
of financial services
services that that
helphelp
the the
poorpoor
managemanage
theirtheir financial
financial needs.
needs. ThisThis
maymay in some
in some casescases
meanmean slower
slower growth
growth of of
microcredit,
microcredit, but but
fasterfaster growth
growth of microfinance.
of microfinance. Funders
Funders and and investors
investors needneed
to to
understand
understand that that
an MFIan MFIwithwith a diversified
a diversified productproduct offering
offering is, inis,the
in long
the long
run, run,
goinggoing
to betomore
be more sustainable
sustainable thanthan a credit-only
a credit-only mono-product
mono-product institution
institution delivering
delivering double
double
or triple
or triple digitdigit growth
growth in gross
in gross loanloan portfolio
portfolio everyevery year”.
year”.
Respondents
Respondents werewere not short
not short of suggestions
of suggestions for new
for new products:
products: payments,
payments, remittances,
remittances,
savings/deposits,
savings/deposits, loansloans for housing
for housing and and education,
education, insurance
insurance products
products etc.. etc.. Carlos
Carlos
Danel,
Danel, vice-president
vice-president at Compartamos
at Compartamos in Mexico,
in Mexico, said said “there
“there is still
is still a lotatolotknow
to know
and and
learnlearn
aboutabout which
which products
products workwork
best best and why,
and why, so that
so that the industry
the industry can shift
can shift its its
focusfocus
fromfrom supply
supply to demand.”
to demand.”
Access.
Access. The The
otherother
area area of potential
of potential product
product innovation
innovation is service
is service delivery
delivery withwith
the the
arrival
arrival of mobile
of mobile banking
banking whichwhich
will will enable
enable MFIsMFIs to compete
to compete withwith commercial
commercial
banks,
banks, and and extend
extend theirtheir
reachreach
into into
ruralrural
areas,areas, thereby
thereby strengthening
strengthening financial
financial
inclusion.
inclusion. However,
However, this presents
this presents difficulties
difficulties of itsofown.
its own.
PaulPaul Rippey,
Rippey, senior
senior fellow
fellow
at Center
at the the Center for Financial
for Financial Inclusion,
Inclusion, said said
that that “banks
“banks serving
serving the poor
the poor havehave
a a
promising
promising future…but
future…but savings
savings groupsgroups
and and
cell cell ‘phone
‘phone banking
banking are are disruptive
disruptive
technologies
technologies that that
will will either
either take take
awayaway clients
clients or increase
or increase clients,
clients, depending
depending on how
on how
banksbanks
reactreact to them”.
to them”.

Constraints.
Constraints.
Product
Product
development
development
is expensive,
is expensive,
and some
and some
respondents
respondents
fearedfeared
that that
MFIs MFIs
wouldwould
not have
not the
haveresources to pursue
the resources it. In certain
to pursue countries,
it. In certain the regulatory
countries, the regulatory
environment did not
environment did encourage innovation,
not encourage for example
innovation, in deposit-taking
for example in deposit-takingand and
telephone banking.
telephone Diversification
banking. is also,
Diversification is itself, a risk.a risk.
also, itself, Some Some
MFIs MFIs
wouldwould
do better to “stick
do better to their
to “stick to knitting”. An Indian
their knitting”. respondent
An Indian said that
respondent said that
“unnecessary diversification
“unnecessary is more
diversification is dangerous”.
more dangerous”.
Know
Know
youryour
customer
customer
One ofOnetheofconcerns
the concerns
about about
the growth
the growth
of microfinance
of microfinance
is thatisMFIs
that are
MFIslosing
are losing
the the
personal
personal
touch:touch:
they seetheytheir
seeclients
their clients
as marketing
as marketing
targetstargets
rather rather
than asthan
people
as people
to be to be
helped,helped,
and this
andrisks
thisdestroying
risks destroying
the essential
the essential
character
character
of the of
business
the business
– and generating
– and generating
bad loans
badfor
loans
MFIs.
for MFIs.
A respondent
A respondent
from one
fromofone
theoflarge
the European
large European
microfinance
microfinance
investors
investors
said: “Wesaid:are
“We are
concerned
concerned
about about
the ethical
the ethical
issues issues
of over-indebting
of over-indebting
needy needy
clients.clients.
It has Ita has
negative
a negative
reputational
reputational
impactimpact
on theon
market
the market
and participants.
and participants.
As double
As double
bottom bottom
line investors
line investors
we we
have ahave
fiduciary
a fiduciary
responsibility
responsibility
to provide
to provide
both an
both
ethical
an ethical
and financial
and financial
return.”return.”
InherentInherent
in this in
risk
this
is arisk
failure
is a failure
to understand
to understand
the customer,
the customer,
as to the
as to
products
the products
they need
they need
and their
and borrowing
their borrowingcapacity.capacity.
An EastAnAfrican
East African
respondent
respondent
said there
said was
therea was
potential
a potential
“failure“failure
to respond
to respondto needs to needs
of theofmarket
the market
through through
properproper
productproduct
development
development
strategies,
strategies,
through through
laxity, laxity,
poor customer
poor customer
care and
carepoor
andsupervision.”
poor supervision.”The spread
The spread
of of
plasticplastic
cards, cards,
electronic
electronic
funds funds
transfer
transfer
and paperless
and paperless
recordsrecords
is speeding
is speeding
up theup the
depersonalisation
depersonalisationof banking
of banking
and making
and making
it harder
it harder
for MFIs
fortoMFIs
assess
to assess
their customers.
their customers.
Emmanuelle
Emmanuelle
Javoy,Javoy,
managing
managing
director
director
of Planet
of Planet
Rating,Rating,
emphasised
emphasised
the difficulties
the difficulties
that that
poor customer
poor customer
contactcontact
createdcreated
in times
in times
of stress.
of stress.
“What“What
the lasttheyears
last have
yearsshown
have shown
is is
that inthat
troubled
in troubled
times strict
timesrepayment
strict repayment
follow-up
follow-up
is not sufficient
is not sufficient
to keep tocredit
keep credit
risk low.
risk low.
A moreAdifferentiated
more differentiated
approach,
approach,
including
including
rescheduling
rescheduling
or refinancing,
or refinancing,
litigation
litigation
in some in some
cases cases
and changes
and changes
in loanin officers’
loan officers’
incentives
incentives
schemes,
schemes,
is thenis necessary.
then necessary.This isThis is
certainly
certainly
more complex
more complex
and costly,
and costly,
but is key
but to
is key
maintaining
to maintaining
the trust
thethat
trustisthat
at the
is at
core
the core
of the of
relationship
the relationship
betweenbetween
an MFIan and
MFIitsand
borrowers."
its borrowers."
20.20.
Ownership
Ownership
(17)(17)
The form of ownership
The form of MFIs
of ownership is a potential
of MFIs risk because
is a potential it canitcreate
risk because internal
can create internal
conflicts, for example
conflicts, between
for example commercially-focused
between investors
commercially-focused and other
investors more more
and other
socially-minded stakeholders.
socially-minded Such conflict
stakeholders. could could
Such conflict be destabilising, even fatal.
be destabilising, even fatal.
Most Most
of ourofrespondents saw the
our respondents sawownership issue issue
the ownership in these terms,terms,
in these thoughthough
they held
they held
different viewsviews
different about about
its severity. Prof. Prof.
its severity. Hans Hans
DieterDieter
SeibelSeibel
of theofUniversity of of
the University
Ownership
Ownership Cologne said that
Cologne saidMFIs whichwhich
that MFIs relied relied
heavily on external
heavily debt funding
on external and had
debt funding andfew
had few
structures
structures
cancan customer
customer deposits
deposits wouldwould
suffersuffer
“a lack“aoflack of ownership
local local ownership and governance,
and governance, riskingrisking
undueundue external
external influence,
influence, including
including profiteering
profiteering (e.g., (e.g.,
throughthrough
IPOs)”.IPOs)”.
S-P S-P
create
create
conflicts
conflicts O'Mahony,
O'Mahony, CEO ofCEO of Opportunity
Opportunity Microcredit
Microcredit in Romania,
in Romania, saidmany
said that that many
MFIs MFIs
now now
of interest
of interest had commercial
had commercial as wellas as
well as social
social purposepurpose funders,
funders, and would
and would “need“need to balance
to balance
sources
sources wiselywisely to ensure
to ensure the strongest
the strongest foundation
foundation for moving
for moving forward”.
forward”.
Another issue issue

Another was the
wasdominance of single
the dominance individuals,
of single often often
individuals, the creators of theof the
the creators
business,
business, who reluctant
who were were reluctant
to cedeto control.
cede control. Srinivas
Srinivas Bonam, Bonam, head microfinance
head microfinance at at
IndusInd Bank Bank
IndusInd in India, said itsaid
in India, would desirable
it would “to have
desirable “to ahave
diversified institutional
a diversified institutional
holding
holding in aninMFI.
an MFI. Individuals,
Individuals, including
including promoters,
promoters, shouldshould
have have a minimal
a minimal

holding”.
holding”.
Another
Another
respondent
respondent
said said
that that
dominant
dominant
shareholders
shareholders
couldcould
standstand
in the
in the
way way
of consolidation among
of consolidation MFIs,
among preventing
MFIs, themthem
preventing fromfrom
becoming stronger.
becoming stronger.
Some respondents
Some felt felt
respondents thesethese
conflicts couldcould
conflicts onlyonly
be resolved by the
be resolved eventual
by the eventual
withdrawal
withdrawalof certain typestypes
of certain of investors. A US
of investors. A USrespondent said said
respondent that that
“tensions
“tensions
between international
between financial
international institutions
financial (IFIs)
institutions and private
(IFIs) investors
and private will will
investors continue
continue
untiluntil thepresence
the IFI IFI presence is substantially
is substantially reduced”.
reduced”. Matthew
Matthew Gamser
Gamser ofInternational
of the the International
Finance
Finance Corporation
Corporation in Hong
in Hong KongKong
said said
that that
“with“with western
western donors
donors and and social
social
investors
investors increasingly
increasingly strapped
strapped for funds,
for funds, we'llwe'll see how
see how weakweak ownerships
ownerships dominated
dominated
by such
by such interests
interests really
really are”.are”.
But others
But others saw saw it moving
it moving the opposite
the opposite way.way. As possibilities
As the the possibilities opened
opened up, they
up, they saw saw
commercial
commercial investors
investors providing
providing MFIsMFIs
withwith access
access to capital,
to capital, paving
paving the way
the way to a to a
stronger
stronger future.
future. One One respondent
that that
“it is“itmore
is more likely
likely that that
NGOs NGOs
will will
find find
it it
difficult
difficult to cope
to cope in theinchanging
the changing environment”.
environment”.
21.21.Interest
Interest
rates
rates
(11)
(11)
LITTLE
LITTLE RISK RISK is seen
is seen on interest
on the the interest
rate rate
frontfront so as
so far farvolatility
as volatility is concerned:
is concerned:
global ratesrates
global havehave
beenbeen
low low
for some timetime
for some and and
are likely to remain
are likely so inso the
to remain in the
foreseeable
foreseeable future.
future.
ThisThis is good
is good newsnews for MFI
for MFI funding:
funding: costscosts should
should remain
remain low.low. However
However it is itbad
is bad
newsnews for MFI
for MFI lenders
lenders whowholive live off high
off high loanloan charges.
charges. It creates
It creates pressure
pressure on them
on them to to
lowerlower
ratesrates
and and accept
accept lower lower margins.
margins. Many Many of respondents
of our our respondents therefore
therefore thought
thought
that that an extended
an extended low low
rate rate environment
environment couldcould prove
prove difficult
difficult for MFIs:
for MFIs: it poses
it poses a riska risk
Little
Little
change
change bothboth to profitability
to profitability and reputation.
and reputation.
seen
seenonon The The
majormajor
risk risk on this
on this frontfront liespolitically
lies in in politically motivated
motivated moves moves to interest
to cap cap interest
ratesrates
thethe
interest
interest on onloansloans
and and squeeze
squeeze MFIMFI margins,
margins, whichwhich complicates
complicates assetasset
and and liability
liability
rate
rate
front
front management,
management, and and presents
presents MFIsMFIswithwith
the the problem
problem of re-pricing
of re-pricing theirtheir
loansloans
to to
conform
conform withwith the regulations.
the regulations. A US A investor
US investorsaid said
that that
“the “the political
political fallout
fallout overover
interest
interest ratesrates
couldcould tarnish
tarnish goodgood
and and
poorpoor institutions
institutions alike,alike,
withwith possible
possible systemic
systemic
implications in some
implications markets”.
in some markets”.
Further
Further out, out,
therethere
is theis prospect
the prospect of rising
of rising interest
interest ratesrates as inflationary
as the the inflationary effects
effects of of
monetary
monetary easingeasing
flowflow through,
through, whichwhich
couldcould inflame
inflame the whole
the whole interest
interest cost cost issue.
issue. A A
Mexican
Mexican respondent
that that
“the “the injured
injured parties
parties will will be users
be the the users
sincesince demand
demand for for
credit
credit in segment
in this this segment is highly
is highly inelastic
inelastic to fluctuations
to fluctuations in interest
in interest rates”.
rates”.
22.22.Too
Too
much
much
funding
funding
(25)
(25)
THETHE PROBLEM
PROBLEM of excessive
of excessive funding
funding for for microfinance
microfinance has has eased,
eased, but butnot not
disappeared (and(and
disappeared it is itseen as a as
is seen greater risk risk
a greater thanthan
a shortage of funding.
a shortage See No.
of funding. 23). 23).
See No.
Although
Although it is it is dangerous
dangerous to generalise,
to generalise, respondents
respondents seeflow
see the the flow of funding
of funding returning
returning
to market
to the the market
afterafter the crisis,
the crisis, oftenoften in quantities
in quantities whichwhich the industry
the industry maymayfind find it hard
it hard
to absorb
to absorb without
without creating
creating strains,
strains, especially
especially at a time
at a time whenwhen growth
growth is slowing.
is slowing.
AlexAlex Silva,
Silva, general
general manager
manager of Omtrix
of Omtrix in Costa
in Costa Rica,Rica,
said said
that that
“too “too
muchmuch money
money is is
beingbeing
mademade available
available to MFIs
to MFIs which,
which, especially
especially whenwhenit is itcombined
is combined
withwith
highhigh
return
return expectations,
expectations, mightmight
forceforce
MFIMFI managers
managers to grow
to grow too too rapidly
rapidly at times
at times

overlooking
overlooking
goodgood
practices”.
practices”.
An Egyptian
An Egyptian
respondent
respondent
said said
that that
this this
was was
“a very
“a very
serious risk.risk.
serious Some MFIsMFIs
Some are close to drowning
are close withwith
to drowning all the
allcash thrown
the cash at them”.
thrown at them”.
A UK-based
A UK-based development
development expert said said
expert that that
in some
in somecountries “the “the
countries threat of aof a
threat
microcredit bubble
microcredit popping
bubble is very
popping real real
is very and it will
and lead lead
it will to massive destabilisation
to massive of of
destabilisation
locallocal
economies artificially
economies pumped
artificially up on
pumped up microcredit
on microcreditand and
thenthen
cast cast
adriftadrift
as the
as the
microfinance
institutions eithereither
fail fail or refuse
or refuse to roll-over
to roll-over microcredits.
microcredits. The The
international
international donors
donors knowknowthis this but cannot
but cannot admit
admit to a tomistake
a mistake that that implicates
implicates 'the 'the
market'
market' and and 'profit-driven
'profit-driven institutions'
institutions' which
which are are
still still sacrosanct
sacrosanct in many
in many
development
development agencies,
agencies, no matter
no matter whatwhat the consequences”.
the consequences”.
The The
fear fear is that
is that MFIsMFIswhichwhich accept
accept easyeasy
moneymoney
will will
take take
risksrisks
withwith
theirtheir business
business
and and the industry’s
the industry’s reputation.
reputation. Luc Luc Vandeweerd,
Vandeweerd, strategic
strategic director
director at ADAat ADA
Asbl,Asbl,
a a
Luxembourg-based
Luxembourg-based microfinance
microfinance development
development group,
group, said said
that that
“most “most of largest
of the the largest
investors
investors are targeting
are targeting the same
the same markets,
markets, workwork
withwith the same
the same kindkind of MFIs
of MFIs offering
offering
the same
the same kindkind of short
of short termterm
(1-2 (1-2
yearsyears renewable)
renewable) funding,
funding, and and putting
putting pressure
pressure on on
theirtheir clients’
clients’ MFIs.MFIs.
The The
mainmain
risk risk is that
is that thesethese
MIVs MIVs contribute
contribute to a to a growth
growth without
without
any any control
control and and to related
to related consequences
consequences (loss(loss of social
of social values,
values, over-indebtedness,
over-indebtedness,
etc.)”.
etc.)”.
Another
Another risk risk is that
is that the high
the high valuations
valuations placed
placed on MFI
on MFI flotations
flotations maymay further
further tarnish
tarnish
TheThe
problem
problem is not
is not microfinance’s
microfinance’s image image
and and provoke
provoke a public
a public backlash.
backlash. Tanmay
Tanmay Chetan,
Chetan, co-founder
co-founder
tootoo
little
little
funding,
funding, and and managing
managing partner
partner of Agora
of Agora Microfinance
Microfinance Partners
Partners in thein UK,
the UK,
said said
that that
over-over-
valuations
valuations werewere “pushing
“pushing the MFIs
the MFIs to and
to try try and maximise
maximise theirtheir returns
returns fromfromtheirtheir
butbut
tootoomuchmuch clients.
clients. ThisThis is creating
is creating a bubble-like
a bubble-like situation
situation in some
in some partsparts of world,
of the the world,
whichwhich
can can
lead lead to a bust
to a bust in some
in some geographies
geographies like like Southern
Southern India”.
India”.
ThatThat
therethere should
should be too
be too muchmuch funding
funding around
around is frustrating
is frustrating for MFIs
for MFIs who whoare are
suffering
suffering the reverse
the reverse problem,
problem, usually
usually the smaller
the smaller onesones serving
serving difficult
difficult markets.
markets.
ManyMany respondents
respondents said said
that that it was
it was not anot a matter
matter of much
of too too much funding
funding but funding
but funding that that
was was
badlybadly spread
spread or indiscriminately
or indiscriminately dispersed.
dispersed. LukasLukas Wellen,
Wellen, CEOCEO of Musoni
of Musoni in in
Kenya,
Kenya, said said bad funding
bad funding “keeps
“keeps weakweak projects
projects afloat”.
afloat”. Another
Another respondent
that that
“too“too
muchmuch funding
funding maymay be diverted
be diverted to small
to small scalescale projects,
projects, and and
we'llwe'll
be inbethe
in same
the same
position
position in five
in five years’
years’ time”.
time”.
23.23.Too
Too
little
little
funding
funding
(6)(6)
ONEONE SIGN SIGN
of a of
return to normality
a return is theislow
to normality levellevel
the low of concern aboutabout
of concern funding for the
funding for the
microfinance industry.
microfinance As inAspre-crisis
industry. days,days,
in pre-crisis the larger problem
the larger is anisoverabundance
problem an overabundance
of finance and the
of finance andrisk
the of
riskexcess capacity.
of excess capacity.
But But
that that
is a is
generalisation.
a generalisation.Concerns
Concernsremain aboutabout
remain the availability of funding
the availability in in
of funding
manymany
markets and and
markets for particular typestypes
for particular of MFI, for example
of MFI, the smaller
for example and and
the smaller less less
profitable onesones
profitable (which maymay
(which also also
be thebe ones serving
the ones the neediest
serving communities).
the neediest communities).
Respondents
Respondents reported funding
reported difficulties
funding in allin regions,
difficulties but overall
all regions, concern
but overall was was
concern
strongest
strongest in Africa
in Africa and Asia.
and Asia. Regulators
Regulators werewere particularly
particularly concerned
concerned aboutabout funding,
funding,
placing this No.
placing this 5No.
on5their risk risk
on their list. list.
A growing
A growing issueissue is that
is that the doubts
the doubts that that are now
are now spreading
spreading aboutabout the effectiveness
the effectiveness of of
microfinance
microfinancewill will
frighten off investors
frighten and lenders.
off investors A microfinance
and lenders. consultant
A microfinance said said
consultant
that that
“the “the
double whammy
double whammy of scarcity
of scarcityof investment capital
of investment (especially
capital if if
(especially
international investors
international become
investors disillusioned)
become and and
disillusioned) the need to increase
the need regulatory
to increase regulatory
capital (which
capital has already
(which happened
has already in some
happened markets
in some but may
markets be more
but may of a of
be more feature
a feature

in future
in future
if consumer
if consumer
protection
protection
worries
worries
spook
spook
regulators)
regulators)
maymay
be too
be much
too much
for some
for some
MFIsMFIs
to bear”.
to bear”.
Growing political
Growing interference
political in the
interference inindustry is another
the industry threat,
is another identified
threat, particularly
identified particularly
by respondents in the
by respondents in Indian sub-continent
the Indian and and
sub-continent LatinLatin
America.
America.Danilda Almanzar,
Danilda Almanzar,
director of deposits
director at Banco
of deposits Ademi
at Banco in the
Ademi in Dominican
the Dominican Republic, said said
Republic, that that
“the “the
economic
economic policies
policies adoptedadopted by populist
by populist governments
governments in some
in some LatinLatin American
American
countries
countries couldcould affect
affect the issue
the issue [and[and
cost]cost] of foreign
of foreign investments
investments in each
in each country”.
country”.
As before,
As before, manymany respondents
commented on the
on the unsuitability
unsuitability of muchof much of the
of the
available
available funding,
funding, on theon need
the need for MFIs
for MFIs to new
to tap tap new sources
sources and and diversify
diversify theirtheir
funding
funding base,base, particularly
particularly into into
locallocal sources,
sources, though
though this
this is notis always
not alwayseasy.easy.
SyedSyed
M. M.
Quader,
Quader, managing
managing director
director and and
CEOCEO of Southtech
of Southtech in Bangladesh,
in Bangladesh, the “home”
the “home” of of
microfinance,
microfinance, said said
that that
“MFIs“MFIs are unable
are unable to borrow
to borrow fromfrom the public
the public like like commercial
commercial
banks,
banks, and and as they
as they attempt
attempt to expand
to expand theythey are increasingly
are increasingly relying
relying on relatively
on relatively
expensive
expensive funding
funding fromfrom commercial
commercial banks.banks.
TheirTheir margins
margins are getting
are getting narrower
narrower by by
the although
the day day although
theythey are perceived
are perceived to betocharging
be charging
highhigh interest
interest rates.”
rates.”
Although
Although MFIsMFIs
whichwhich
take take deposits
deposits are better
are better placed
placed for local
for local funding,
funding, therethere is also
is also
concern
concern in some
in some places
places that that economic
economic difficulties
difficulties will will damage
damage people’s
people’s confidence
confidence
in banks
in banks and and reduce
reduce theirtheir savings.
savings. Bernard-Désiré
Bernard-Désiré Ntavumba
Ntavumba of FSTE
of FSTE in Burundi
in Burundi
said said it was
it was “difficult
“difficult for poor
for poor people
people to make
to make voluntary
voluntary savings,
savings, andconsequence
and the the consequence
is a decrease
is a decrease in available
in available cash”.
cash”.
Overall,
Overall, though,
though, the very
the very low low position
position scored
scored by funding
by funding risk risk suggests
suggests that that
fearsfears
that that
investors
investors will will be scared
be scared offcontroversy
off by by controversy
maymay be exaggerated.
be exaggerated.
24.24.
Foreign
Foreign
exchange
exchange
(8)(8)
DESPITE
DESPITE all the
all talk
the talk
of global
of global
currency
currency
warswars
and and
euroeuro
crises,
crises,
foreign
foreign
exchange
exchange
is is
not seen
not seen as a as
biga Banana
big BananaSkinSkin for MFIs
for MFIs because
because mostmost of them
of them havehave
littlelittle exposure
exposure to to
currencies
currencies otherother
thanthan
theirtheir
own.own.
FewFewworries
worries
about
about
foreign
foreign
exchange
exchange Respondents
Respondents said said
that that
MFIsMFIswerewere tapping
tapping moremore
locallocal deposits
deposits and receiving
and receiving moremore
of of
theirtheir foreign
foreign funding
funding in local
in local currency.
currency. Foreign
Foreign exchange
exchange expertise
expertise was was
also also
risk
risk growing,
growing, and and hedging
hedging possibilities
possibilities had had improved.
improved. A respondent
EastEast Africa
Africa
said said
that that
“most“most
MFIsMFIs prefer
prefer to borrow
to borrow fromfrom
locallocal sources,
sources, and and
thosethose
that that borrow
borrow
fromfrom overseas
overseas engage
engage in hedging
in hedging arrangements
arrangements withwith
locallocal banks”.
banks”.
However,
However, the importance
the importance of external
of external funding
funding to some
to some MFIsMFIs
meansmeans this could
this could still still
be be
an area
an area of risk
of risk particularly
particularly if, asif, respondents
as respondents in particular
in particular markets
markets noted,
noted, locallocal
funding
funding sources
sources are inadequate
are inadequate and hedging
and hedging possibilities
possibilities remain
remain limited.
limited.
Fermin
Fermin Vivanco,
Vivanco, investment
investment officer
officer at theat Inter-American
the Inter-American Development
Development BankBank in the
in the
US, US,
said said
that that
MFIsMFIswerewere “relying
“relying too too muchmuch on hard
on hard currency
currency loansloans
fromfrom
microfinance
investment vehicles,
vehicles, instead
instead of capturing
of capturing deposits.
deposits. The The
valuevalue of the
of the
dollar
dollar has been
has been going
going downdown
thesethese last years,
last years, so debt
so debt in dollars
in dollars has been
has been cheap.
cheap. But But
this this exposure
exposure maymay become
become a problem
a problem in the in long
the long
termterm
if theif economic
the economic environment
environment
changes”.
changes”.
SomeSome respondents
respondents flagged
flagged an indirect
an indirect foreign
foreign currency
currency risk:risk: the impact
the impact of foreign
of foreign
exchange
exchange volatility
volatility on the
on the valuevalue of remittances,
of remittances, and and through
through that that on the
on the locallocal
economy
economy and borrowers’
and borrowers’ creditworthiness.
creditworthiness.

Preparedness
Preparedness
We asked respondents
We asked to score
respondents the preparedness
to score of MFIs
the preparedness to handle
of MFIs the risks
to handle theythey
the risks had had
identified on aon
identified scale where
a scale 1=poor
where and 5=good.
1=poor The The
and 5=good. totaltotal
scorescore
was was
2.70,2.70,
which is is
which
slightly better
slightly thanthan
better middling. However
middling. therethere
However werewere
variations according
variations to the
according to the
category of respondent.
category of respondent.
Geographically,
Geographically, respondents
respondents fromfrom
LatinLatin America
America werewere the most
the most optimistic
optimistic and those
and those
fromfrom
AsiaAsia the least.
the least. AmongAmong respondent
respondent types,
types, practitioners
practitioners werewere the most
the most confident
confident
aboutabout the level
the level of preparedness
of preparedness and regulators
and regulators the least.
the least.
Total
Total 2.702.70
Practitioners
Practitioners 2.792.79
Investors
Investors 2.682.68
Analysts
Analysts 2.51 2.51
Regulators
Regulators 2.222.22
LatinLatin America 3.12 3.12

America
MENA MENA 2.962.96
CEE CEE 2.782.78
Western
Western Europe 2.72 2.72
Europe
NorthNorth America 2.682.68
America
Far East
Far East 2.67 2.67
Africa
Africa 2.57 2.57
AsiaAsia 2.482.48
Respondents’ comments
Respondents’ aboutabout
comments preparedness reflected
preparedness concerns
reflected aboutabout
concerns MFIs’ ability
MFIs’ ability
to manage risk risk
to manage successfully in the
successfully volatile
in the environment
volatile that that
environment currently prevails,
currently prevails,
particularly in the
particularly inareas of credit
the areas and reputation.
of credit and reputation.
Preparedness
Preparedness
could
couldbe be KarlaKarla
Brom, an MFI
Brom, an MFIconsultant in the
consultant in US, said:said:
the US, “Most MFIsMFIs
“Most do notdo have the risk
not have the risk
better
better infrastructure in place
infrastructure to handle
in place theirtheir
to handle current clients
current and and
clients products…There
products…There is notis anot a
largelarge
poolpool
of trained risk risk
of trained managers to draw
managers from,from,
to draw and and
veryvery
littlelittle
comprehension
comprehension of of
howhowto measure and manage
to measure the trade
and manage off between
the trade risk risk
off between and reward…Operational
and reward…Operational risk risk
grows as MFIs
grows grow,
as MFIs and and
grow, as their product
as their and and
product clientclient
mix mix
grows as well.
grows ThisThis
as well. leadsleads
to reputational risk risk
to reputational sincesince
moremore
eyeseyes
are focused on the
are focused onsector, and MFIs
the sector, and MFIscan'tcan't
explain
explain
theirtheir
pricing or business
pricing models
or business in a clear
models way way
in a clear to regulators or others.”
to regulators or others.”
Further
Further out, out, respondents
felt that the microfinance
the microfinance industry
industry stoodstood
at theat threshold
the threshold
of of
big long termterm
big long decisions which
decisions needed
which to beto firmly
needed addressed
be firmly to ensure
addressed to ensuresurvival.
survival.
SarahSarah Nolan,
Nolan, regional
regional risk risk director
director for East
for East Europe,
Europe, AsiaAsia
and and
AfricaAfrica at Opportunity
at Opportunity
International,
International, said:said: “Shareholders,
“Shareholders, lenders
lenders and and leaders
leaders needneed
to beto prepared
be preparedfor afor a
‘generational’
‘generational’ transition
transition of industry
of the the industry
fromfrom a phase
a phase characterised
characterised by rapid
by rapid growth,
growth,
commercial
commercial investment
investment and and subsidized
subsidized support,
support, towards
towards a more
a more self-reliant
self-reliant industry
industry
featuring
featuring a systematic
a systematic approach
approach to management,
to management, governance,
governance, and and organisational
organisational
development”.
development”.

APPENDIX: The questionnaire and guide

Insert pdf
CSFI
CENTRE FOR THE STUDY OF FINANCIAL INNOVATION
5, Derby Street, London W1J 7AB, UK
Tel: +44 (0)20 7493 0173 Fax: +44 (0)20 7493 0190
Microfinance Banana Skins 2011

This survey seeks to identify the risks facing microfinance institutions (MFIs) over the medium
term (2-3 years), as seen by practitioners, investors and close observers of the industry. Its
focus is the commercial microfinance sector, by which we mean institutions which are run for
profit and have assets of more than US$5 million.
Who you are

Name:
Position:
Institution:
Country:
Replies are in confidence, but if you are willing to be quoted in our report, please tick
Your perspective on the microfinance industry

Practitioner If yes, does your institution take customer deposits?
Investor
Regulator
Analyst
Other (please state)
Question 1. Please describe in your own words the main risks you see facing the
microfinance industry over the next 2-3 years, and your reasons.

Question 2. Here are some areas of risk for MFIs which have been attracting attention.
How do you rate their severity, and what is their trend: rising, steady or falling? Use the right
hand column to add comments. Insert more risks at the bottom if you wish.
Severity Trend
1=low Rising
5=high Steady Comment
Falling
1 Back office operations
How vulnerable are MFIs to
risks in administration,
accounting, systems and
controls?
2 Competition
Will competitive pressures
push MFIs to take greater
risks in areas such as
pricing, product innovation
and credit quality?
3 Corporate governance
Are there weaknesses such
as low calibre or lack of
independence?
4 Credit risk
Will MFIs be damaged by
borrowers failing to repay
their loans because of
overborrowing, poor credit
management, poor client
understanding or difficult
economic conditions?
5 Foreign exchange
Could MFIs be harmed by
currency fluctuations?
6 Fraud
Will MFIs be damaged by
dishonest staff and
customers?
7 Inappropriate regulation
Could MFI growth and
profitability be constrained
by bad rules?
8 Interest rates
Will MFIs be hurt by
fluctuations in interest
rates?
9 Liquidity
Will MFIs suffer a shortage
of ready cash?

10 Macro-economic trends
Are MFIs vulnerable to
pressures in the wider
economy such as inflation,
recession and volatile
markets?
11 Management quality
Is MFI management up to
the challenge of growing the
business and managing the
risks?
12 Managing technology
Will MFIs be able to master
this difficult area?
13 Mission drift
How strong is the risk that
MFIs will be deflected from
their stated missions?
14 Ownership
Are the ownership
structures of MFIs
appropriate and stable?
15 Political interference
Will political interference
harm MFI business, eg in
the areas of interest rates,
lending policy and
subsidised competition?
16 Product development
Could MFIs fail to develop
the right products and
manage them successfully?
17 Profitability
Could inadequate
profitability affect MFI
growth and commercial
viability?
18 Reputation
How severe are the threats
to the industry’s reputation?
19 Staffing
Will MFIs have difficulty
recruiting and retaining good
staff?
20 Strategy
Will MFIs be able to map
strategies to survive and
grow in today’s challenging
environment?

21 Too little funding

Will there be sufficient
funding to sustain healthy
growth in the industry?
22 Too much funding

Alternatively, does an
overabundance of funding
encourage MFIs to take
unnecessary risks?
23 Transparency
Do MFIs report enough
good information to sustain
confidence in the sector?
24 Unrealisable expectations
Do people expect too much
of MFIs, and what happens
if they fail to deliver?
25
Question 3. How well prepared do you think MFIs are to handle the risks you have identified?
On a scale of 1-5, 1=poorly prepared, 5=well prepared
Thank you for your time.

CSFI PUBLICATIONS
99. “Microfinance Banana Skins 2011: the CSFI survey of microfinance risk” £25/$45/€35
February 2011. ISBN 978-0-9563888-6-5.
98. “Including Africa - Beyond microfinance” £25/$45/€35
By Mark Napier. February 2011. ISBN 978-0-9563888-5-8.
97. “Getting Brussels right: “best practice” for City firms in handling EU institutions” £25/$45/€35
By Malcolm Levitt. December 2010. ISBN 978-0-9563888-4-1.
96. “Private equity, public loss?” £25/$45/€35
By Peter Morris. July 2010. ISBN 978-0-9563888-3-4.
95. “Systemic policy and financial stability: a framework for delivery.” £25/$45/€35
By Sir Andrew Large. June 2010. ISBN 978-0-9563888-2-7.
94. “STRUGGLING UP THE LEARNING CURVE: solvency II and the insurance industry.” £25/$45/€35
By Shirley Beglinger. June 2010. ISBN 978-0-9563888-1-0.
93. “Investing in Social Enterprise: the role of tax incentives.” £25/$45/€35
By Vince Heaney. May 2010. ISBN 978-0-9561904-8-2.
92. “banana skins 2010: after the quake.” £25/$45/€35
Sponsored by PricewaterhouseCoopers.
By David Lascelles. February 2010. ISBN 978-0-9561904-9-9.
91. “FIXING REGULATION” £25/$40/€27
By Clive Briault. October 2009. ISBN 978-0-9563888-0-3.
90. “CREDIT CRUNCH DIARIES: the financial crisis by those who made it happen.” £9.99/$15/€10
By Nick Carn and David Lascelles. October 2009. ISBN 978-0-9561904-5-1.
89. “Twin Peaks Revisited: a second chance for regulatory reform.” £25/$45/€35
By Michael W. Taylor. September 2009. ISBN 978-0-9561904-7-5.
88. “NARROW BANKING: the reform of banking regulation.” £25/$45/€35
By John Kay. September 2009. ISBN 978-0-9561904-6-8.
87. “THE ROAD TO LONG FINANCE: a systems view of the credit scrunch.” £25/$45/€35
By Michael Mainelli and Bob Giffords. July 2009. ISBN 978-0-9561904-4-4.
86. “FAIR BANKING: the road to redemption for UK banks.” £25/$50/€40
By Antony Elliott. July 2009. ISBN 978-0-9561904-2-0.
85. “MICROFINANCE BANANA SKINS 2009: confronting crises and change.”
By David Lascelles. June 2009. ISBN 978-0-9561904-3-7.
84. “GRUMPY OLD BANKERS: wisdom from crises past.” £19.95/$29.95/€22.95
March 2009. ISBN 978-0-9561904-0-6.
83. “HOW TO STOP THE RECESSION: a leading UK economist’s thoughts on resolving the current crises.” £25/$50/€40
By Tim Congdon. February 2009. ISBN 978-0-9561904-1-3.
82. “INSURANCE BANANA SKINS 2009: the CSFI survey of the risks facing insurers.” £25/$50/€40
By David Lascelles. February 2009. ISBN 978-0-9551811-9-1.
81. “BANKING BANANA SKINS 2008: an industry in turmoil.” £25/$50/€40
The CSFI’s regular survey of banking risk at a time of industry turmoil.
May 2008. ISBN 978-0-9551811-8-4.
80. “MICROFINANCE BANANA SKINS 2008: risk in a booming industry.” £25/$50/€40
By David Lascelles. March 2008. ISBN 978-0-9551811-7-7.
79. “INFORMAL MONEY TRANSFERS: economic links between UK diaspora groups and recipients ‘back home’.” £25/$50/€40
By David Seddon. November 2007. ISBN 978-0-9551811-5-3.
78. “A TOUGH NUT: Basel 2, insurance and the law of unexpected consequences.” £25/$50/€40
By Shirley Beglinger. September 2007. ISBN 978-0-9551811-5-3.
77. “WEB 2.0: how the next generation of the Internet is changing financial services.” £25/$50/€40
By Patrick Towell, Amanda Scott and Caroline Oates. September 2007. ISBN 978-0-9551811-4-6.
76. “PRINCIPLES IN PRACTICE: an antidote to regulatory prescription.” £25/$50/€40
The report of the CSFI Working Group on Effective Regulation. June 2007. ISBN 978-0-9551811-2-2.
75. “INSURANCE BANANA SKINS 2007: a survey of the risks facing the insurance industry.” £25/$45/€40
By David Lascelles. May 2007. ISBN 978-0-9551811-3-9.
74. “BIG BANG: two decades on.” £25/$45/€40
City experts who lived through Big Bang discuss the lasting impact of the de-regulation of London’s securities markets
Sponsored by Clifford Chance.
February 2007. ISBN 978-0-9551811-1-5.
73. “BANKING BANANA SKINS 2006” £25/$45/€40
The latest survey of risks facing the banking industry
By David Lascelles. April 2006. ISBN 0-9551811-0-0.
72. “THE PERVERSITY OF INSURANCE ACCOUNTING: in defence of finite re-insurance.” £25/$45/€40
An industry insider defends finite re-insurance as a rational response to irrational demands.
By Shirley Beglinger. September 2005. ISBN 0-9545208-9-0.
71. “SURVIVING THE DOG FOOD YEARS: solutions to the pensions crisis.” £25/$45/€40
New thinking in the pensions area (together with a nifty twist by Graham Cox).
By John Godfrey (with an appendix by Graham Cox). April 2005. ISBN 0-9545208-8.
70. “NOT WAVING BUT DROWNING: over-indebtedness by misjudgement.” £25/$45/€40
A former senior banker takes an iconoclastic look at the bottom end of the consumer credit market.
By Antony Elliott. March 2005. ISBN 0-9545208-7-4.
69. “BANANA SKINS 2005” £25/$45/€40
Our latest survey of where bankers, regulators and journalists see the next problems coming from.
By David Lascelles. February 2005. ISBN 0-9545208-6-6.
68. “BETTING ON THE FUTURE: online gambling goes mainstream financial.” £25/$45/€40
By Michael Mainelli and Sam Dibb. December 2004. ISBN 0-9545208-5-8
67. “REGULATION OF THE NON-LIFE INSURANCE MARKET: why is it so damn difficult?” £25/$45/€40
By Shirley Beglinger. November 2004. ISBN 0-9545208-4-X
66. “COMPANIES CANNOT DO IT ALONE: an investigation into UK management attitudes to Company Voluntary Arrangements.” £25/$45/€40
By Tim Mocroft (with Graham Telling and Roslyn Corney). July 2004. ISBN 0-9545208-3-1
65. “THE CURSE OF THE CORPORATE STATE: saving capitalism from itself.” £25/$40/€45
By Bob Monks. January 2004. ISBN 0-9545208-2-3
64. “BANKING BANANA SKINS 2003: what bankers were worrying about in the middle of 2003.” £25/$45/€40
Sponsored by PricewaterhouseCoopers
By David Lascelles. September 2003. ISBN 0-9545208-1-5
63. “THE GLOBAL FX INDUSTRY: coping with consolidation.” £25/$45/€40
Sponsored by Reuters.
By Christopher Swann. May 2003. ISBN 0-9545208-0-7
62. “PENSIONS IN CRISIS? RESTORING CONFIDENCE: a note on a conference held on February 26, 2003.” £25/$45/€40
By Andrew Hilton. May 2003. ISBN 0-954145-7-3
61. “BASEL LITE: recommendations for the European implementation of the new Basel accord.” £25/$45/€40
By Alistair Milne. April 2003. ISBN 0-954145-8-1
60. “THINKING NOT TICKING: bringing competition to the public interest audit.” £25/$40/€40
By Jonathan Hayward. April 2003. ISBN 0-9543145-6-5
59. “A NEW GENERAL APPROACH TO CAPITAL ADEQUACY: a simple and comprehensive alternative to Basel 2.” £25/$40/€45
By Charles Taylor. November 2002. ISBN 0-9543145-5-7
58. “WHO SPEAKS FOR THE CITY? trade associations galore.” £25/$40/€45
By David Lascelles and Mark Boleat. November 2002. ISBN 0-9583145-4-9
57. “CAPITALISM WITHOUT OWNERS WILL FAIL: a policymaker’s guide to reform.” £25/$40/€45
By Robert Monks and Allen Sykes. November 2002. ISBN 0-9543145-3-0
56. “THE FUTURE OF FINANCIAL ADVICE IN A POST-POLARISATION MARKETPLACE.” £25/$40/€45
By Stuart Fowler. November 2002. ISBN 0-9543145-2-2
55. “CLEARING AND SETTLEMENT: monopoly or market?” £25/$40/€45
By Tim Jones. October 2002. ISBN 0-9543145-1-4
54. “WAITING FOR ARIADNE: a suggestion for reforming financial services regulation.” £25/$40/€45
Kevin James. July 2002. ISBN 0-9543145-0-6
53. “HARVESTING TECHNOLOGY: financing technology based SMEs in the UK.” £25/$40/€45
Craig Pickering. April 2002. ISBN 0-9543144-5-3
52. “SINGLE STOCK FUTURES: the Ultimate Derivative.” £25/$40/€45
By David Lascelles. February 2002. ISBN 0-9543144-5-2
51. “BANKING BANANA SKINS 2002: a CSFI Survey of Risks Facing Banks.” £25/$40/€45
What bankers are worrying about at the beginning of 2002.
By David Lascelles. February, 2002. ISBN 0-9543144-5-1
50. “BUMPS ON THE ROAD TO BASEL: an anthology of views on Basel 2.” £25/$40/€45
Edited by Andrew Hilton. January 2002. ISBN 0-9543144-5-0
49. “THE SHORT-TERM PRICE EFFECTS OF POPULAR SHARE RECCOMENDATIONS.” £25/$40
By Bill McCabe. September 2001. ISBN 0-9543144-4-9
48. “WAKING UP TO THE FSA: how the City views its new regulator.” £25/$40
By David Lascelles. May 2001. ISBN 0-9543144-4-8
47. “BRIDGING THE EQUITY GAP: a new proposal for virtual local equity markets.” £25/$40
By Tim Mocroft. January 2001. ISBN 0-9543144-4-7
46. “iX: better or just bigger?” £25/$40
By Andrew Hilton and David Lascelles. August 2000. ISBN 0-9543144-4-6
45. “BANKING BANANA SKINS 2000: the CSFI’s latest survey of what UK bankers feel are the biggest challenges facing them.” £25/$40
By David Lascelles. June 2000. ISBN 0-9543144-4-5
44. “INTERNET BANKING: a fragile flower.” £25/$40
By Andrew Hilton. April 2000. ISBN 0-9543144-4-4
43. “REINVENTING THE COMMONWEALTH DEVELOPMENT CORPORATION UNDER PUBLIC-PRIVATE PARTNERSHIP.” £25/$40
By Sir Michael McWilliam. March 2000. ISBN 0-9543144-4-3
42. “IN OR OUT: maximising the benefits/minimising the costs of (temporary or permanent) non-membership of EMU.” £25/$40
Various. November 1999. ISBN 0-9543144-4-2
41. "EUROPE’S NEW BANKS: the non-banks phenomenon.” £25/$40
By David Lascelles. November 1999. ISBN 0-9543144-4-1
40. “A MARKET COMPARABLE APPROACH TO THE PRICING OF CREDIT DEFAULT SWAPS.” £25/$40
By Tim Townend. October 1999. ISBN 0-9543144-4-0
39. “QUANT AND MAMMON: meeting the City’s requirements for post-graduate research and skills in financial engineering.” £25/$40
By David Lascelles. April 1999. ISBN 0-9543144-3-9
38. “PSYCHOLOGY AND THE CITY: applications to trading, dealing and investment analysis.” £25/$40
By Denis Hilton. April 1999. ISBN 0-9543144-3-8
37. “LE PRIX DE L’EUROPE: competition between London, Paris and Frankfurt.” £25/$40
By David Lascelles. February 1999. ISBN 0-9543144-3-7
36. “THE INTERNET IN TEN YEARS’ TIME: a CSFI survey.” £25/$40
Various. November 1998. ISBN 0-9543144-3-6
35. “CYBERCRIME: tracing the evidence.” £6/$10
By Rosamund McDougall. September 1998. ISBN 0-9543144-3-5
34. “THE ROLE OF MACRO-ECONOMIC POLICY IN STOCK RETURN PREDICTABILITY.” £25/$40
By Nandita Manrakhan. August 1998. ISBN 0-9543144-3-4
33. “MUTUALITY FOR THE 21ST CENTURY.” £25/$40
By Rosalind Gilmore. July 1998. ISBN 0-9543144-3-3
32. “BANKING BANANA SKINS” £25/$40
The fifth annual survey of possible shock to the system.
By David Lascelles. July 1998. ISBN 0-9543144-3-2
31. “EMERALD CITY BANK: banking in 2010.” £25/$40
Various. March 1998. ISBN 0-9543144-3-1
30. “CREDIT WHERE CREDIT IS DUE: bringing microfinance into mainstream.” £25/$40
By Peter Montagnon. February 1998. ISBN 0-9543144-3-0
29. “THE FALL OF MULHOUSE BRAND.” £30/$50
By David Shirreff. December 1997. ISBN 0-9543144-2-9
28. “CALL IN THE RED BRACES BRIGADE: the case for electricity derivatives.” £25/$40
Ronan Parker and Anthony White. November 1997. ISBN 0-9543144-2-8
27. “FOREIGN CURRENCY EXOTIC OPTIONS.” £25/$40
A trading simulator for innovative dealers in foreign currency (with disc).
By Stavros Pavlou. October 1997. ISBN 0-9543144-2-7
26. “BANKING BANANA SKINS:1997.” £25/$40
The latest survey showing how bankers might slip up over the next two to three years.
By David Lascelles. April 1997. ISBN 0-9543144-2-6
25. “THE CRASH OF 2003: an EMU fairy tale.” £25/$40
By David Lascelles. December 1996. ISBN 0-9543144-2-5
24. “CENTRAL BANK INTERVENTION: a new approach.” £25/$40
New techniques for managing exchange rates.
By Neil Record. November 1996. ISBN 0-9543144-2-4
23. “PEAK PRACTICE: how to reform the UK’s regulatory system.” £25/$40
By Michael Taylor. October 1996. ISBN 0-9543144-2-3
22. “WELFARE:A RADICAL RETHINK: the Personal Welfare Plan.” £25/$40
Andrew Dobson. May 1996. ISBN 0-9543144-2-2
21. “BANKING BANANA SKINS III” £25/$40
By David Lascelles. March 1996. ISBN 0-9543144-2-1
20. “TWIN PEAKS: a regulatory structure for the new century.” £25/$40
Michael Taylor. December 1995. ISBN 0-9543144-2-0
19. “OPTIONS AND CURRENCY INTERVENTION.” £20/$35
A radical proposal on the use of currency option strategies for central banks.
Charles Taylor. October 1995. ISBN 0-9543144-1-9
18. “THE UK BUILDING SOCIETIES: do they have a future?” £20/$35
A collection of essays by Angela Knight; Alistair Darling, Peter White, Peter Birch, Bert Ely and Karel Lannoo
September 1995. ISBN 0-9543144-1-8
For more CSFI publications, please visit our website: www.csfi.org.uk

Sponsorship
The CSFI receives general support from many public and private institutions, and that support takes different forms.
The Centre currently receives financial support from; inter alia:
Ruffer GISE AG
Citigroup ICMA
Ernst & Young JP Morgan
Fitch Ratings PricewaterhouseCoopers
Aberdeen Asset Management KPMG

ABI LCH.Clearnet
ACCA Lloyds Banking Group
Accenture Lloyd's of London
Arbuthnot Logica
Aviva Man Group plc
Bank of England Morgan Stanley
Barclays Nomura Institute
Chartered Insurance Insititute PA Consulting
City of London Prudential plc
Deloitte Royal Bank of Scotland
Eversheds Royal London Group
Fidelity International Santander
Finance & Leasing Association The Law Debenture Corporation
FRC Thomson Reuters
FSA UBS Wealth Management
Gatehouse Bank UK Payments (APACS)
HSBC Z/Yen
Jersey Finance Zurich
Absolute Strategy LandesBank Berlin

ACT Lansons Communications
AFME LEBA and WMBA
Alpheus Solutions Lending Standards Board
Bank of Italy Lombard Street Research
BCM Strategy MacDougall Auctions
Brigade Electronics Miller Insurance Services
BVCA NM Rothschild
Chown Dewhurst Record Currency Management
CISI RegulEyes
Greentarget Risk Reward
HM Treasury Taiwan FSC
Hume Brophy The Share Centre
Intrinsic Value Investors THFC
Investment Management Association WDX Organisation
The CSFI also received support in kind from, inter alia:
- Clifford Chance - Macquarie Group

- Edwin Coe - NERC
- Financial Times - NESTA
- ifs School of Finance - Promontory
- Linklaters LLP - Standard Chartered
- Hogan Lovells - Taylor Wessing
The Centre has received special purpose funding from:

- CGAP and Citi (for Microfinance Banana Skins) and;
- PwC (for Banking Banana Skins and Insurance Banana Skins).
In addition, it has set up the following fellowship programmes:

- the VISA/CSFI fellowship in Identity in Financial Services; and
- the DfID/Citi/CSFI fellowship in Development.
UK £25
US $45
€35
CSFI ©
CSFI
Registered Charity Number 1017353
Registered Office: North House, 198 High Street, Tonbridge, Kent TN9 1BE
2 0 11 Registered in England and Wales limited by guarantee. Number 2788116

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Microfinance

Losing its fairy dust

CSFI publications can be purchased through our website www.bookstore.csfi.org.uk or

Printed in the United Kingdom by Heron, Dawson & Sawyer

CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

This report was written by David Lascelles and Sam Mendelson

Robert Annibale Tilman Ehrbeck

2 CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

The breakdown by type of respondent was as follows:

CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk 3

The distribution of responses by region was as follows:

The responses by country were as follows

4 CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

The The survey

The The survey

The The overall

CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk 5

6 CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk 7

8 CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk 9

Investors – people who invest in MFIs

The risk perceptions of investors in microfinance have changed sharply since

In another big shift, investors increasingly see competition as a risk to the

10 CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

Regulators – government officials and those who regulate MFIs

Another strong area of concern is operational risk: weakness in the back

Regulators tended to be less concerned than other groups about reputation

CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk 11

Deposit-takers – people who run or work in deposit-taking MFIs

These MFIs see a high risk of inappropriate regulation: rules governing

Among institutional risks, deposit-taking MFIs focus particularly on the

12 CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

North American respondents were mostly investors and members of

The growing reputational controversy over microfinance is a top level concern,

The problem of poor regulation – a key concern for practitioner-dominated

CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk 13

Latin American respondents were mostly practitioners, which gave their

A set of fast-rising concerns surrounds reputation risk: the problems of

14 CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

Matthias Adler, principal sector economist at KfW, the German development

Respondents see these developments stemming from overexpansion of

CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk 15

Central and Eastern Europe

Respondents from Central and Eastern Europe consisted mostly of practitioners

An additional problem in many countries is the absence of good microfinance

Funding and liquidity risks ranked low.

16 CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

Respondents from Africa were mostly practitioners, plus some investors,

A respondent from West Africa said: “The quality of governance and

CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk 17

Middle East and North Africa

Much of respondents’ high level concern centred on the commercial pressures

The weakness of management and corporate governance is another top level

18 CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

With the turmoil sparked by events in Andhra Pradesh, it is no surprise that

CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk 19

Respondents in the Far East included practitioners, investors, regulators and

Ruben C. De Lara, executive director of TSPI Development Corporation in the

The growth in over-lending is already affecting the industry’s reputation (No.

Another of the region’s preoccupations is with the institutional strength of

20 CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

The The breadth