July 10, 2009
Microfinance Practitioners See Themselves as Vulnerable to Macro-Economic Forces
by Robert Kropp
Second Microfinance Banana Skins report finds that in wake of economic crisis, financial issues
such as credit risk and liquidity replace management quality and corporate governance as primary
From its origins rooted in small-scale operations designed to provide small amounts of credit to
the world's neediest people, microfinance has grown to a point at which the 1,200 microfinance
institutions (MFIs) reporting to the Microfinance
Information Exchange (MIX) have 64 million borrowers and total assets of $32 billion.
In a report entitled Microfinance Banana Skins
2008: Risk in a booming industry, issued before the worst of the financial crisis struck, the
authors at the Centre for the Study of Financial
Innovation (CSFI) found that a shortage of funding was not perceived as a risk by respondents
in the microfinance industry. Indeed, the biggest risks cited by respondents were management
quality and corporate governance.
Now that the global economy has been brought to its
knees, have the perceptions of those in the microfinance industry changed in response? To assess
the status of MFIs in 2009, CSFI recently issued its Microfinance Banana Skins 2009: Confronting crisis and change.
Not surprisingly for an industry that has grown so far beyond its modest beginnings, the report
finds that the concerns of MFIs now mirror much more closely those of banks and other traditional
Only a year ago, many believed the microfinance industry "to be more or less
insulated from the vicissitudes of mainstream finance," according to the report's preface. Today,
however, "the main message to take from this year's survey is that the climate for microfinance has
changed, just as surely as the broader financial and economic climate has changed."
its 2009 Microfinance Banana Skins report, CSFI received responses from 430 participants in 82
countries. The special focus of the report was on the 350 MFIs with more than $5 million in assets,
which are profitable and capable of commercial growth.
The top three risks identified in
the 2008 report lost ground in 2009. Management quality fell from first to fourth, corporate
governance fell from second to seventh, and inappropriate regulation fell from third to thirteenth.
Competition, interest rates, and staffing were also seen as lesser concerns in 2009 than in the
Given the state of the economy today, it comes as no surprise that the
biggest concerns among MFIs in 2009 pertain to specifically financial issues. Credit risk rose from
tenth to first among biggest risks, indicating that microfinance is no longer considered to be a
low-risk industry. Liquidity rose from 20th to second, reflecting the vulnerability of MFIs to
tightened credit. And macro-economic trends rose all the way from 23rd to third, as the perception
that microfinance was insulated from the mainstream economy could no longer be held with
"A further recession-led concern," according to the report, "is for the
reputation of the industry if MFIs are unable to sustain their flow of lending or are forced to
become tougher about loan re-payment. Any hardening of the MFIs' position would add to concerns
about mission drift and the perception that MFIs are abandoning their social objectives."
The report surveyed those who invest in MFIs as well, and found that "Investors are concerned
about the aspects of the crisis that could reduce the value of their commitments: the ability of
MFIs to manage their liquidity and funding, the effect of currency fluctuations on cross-border
exposures, and the impact of credit risk on their soundness and profitability." Investors also
remain concerned about the issues of corporate governance and management quality, according to the
Asked how well prepared they were to take on the risks they identified, only 5% of
respondents described themselves as well-prepared, compared to 27% in 2008. Such an indicator of
heightened anxiety is one crucial reason why the authors wrote of their report, "If a single word
was needed to sum up its tone, it is 'ominous'."
One of the sponsors of the report is
CitiGroup, whose Citi
Microfinance business unit was created in 2005 as an initiative to expand financial access in
many countries. SocialFunds.com spoke with Bob Annibale, the Global Director of Citi Microfinance,
about his view of the report's findings.
"The report is meant to be a stress test,"
Annibale said. "If you look at the market with your risk manager's hat on, what makes you worry?"
"But I think what also comes across is resilience," Annibale continued. "I don't believe
there's a crisis in microfinance, although there is a greater correlation between markets."
Annibale pointed that in countries like Bosnia & Herzegovina, whose economic fortunes are
closely allied with the rest of Europe, some deterioration of market has appeared as enforced
transformation to regulated status has caused serious problems for MFIs there.
Annibale went on to say, "In some of the biggest markets, such as Indonesia, Bangladesh, and India,
we're not seeing the deterioration that we might expect."
The report states, "It is
impossible to read this year's text without coming to the conclusion that microfinance is at a
crossroads, and that it might do the industry a power of good if it were able to call a time-out to
reassess its role."
Along such lines, Annibale observed, "We've seen a slowing of the pace
of growth almost everywhere, which we see as a good thing. There's certainly a caution about