Microfinance Banana Skins 2008 - Citigroup

MicrofinanceBanana Skins2008Risk in abooming industrySponsored byCSFICentre for the Study ofFinancial Innovation

C S F I / New York CSFII believe that this report – written by my colleague, David Lascelles, who has made the ‘Banana Skins’ patch his ownover the last dozen years – is genuinely important. It looks at microfinance from the inside, at what those who are mostdirectly involved feel. It differentiates responses and respondents by their role within the industry and by geography.And it raises a number of warning flags that (to our knowledge) have not been raised before.We are very grateful to all those institutions who made this report possible. In particular, our thanks go to our two mainsponsors – Citi and CGAP (the Consultative Group to Assist the Poor). In addition, the Council of Microfinance EquityFunds (CMEF) and the Microfinance Information eXchange (MIX) provided important support. The report could nothave been completed without the help of several individuals from our sponsors, notably Deborah Drake, Philip Brownand Xavier Reille. Finally, a word of thanks to Zach Grafe, who ran the Survey Monkey programme that enabled somany respondents from around the world to join in electronically.Andrew HiltonDirectorCSFI2 CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

C S F I / New York CSFISponsors’ forewordIn 1998 when the CSFI issued its first Banking Banana Skins report, microfinance was still largely unknown andobscure, a niche-interest for government-sponsored donors. Today, a decade later, with a Nobel Prize under its belt, andwith foreign capital investment at US$1.5 billion a year, it’s a dynamic field, with a slew of new and serious investors.Microfinance is exploding.No longer the provenance only of NGOs offering microcredit to a limited number of entrepreneurs, the word‘microfinance’ has entered the general lexicon. It no longer denotes just small loans for productive purposes. Today, itactually means, for many, retail banking for millions – potentially billions – of poor people.This is the context in which the Citigroup Foundation and CGAP, a leading microfinance group housed at the WorldBank, sponsored CSFI to write the inaugural Microfinance Banana Skins Report.This report presents the findings of the first global industry survey on the risks affecting the growth and viability ofcommercial microfinance institutions. Our ambition is to raise awareness and engage investors, policy makers andmicrofinance institution managers on the perceived risks facing this new sector. While by no means exhaustive, thetwenty-nine risks identified provide a faithful snapshot of the microfinance industry today.None of the risks highlighted here are that surprising for a young, emerging industry that is expanding at breakneckspeed. Nonetheless, we hope that by highlighting the perceived risks affecting the global growth of commercialmicrofinance the report will inject a dose of realism into the debate about the investment boom – and the(mis)perception that microfinance, which has enjoyed limited default history, therefore carries little or no risk.The report is intended to distinguish areas where development is needed, particularly at an industry level, to keep thingson track. It is notable that the report highlights the importance of qualitative variables, with Management Quality, andGovernance topping the list of risks, and points to an old microfinance mantra: the need for increased focus on retailinstitution capacity building.As sponsors of the report, we are grateful for the 305 industry participants from 74 countries who contributed to thesurvey and whose comments form the basis of the report. We would like to thank the CSFI and David Lascelles inparticular, for producing such a coherent and engaging report. The Council of Microfinance Equity Funds was also animportant project partner in this endeavour, and we are grateful to them for co-ordinating the Steering Committee’swork. We would also like to thank the Microfinance Information eXchange (MIX) for their support in the surveydesign and outreach.We hope that the Microfinance Banana Skins Report will be a valuable tool in charting the progress of commercialmicrofinance, highlighting the biggest and rising risk areas on the road ahead.Bob AnnibaleGlobal DirectorCiti MicrofinanceElizabeth LittlefieldCEOCGAPCSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk 3

C S F I / New York CSFIThe breakdown by countries was as followsAfghanistan 3 Ethiopia 2 Nicaragua 4Africa 1 Finland 1 Nigeria 3Albania 3 France 9 Norway 2Angola 1 Germany 7 Pakistan 2Argentina 1 Guatemala 4 Palestine 1Aruba 1 Guinea-Conakry 1 Paraguay 2Australia 1 Haiti 2 Peru 12Azerbaijan 2 Honduras 1 Philippines 2Bangladesh 5 Hong Kong 1 Romania 1Belgium 2 India 13 Russia 3Benin 1 Italy 2 Rwanda 1Bolivia 5 Jordan 3 Slovakia 1Bosnia & Herzegovina 7 Kenya 4 South Africa 4Brazil 1 Kosovo 1 Sri Lanka 2Cambodia 7 Kyrgyzstan 1 Sudan 1Cameroon 1 Lebanon 3 Sweden 1Canada 3 Luxembourg 3 Switzerland 8China 1 Mexico 9 Syria 1Colombia 5 Mongolia 1 Tajikistan 2Costa Rica 2 Montenegro 1 Uganda 2Denmark 1 Morocco 2 UK 11Dominican Republic 2 Multinational 5 United Arab Emirates 1Ecuador 5 Nepal 2 US 84Egypt 1 Netherlands 10 Venezuela 2El Salvador 1 Zimbabwe 1A breakdown of countries by region is given in Appendix 3.CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk 5

C S F I / New York CSFISummaryBiggest risksMicrofinance Banana Skins2008Fastest risers1 Management quality 1 Competition2 Corporate governance 2 Staffing3 Inappropriate regulation 3 Political interference4 Cost control 4 Too much funding5 Staffing 5 Credit risk6 Interest rates 6 Strategy7 Competition 7 Mission drift8 Managing technology 8 Ownership9 Political interference 9 Interest rates10 Credit risk 10 Unrealisable expectations11 Transparency 11 Reputation12 Foreign exchange 12 Corporate governance13 Unrealisable expectations 13 Managing technology14 Mission drift 14 Fraud15 Fraud 15 Natural catastrophes16 Strategy 16 Cost control17 Ownership 17 Management quality18 Back office operations 18 Foreign exchange19 Reputation 19 Product development20 Liquidity 20 Profitability21 Too much funding 21 Inappropriate regulation22 Profitability 22 Distribution channels23 Macro-economic trends 23 Liquidity24 Product development 24 Macro-economic trends25 Capital availability 25 Back office operations26 Distribution channels 26 Transparency27 Natural catastrophes 27 Refinancing28 Refinancing 28 Capital availability29 Too little funding 29 Too little fundingThis survey explores the risks and challenges facing microfinance as a business and asocial service at a time when the sector is undergoing profound changes.Originally a small-scale, philanthropic movement to provide credit to the neediest,microfinance has grown enormously in recent years and is now firmly established asa major supplier of a wide range of financial services to millions of people aroundthe world. The 1,200 microfinance institutions (MFIs) who report to theMicrofinance Information eXchange (MIX) have 53m borrowers and 64m savers,6 CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

C S F I / New York CSFIWho said whatPractitionersBiggest1 Competition 1 Competition2 Cost control 2 Mission drift3 Inappropriate regulation 3 Credit riskFastest risers4 Interest rates 4 Political interference5 Credit risk 5 Staffing6 Mission drift 6 Strategy7 Management quality 7 Managing technology8 Managing technology 8 Ownership9 Staffing 9 Interest rates10 Corporate governance 10 Management qualityThe biggest concern for microfinance practitioners is the rise of competition from new entrants, whichthey see putting downward pressure on standards and squeezing margins. Key managementchallenges of cost control, credit risk and technology are also high on the list, as are people issues suchas management quality and staffing. Inappropriate regulation is a widespread concern. A fast-risingrisk for this group is mission drift: the danger that MFIs will be driven away from their original socialpurposes by commercial interests.AnalystsBiggestFastest risers1 Corporate governance 1 Competition2 Management quality 2 Too much funding3 Interest rates 3 Interest rates4 Managing technology 4 Unrealisable expectations5 Unrealisable expectations 5 Natural catastrophes6 Mission drift 6 Strategy7 Inappropriate regulation 7 Staffing8 Ownership 8 Managing technology9 Strategy 9 Mission drift10 Transparency 10 Foreign exchangeAnalysts of the microfinance sector focused on the control aspects of MFIs: the quality of management,corporate governance, strategy and transparency. They see the biggest risks in the rise of competition -both among MFIs and investors – and a greater exposure to interest rate pressure. Generally, theirinterest lies with the longer term issues of MFI development such as regulation and ownership ratherthan with short term issues of credit risk and profitability. They were particularly concerned thatmicrofinance might not be able to meet high investor expectations.CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk 9

C S F I / New York CSFIInvestorsBiggest risksFastest risers1 Management quality 1 Too much funding2 Corporate governance 2 Competition3 Foreign exchange 3 Political interference4 Inappropriate regulation 4 Reputation5 Staffing 5 Staffing6 Too much funding 6 Credit risk7 Political interference 7 Unrealisable expectations8 Managing technology 8 Strategy9 Interest rates 9 Ownership10 Unrealisable expectations 10 Interest ratesInvestors were interested in the control aspects of MFIs – governance, management, staffing - and inbroader issues of competition and political interference. As dollar investors, mostly, they are alsosensitive to foreign exchange risk. One of their sharpest concerns is with competition from otherinvestors: they see excessive funding as both a high and a rising risk. Their relative lack of concernwith issues such as profitability suggests that they are taking a longer term view of the challenges facingthe industry.ObserversBiggest risksFastest risers1 Corporate governance 1 Competition2 Staffing 2 Staffing3 Management quality 3 Ownership4 Transparency 4 Corporate governance5 Inappropriate regulation 5 Political interference6 Interest rates 6 Strategy7 Competition 7 Interest rates8 Cost control 8 Reputation9 Managing technology 9 Too much funding10 Strategy 10 Unrealisable expectationsObservers of the microfinance scene (consultants, academics, regulators, lawyers etc) see the main riskslying with internal control issues: corporate governance, staffing, management, transparency, costcontrol and strategy. They see external risks in inappropriate regulation, pressure on interest rates andrising competition. A growing concern is the rise of political interference and reputational risk,particularly if MFIs fail to deliver on public expectations. They are less concerned than other groupswith the problems posed by excessive funding.10 CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

C S F I / New York CSFINorth AmericaBiggest risksFastest risers1 Corporate governance 1 Competition2 Management quality 2 Too much funding3 Inappropriate regulation 3 Unrealisable expectations4 Staffing 4 Reputation5 Transparency 5 Political interference6 Interest rates 6 Staffing7 Unrealisable expectations 7 Ownership8 Foreign exchange 8 Interest rates9 Back office operations 9 Strategy10 Managing technology 10 Mission driftRespondents from the US and Canada, who included a large proportion of investors, saw the greatestrisks lying in the areas of management of MFIs: corporate governance, management quality, staffingand transparency. They saw external risks in inappropriate regulation and market pressures such asinterest rates and foreign exchange. They also focused strongly on the risks to MFI reputations fromexcessive public expectations and the danger of mission drift, both of which raised the danger of greaterpolitical interference.Latin AmericaBiggest risksFastest risers1 Competition 1 Competition2 Interest rates 2 Political interference3 Political interference 3 Strategy4 Inappropriate regulation 4 Credit risk5 Cost control 5 Interest rates6 Credit risk 6 Natural catastrophes7 Capital availability 7 Foreign exchange8 Profitability 8 Staffing9 Product development 9 Ownership10 Managing technology 10 FraudLatin American respondents, who were mostly practitioners, focused closely on external factors bearingon their business: competition, regulatory and political pressures. Their high concern with interest ratesreflected the growing commercial pressures to which they feel exposed. Their internal concerns werewith improving the quality of the business through better management of costs and credit, by raisingprofitability, and by expanding the range of products they offer. This group also showed concern withthe rising risk of fraud.CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk 11

C S F I / New York CSFIEuropeBiggest risksFastest risers1 Management quality 1 Competition2 Corporate governance 2 Too much funding3 Inappropriate regulation 3 Credit risk4 Staffing 4 Unrealisable expectations5 Cost control 5 Staffing6 Fraud 6 Interest rates7 Managing technology 7 Political interference8 Too much funding 8 Mission drift9 Transparency 9 Reputation10 Strategy 10 Corporate governanceEuropean respondents, who consisted mostly of investors in West Europe and practitioners in EastEurope, saw the greatest risks in internal management issues including corporate governance, staffing,cost control and strategy, though these were not necessarily seen to be the fastest rising risks. Concernsabout inappropriate regulation were particularly strong in East Europe. The areas of rising risk are thegrowth of competition, both in business and funding. They also see rising risks in the areas ofreputation and mission drift. This group showed a strong concern with fraud.AfricaBiggest risksFastest risers1 Too little funding 1 Competition2 Management quality 2 Corporate governance3 Credit risk 3 Management quality4 Managing technology 4 Managing technology5 Inappropriate regulation 5 Staffing6 Corporate governance 6 Distribution channels7 Staffing 7 Product development8 Cost control 8 Profitability9 Profitability 9 Strategy10 Strategy 10 Back office operationsAfrican respondents consisted mainly of practitioners and members of aid organisations and NGOs.They were the most concerned of any group about the scarcity of funding for microfinance – in contrastto other regions which saw the risk lying in an overabundance. Management issues ranked high ontheir list, particularly staffing. Credit risk was also seen as a high level problem. African MFIs putprofitability and cost control among their strongest concerns, and saw growing challenges in the areasof distribution channels and product development.12 CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

C S F I / New York CSFIAsiaBiggest risksFastest risers1 Managing technology 1 Competition2 Management quality 2 Staffing3 Corporate governance 3 Credit risk4 Staffing 4 Mission drift5 Competition 5 Strategy6 Mission drift 6 Interest rates7 Fraud 7 Fraud8 Reputation 8 Product development9 Strategy 9 Managing technology10 Credit risk 10 Corporate governanceThe Asian response was strongly tilted towards practitioners who saw the biggest challenges lying inthe area of management, particularly technology, and also staffing and corporate governance. Therise of competition is a top level concern. This group saw credit risk as a growing problem, as well asfraud. Reputation risk and mission drift were also among their worries. This group was lessconcerned than others with the problems of inappropriate regulation.Far EastBiggest risksFastest risers1 Foreign exchange 1 Competition2 Unrealisable expectations 2 Ownership3 Cost control 3 Credit risk4 Competition 4 Distribution channels5 Inappropriate regulation 5 Mission drift6 Management quality 6 Political interference7 Political interference 7 Staffing8 Credit risk 8 Too little funding9 Natural catastrophes 9 Management quality10 Mission drift 10 Managing technologyRespondents from the Far East included microfinance practitioners, investors and NGOs. Theirresponse was very different from other regions. It showed a stronger concern with operational issuessuch as foreign exchange risk than with the management themes highlighted by other groups. ManyMFI respondents felt they faced growing political pressure because of the excessive expectations thatwere placed upon them. This group also showed a high concern with the impact of naturalcatastrophes, not surprising given the number of recent disasters.CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk 13

C S F I / New York CSFIMiddle EastBiggest risksFastest risers1 Staffing 1 Competition2 Capital availability 2 Mission drift3 Competition 3 Staffing4 Inappropriate regulation 4 Capital availability5 Interest rates 5 Interest rates6 Mission drift 6 Unrealisable expectations7 Managing technology 7 Inappropriate regulation8 Corporate governance 8 Political interference9 Macro-economic trends 9 Strategy10 Political interference 10 Credit riskMiddle East respondents, who were mostly practitioners, showed less concern than other groups withhigh level management issues, apart from staffing shortages which are a problem the world over.Instead they focused on the growing competition in their region for business and capital, and the riskthat MFIs will be diverted from their missions by mounting commercial pressures. MFIs in this groupfeel vulnerable to growing political interference. They also felt the most exposed of any group toeconomic trends at the macro level.A full breakdown of the responses by type and region is given in Appendix 2 on p 38.14 CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

C S F I / New York CSFI1. 1. Management qualityThe The uneven quality of of management in in microfinance institutions (MFIs) is is the thegreatest risk risk facing the the industry, according to to respondents to to this this survey. In In all all the theregions in in which they they operate, MFIs are are being stretched by by hectic rates rates of of growth, by bythe the growing complexity of of their their business, and and by by pressures to to become morecommercially-motivated. One One respondent warned: “MFIs which lack lack managementbreadth and and depth will will remain higher risk risk institutions and and are are not not likely to to emerge as aswinners in an an increasingly competitive environment.”Concerns about management quality were were strongest among investors and and analysts of ofthe the microfinance sector (who placed this this Banana Skin Skin at at No.1 and and No.2 respectively)as as opposed to to practitioners who who ranked it it No No 7. 7. Julie Julie Earne, an an investment officerwith with the the International Finance Corporation in in South Africa, said said there were were “not “notenough good managers and and a a growing market.” Geographically, concerns were werehighest in in Europe, North America, Africa and and Asia.South America was was least leastconcerned, placing it it No No 16. 16.MFIs with poormanagementcould be be thelosersMuch of of the the worry aboutmanagement quality focused on onManaging changethe the fact fact that that MFIs tend tend to to be bedominated by by “visionaries” who whoThe The principal risk risk is is overheating: high high and and are are strong on on charisma but but less lessunrealistic expectations for for long long term term returns, so so on on management skills and andexcess investor liquidity and and appetite, and and a astrategic flexibility.Manylack lack of of clarity about the the difference betweenmainstream investors and and those with with a a socialrespondents felt felt that that MFIs riskedmotivation.getting trapped between their theirElizabeth Littlefieldsocial and and commercial objectivesChief executive officerand and succeeding at at neither as as the theConsultative Group to to Assist the the Poor Poorindustry changed around them.A A US US practitioner saw saw MFIshaving “difficulty in in balancingbusiness and and social missions, leading to to tension, unclear focus, and and inefficiencies inoperations.” Several respondents felt felt that that MFIs were not not investing enough in in MF MFmanagement skills because the the philanthropic culture of of the the industry emphasiseddedication rather than than professionalism.This This risk risk was was closely linked to to concerns about weak corporate governance (see (see No No 2) 2)and and staffing (No (No 5). 5).However the the risks risks of of poor poor management are are not not seen seen as as rising: this this Banana Skin Skin cameonly only No No 17 17 on on the the risers list. list. Indeed, many respondents saw saw it it falling as as the the problemwas was increasingly recognised and and tackled.Leonor Melo de de Velasco, executivepresident of of the the Fundacion Mundo Mujer in in Colombia, said: said: “It “It is is being strengthenedby by training.” Another respondent said said he he had had observed “a “a strong performance amongMF MF managers who who have have ‘grown with with their their institutions’.”2. 2. Corporate governancePoor Poor corporate governance is is seen seen an an area area of of high high risk, risk, though more by by investors,analysts and and regulators than than by by MFI MFI practitioners themselves. A A Canadiandevelopment expert said said that that “lack of of governance has has been been a a major risk risk factor in inCSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk 15

C S F I / New York CSFImany MFIs and and will will continue to to be be an an area area of of concern for for the the coming years”. The Theperceived trend in in this this risk risk is moderately upwards.Investors were particularly concerned.“Too often, basic concepts of of corporategovernance are are little little known or or neglected,” said said Geert Peetermans, chief investmentofficer of of Incofin in in Belgium. At At the the end end of of the the day, day, the the risk risk is is that that MFIs will willforego funding if if they they lose lose the the confidence of of their their investors.Shortcomings typically take take the the form form of of low low calibre personnel, lack lack of of experience,cronyism and and poor poor transparency.Khirod Chandra Malick, chairman of of the the BharatIntegrated Social Welfare Agency in in India, said said this this whole area area “needs moreprofessionalism.”Many of of these weaknesses have have been been shown up up by by the the demands of of commercialinvestors. But But this this discipline has has also also had had the the beneficial effect of of forcing MFIs to toraise raise their their game.Hanns Martin Hagen, senior financial sector economist at at the theKfW Entwicklungsbank in in Germany, said: said: “Many MFIs have have opened up up to to outsideprivate investors and and now now have have a a much more transparent corporate governancestructure.”3. 3. Inappropriate regulationPoor regulatorystructures areblocking changein in many countriesThe The lack lack of of appropriate regulatory structures for for MFIs in in many parts of of the the world is is a athreat to to their their healthy development.Alejandro Soriano, deputy director of of the theCorporación Andina de de Fomento in in Venezuela, said: said: “Many countries do do not notprogress due due to to the the lack lack of of prudential regulation”, a view a view which was was widely echoedin in Latin America, Africa, the the Middle East East and and the the Far Far East. A A Cambodianrespondent said said the the central bank bank was was “too “too slow slow in in regulating new new areas that that need needurgent attention (savings, insurance, etc)”. Asia Asia was was the the only only region in in which this thisBanana Skin Skin did did not not feature in in the the top top ten. ten.According to to comments from from respondents, inadequate regulatory structures are arerestricting MFIs’ operating freedoms and and creating legal legal uncertainty, particularly by byblocking their their efforts to to transform themselves from from NGO status to to fully-fledgedbanks, or or alternatively by by forcing them to to make the the change against their their will will (see (seebox). A A respondent from from Angola said: said: “I “I believe that that MFIs must must be be clearly definedwithin the the legal legal framework to to obtain the the clear clear identity which is is necessary in dealingwith with banks and and other investors”.At At another level, respondents complained about the the “hassle factor” of of petty rules ruleswhich looked like like political interference in in disguise. Money laundering regulationswere a a particular annoyance.Corruption, delays, and and unnecessary cost cost were were extrahazards. A A US US investor said said that that “the “the relative lack lack of of sophistication and andinconsistency of of many regulators in in sub-Saharan Africa is is going to to stifle growth”.Poor Poor regulation was was attributed variously to to incompetence, bureaucratic heavyhandedness,or or simple failure to to keep keep up up with with a a fast-moving industry. In In India, an aninvestor said said that that it it was was clear clear that that regulators “can “can afford to to ignore MFIs – – as as they theyhave have done done for for years”, though this this could not not continue as as MFIs became moreimportant players on on the the financial landscape.16 CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

C S F I / New York CSFIDespite the the gloom, though, this this was was not not seen seen to to be be a a rising risk risk (No. (No. 22), 22), and and severalrespondents saw saw improvements on on the the way way with with new new legislation and and stronger skills in inthe the regulator.The transformation challengeOne One of of the the biggest challenges facing MFIs MFIs is is to to transform themselves from from NGOs into intocommercial institutions, a a task task which is is greatly complicated in in many countries by byunhelpful regulation.The The problem is is particularly acute in in Bosnia & & Herzegovina where MFIs MFIs are are beingforced by by a a new new microcredit law law to to transform themselves into into institutions with with profitobjectives, regulated by by the the central bank. One One practitioner from from that that country said: said:“The “The transformation risk risk will will be be very very high high for for those MFIs MFIs which decide to to transformthemselves into into for-profit companies because a a company is is a a very very different ‘animal’from from an an NGO. There are are associated risks risks such such as as management, governance,regulation and and supervision, etc.” etc.”In In Kenya, Phyllis Mbungu, CEO CEO of of the the Small and and Micro-Enterprise Programme, faced a areverse though not not uncommon problem.Regulation of of banks has has been been tightened up, up,and and many smaller banking institutions are are opting to to become MFIs MFIs instead, adding to tocompetition in in the the sector.4. 4. Cost control“Most MFIs havenever been goodat at controllingcosts…”This This risk risk was was particularly stressed by by microfinance practitioners who who put put it it No No 2 2 on ontheir their list, list, with with comments that that stressed the the need need to to keep keep a a tight tight grip grip on on spending."Obligatory… more important than than ever ever before… a a matter of of survival…the numberone one operational challenge for for microfinance today.”Geographically, concern was wasstrongest in Latin America and and the the Far Far East.But But respondents recognised that that it it wasn’t easy. A A Scandinavian government advisorsaid: said: “Most MFIs have have never been been very very good at at controlling cost,” because so so muchMFI MFI work is is labour intensive and and requires strong management to to stay stay within budget.Some respondents felt felt that that MFIs lacked the the discipline to to keep keep costs down becausethey they could easily pass pass them on on to to their their customers through higher loan loan charges. The Thesuperabundance of of capital also also made life life too too comfortable. A A practitioner in in Albaniasaid said that that the the MFI MFI business model “will need need to to change to to lower the the delivery cost cost of ofservices.”Some MFIs operate in in high high inflation countries where cost cost control is is speciallydifficult.Nkosilathi Moyo, a a bank bank supervisor at at the the Reserve Bank of of Zimbabwe,said said that that this this was was “a “a challenge in in a a hyperinflationary environment and and also also due due to to the thefact fact that that granting small loans is is expensive”.This This was was not, not, however, seen seen as as a a strongly rising risk risk (No (No 16) 16) because it it was was widelyrecognised and and being acted upon.CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk 17

C S F I / New York CSFI5. 5. StaffingStaffing is is a a perennial and and worsening risk risk for for most most MFIs. The The growth in incompetition, poaching, the the lack lack of of training and and rising salaries make this this one one of of the themost most intractable problems in in the the sector.Responses from from all all major regions told told a a similar tale tale of of staff staff shortages holding back backgrowth and and service improvement. “A “A critical issue…a huge huge problem…humancapacity is is a key a key constraint” were among the the comments made. The The lack lack of of locallytrained staff staff to to fill fill management positions is is widespread.“MFIs are are headed by byamazing visionaries and and leaders but but lack lack the the mid-management resources to to scale up,” up,”said said one one respondent.A perennial andworsening risk…Even when they they are are available, staff staff are are hard hard to to retain. Poaching is is rife, rife, particularlyby by well-heeled new new entrants who who can can outbid the the locals. Yousef Mousa Kandah,deputy general manager of of the the Ahli Ahli Microfinancing Company in in Jordan, said said that thatcompetition “will put put us us at at risk risk due due to to the the resignation of of field field loan loan officers who who are areattracted by by banks entering the the MFI MFI business”.Inadequate training is is a a serious bottleneck. An An Indian investor saw saw a a “lack of of focuson on quality and and training of of human resources, particularly at at the the field field level, and and on onbuilding a a strong second/third line line of of management”. In In Venezuela, Juan Juan Uslar-Gathmann, president of of BanGente microfinance institution, said said that that his his bank bank had had set setup up a a training institute and and opened it it to to the the competition in in order to to address the the staffingrisk. risk.The The staff staff requirements at at MFIs are are also also specialised: they they need need people who who are are“dedicated” but but also also able able to to handle the the new new pressures on on microfinance. A Apractitioner in in Angola said said “I “I strongly believe that that the the sustainability of of MFIs greatlydepends on on the the competence and and efficiency of of its its personnel”.Practitioners saw saw all allthese pressures steadily driving up up operating costs without delivering any anyimprovements.6. 6. Interest ratesTwo Two types of of risk risk are are identified here: market and and political.On On the the market side, side, many MFIs are are protected from from interest rate rate movements by by the theinsensitivity of of their their borrowers to to loan loan pricing, which can can also also encourage bad badmanagement practice. But But as as competition grows and and clients become financiallymore literate this this protection disappears, exposing MFIs to to stronger interest rate ratepressures. Can Can they they meet meet this this challenge?Respondents had had their their doubts. An An Egyptian practitioner said said that that high high interest rates rates“are “are covering inefficiency” and and many other respondents thought that that rates rates should be bemore market-driven to to instil cost-awareness into into MFIs. Bill Bill Harrington, an an advisorto to the the Mennonite Economic Development Associates in in the the US, US, said: said: “Competitivepressure to to lower interest rates rates will will hurt, hurt, but but will will benefit clients.”Anotherrespondent pointed out out that that high high interest rates rates merely attract “new profit maximizingplayers to to a field a field that that was was never meant to to be be for for ‘high profits’“. Several agreed that thathigh high loan loan rates rates bring in “the “the wrong type type of of competition”.18 CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

C S F I / New York CSFIOn On the the political side, side, high high interest rates rates are are catching the the attention of of politicians and andprovoking potentially damaging measures such such as as interest rate rate caps caps (see (see No No 9). 9).Greater competition among MFIs could avert this this risk risk by by forcing them to to reducetheir their costs. Several respondents noted that that interest rates rates on on loans are are already fallingin in some countries, for for example in Latin America.This This was was seen seen as as a a moderately rising risk risk (No (No 9). 9).The urge to to mergeOver Over the the next next 2-3 2-3 year year horizon, I I believe the the microfinance sector will will undergo someconsolidation, increased competition and and deepen its its market penetration. MFIs MFIs will willneed need to to do do this this not not only only to to stay stay on on the the path path towards profitable growth but, but, in in manycases, to to stay stay competitive.Romi BhatiaVice Vice president, International operationsMicrofinance International Corp., US US7. 7. CompetitionCompetition is rising strongly and and having a a big big impact on on the the microfinance sector,though whether this this is good or or bad bad is is an an open open question. Practitioners are are the the most mostworried about it: it: they they put put competition risk risk at at the the top top of of their their list, list, notably in in LatinAmerica. But But other respondents ranked it it much lower, investors at at No. No. 17 17 and andanalysts at at No. No. 18. 18. All All groups, however, saw saw it it strongly on on the the up. up.Practitioners seecompetition as as thegreatest riskThe The facts facts are are that that commercial banks, money lenders and and consumer financecompanies are are taking advantage of of low low entry barriers to to move into into MFI MFI territory with withaggressive, well-funded campaigns, bringing market forces to to bear bear on on hithertosacrosanct lending margins.MFIs are are also also competing more strongly amongthemselves.The The downside is is that that competition could undermine operating standards and and erodeprofitability. A A practitioner from Colombia saw saw “bad “bad practices and and greater risk” risk”emerging in in the the sector. Many respondents felt felt that that competition was was destroying the thesocial purpose of of microfinance by by choking off off the the supply of of finance to to the the most mostneediest and and encouraging overindebtedness in in the the creditworthy. A A frequentcomplaint from from Latin American practitioners was was that that new new entrants were were“prostituting” the the market. One One respondent from India blamed “unethicalcompetition”.Ganhuyag Ch. Ch. Hutagt, CEO of of XacBank in in Mongolia, said said that thatcompetitive pressures were were “pushing MFIs out out of of their their traditional market [with]abandonment of of the the poor poor as as a a result”. An An African regulator described competition as as“destructive”.But But many respondents saw saw competition as as a a good thing because it it brought down loan loancosts and and encouraged innovation. An An investor in India saw saw it it delivering “benefitsto to customers through lower interest rates rates and and availability of of loans”. And And whilecompetition might squeeze individual MFIs, it it was was good for for the the industry as as a a whole.An An analyst in in the the Netherlands said: said: “The industry should start start to to see see this this as as normal.”CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk 19

C S F I / New York CSFIHowever, the the responses showed that that this this risk, risk, while rising, is specific to to particularcountries. A A respondent in in Colombia said: said: “There is is no no interference here”.Somerespondents even even welcomed political interference, provided it it was was supportive and and led ledto to better regulation. A A bank bank regulator said said that that without political interest in inmicrofinance there would be be no no “conducive and and enabling environment to to allowgrowth in in the the sector.”Borrowers hit hit backWhat would happen if if a a campaign developed to to support the the cancellation of ofmicrofinance debt?Shortly after after his his arrival as as the the new new and and democratically electedhead head of of state, the the new new president of of Benin, and and former president of of the the West West AfricanDevelopment Bank, declared that that microfinance loans were were too too expensive and and incitedborrowers to to not not pay pay them back. This This declaration contributed to to sending the the local localmicrofinance sector, which had had been been the the best best performing in West West Africa, into into a a severecrisis.Cyrille ArnouldSenior operations officerEuropean Investment BankLuxembourg10. Credit riskCredit risk risk is is not not traditionally seen seen as as a a major threat to to the the microfinance sectorbecause the the social sanctions against default in in typical MFI MFI markets are are strong. In Inthis this survey, it it appears only only as as a a moderately high high risk risk though, ominously perhaps, as asone one of of the the fastest risers, ranking fifth.Loan default is isseen as as a afast-rising riskOur Our respondents identified many reasons for for the the rising trend. One One is is the the growth in inlending capacity which is is leading to to greater competition and and through that that to to lowercredit standards and and tighter margins. A A Mexican analyst warned: “As “As marketsbecome increasingly saturated, the the risk risk of of default is rising.” A A bank regulator fromCentral Africa noted “the “the high high rate rate of of non-performing loans to to several MFIs” in in her herterritory.Banks are are also also taking on on greater risk risk by by extending their their reach into intounfamiliar markets and and new new product areas.A A consequence of of growing commercial pressure is is the the spread of of overindebtedness as asMFIs push push more loans on on to to their their customers. A A respondent from a a women’s bank in inColombia warned of of “the “the high high level level of of indebtedness in in the the microfinance sector.”Elizabeth Marinelli of of Norfund in in Norway said said the the greatest risk risk in in the the coming yearswas was “potentially a lack a lack of of proper portfolio monitoring and and provisioning”.Some respondents noted that that borrowers were were getting the the message about lowerstandards and and had had become more delinquent, running up up debts to to several banks at atonce. Group guarantees, traditionally the the underpinning of of individualcreditworthiness, were were also also weakening. Philip Biswas, executive director of of the theRural Reconstruction Foundation in in Bangladesh, said said “the “the main risk risk we we are are currentlyfacing - and - and it'll it'll be be critical in in future - is - is the the duplication of of different MFIs in in the the samearea area with with the the same borrowers.”CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk 21

C S F I / New York CSFIAll this All this taking is taking place place against against a a background in which in which credit credit assessment and and portfolio portfoliomanagement skills skills may may be be inadequate, where where credit credit bureaux bureaux are lacking, are lacking, and and where wherelegal legal systems systems may may not aid not the aid recovery the recovery of bad of bad debts. debts.But But improvement may may be on be the on way. the way. Eduardo Eduardo Carlos Carlos Ferreira, Ferreira, executive executive manager managerof of Microinvest in Brazil, in Brazil, said said that that “international best best practices, practices, microcredit tools tools and andtechniques have have only only been been very very recently recently and and partially partially applied, applied, and and could could improve improveand and stabilize stabilize loan loan quality.” quality.”Leaders and and LudditesThe The adoption adoption of change of change is one is one of the of biggest the biggest risks risks for any for industry, any industry, and and microfinancecannot cannot be insulated be insulated from from that. that. Will the Will current the current senior senior management react react positively positively or ornegatively negatively to the to change the change required required to manage to manage a business, a business, and and one one that that is ten is times ten times its itscurrent current size? size? There There will be will those be those who who react react brilliantly, brilliantly, and and those those who who adopt adopt Luddite Ludditeattitudes. attitudes. Either Either way way there there will be will stresses, be stresses, successes successes and and failures. failures.Colin Colin Howard HowardMFDAQ, MFDAQ, The The microfinance capital capital market, market, UK UK11. 11. TransparencyMFIs MFIs need need to to“dispel suspicion”The The risks risks associated associated with with poor poor transparency in MFIs in MFIs are high are high because because it drives it drives away awayinvestors investors and and customers, and and attracts attracts unwelcome political political attention. attention. A A practitioner in inColombia Colombia described described this this as “the as “the great great challenge” and and Indian Indian investor investor said said MFIs MFIsshould should act to act dispel to dispel “suspicion about about the sector”. the sector”.Several Several respondents from from the investor the investor side side singled singled out out transparency as a as key a key risk, risk,particularly the lack the lack of of standardised reporting reporting structures structures and and measurement tools. tools. A Adirector director of a of rating a rating agency agency said said “The “The sector sector needs needs more more transparency and and instrumentsto help to help investors investors assess assess risk”. risk”. Tracey Tracey Pettengill Pettengill Turner, Turner, general general manager manager of ofMicroPlace in the in US, the US, felt felt that that transparency should should be more be more widely widely cast cast to include to includefinancial financial performance, social social metrics metrics and and mission mission statements to aid to aid borrowers borrowers as aswell well as investors. as investors. An African An African bank bank regulator regulator said said transparency should should be extended be extendedto the to pricing the pricing of products of products and and services. services.However, However, the the risks risks of poor of poor transparency are are widely widely recognized, and and many manyrespondents said said there there had had been been a marked a marked improvement in recent in recent years, years, even even if it if had it hadbeen been uneven. uneven. Credit Credit for for this this was was given given to investor investor pressure pressure as well as well as to as tointernational accounting and and governance initiatives, and and to the to growing the growing role role of rating of ratingagencies. agencies. An investor An investor India in India said said that that “the “the involvement of various of various stakeholders is isleading leading to an to an improvement in in transparency”, and and analyst analyst in Mexico in Mexico said said that that“accountability is rising rising as more as more international funds funds are used are used by various by various MFIs”. MFIs”.12. 12. Foreign exchangeAn An increasing increasing number number of MFIs of MFIs face face foreign foreign exchange exchange risk risk because because they they fund fundthemselves in a in a non-domestic currency. currency. Many Many of them of them do not do have not have the means the means to toprotect protect themselves against against currency currency volatility, volatility, notably notably against against the US the dollar US dollar in which in whichmost most foreign foreign funding funding comes. comes.22 CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

C S F I / New York CSFIPaul Paul Hamlin, an an advisor at at ACDI/VOCA in in Azerbaijan said: said: “Given increasedvolatility in in almost all all capital market components, foreign exchange risk risk will will only onlyincrease as as well.” A A practitioner in in Egypt said said that that MFIs “are “are lending in in foreigncurrency assuming that that they they have have no no currency risk risk on on the the balance sheet, but but their theirclients are are exposed to to this this risk, risk, which could affect their their repayment capabilities.”Some respondents blamed foreign exchange exposure on on the the shortage of of local localfunding sources. A A practitioner in in Cambodia said said that that it it was was easier for for banks there to tolend lend in in dollars than than in in local local currency, and and because of of this this the the supply of of small loans in inriel riel or or bhat bhat was was restricted. In In Nicaragua, Gabriel Solorzano, president of of Findesa,said said there was was “a “a need need for for more local local currency funding.”However a a number of of respondents saw saw local local funding on on the the rise, rise, and and thereforereducing the the risk risk of of foreign exposure. One One respondent noted that that funding was wasincreasingly available in in Mexican pesos, Peruvian soles and and Russian roubles.Technology and and training are are also also strengthening MFI MFI capability in in this this area. area. HeatherHenyon, general manager of of Grameen-Jameel Pan-Arab Microfinance in in the the UnitedArab Emirates said said that that MFIs in in the the Middle East East and and North African regions “havegrown increasingly aware of of their their inability to to manage forex risk, risk, and and have have thereforedecreased taking on on funding in hard hard currency.”13. Unrealisable expectationsSo So much is is expected of of microfinance that that it it could be be riding for for a fall. a fall. Gil Gil Lacson,relationship manager with with Women’s World Banking in in the the US, US, said: said: “With the theamount of of attention given to to microfinance, it it is is easy easy for for expectations to to dramaticallyexceed delivery, possibly leading to to negative consequences like like ‘microfinancefatigue’”.Can MFIs matchup up to to what is isexpected of of them?The The risk risk lies lies on on two two fronts. One One is is that that public expectations will will be be disappointed,leading to to political and and regulatory backlash. The The other is is that that investors, drawn to tomicrofinance by by philanthropic or or commercial motives, will will become cynical and and go goelsewhere. Brigit Helms, a a project manager with with the the IFC IFC in in Cambodia, said said that that“once many of of the the new new players seduced into into the the sector (the (the Gates and and the the JP JPMorgans of of this this world, especially) realise that that microfinance may may not not be be able able to toresolve all all the the world's problems as as advertised, the the disillusionment may may cause them to towithdraw their their capital and and support, to to the the detriment to to the the sector as as a a whole”.The The denouement could be be even even more dramatic: a a few few negative newspaper articlesexposing mismanagement and and corruption, or or researchers producing evidence that thatmicrofinance is is having minimal impact on on poverty could severely damage the thestanding of of the the industry.Anne Hastings, director of of Fonkoze in in Haiti, said saidmicrofinance’s biggest risk risk was was that that it it will will “not “not be be able able to to produce credible evidencethat that it it does does indeed reduce poverty.”Many respondents said said it it was was up up to to the the industry to to respond to to these risks risks by by stressingthat that microfinance was was “not “not a a panacea”, and and by by launching robust studies to to measurethe the investment and and social performance of of MFIs.CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk 23

C S F I / New York CSFI14. Mission driftMounting commercial pressures are are pushing MFIs away from from their their original missionsof of poverty alleviation and and financial inclusion. This This is seen seen as as a a strongly rising risk riskin in many parts of of the the world.A A respondent from Mexico said said that that “as “as microfinance becomes more lucrative, the theinitial objective of of sustained socio-economic development is is being brushed aside.” A Apractitioner in in Haiti said said that that pressures from profit-seeking investors “will lead, lead, little littleLoans for for jewellery and cosmeticsMicrofinance is is now now seen seen as as a a highly profitable area area in in which to to invest,forgetting/ignoring that that the the clients behind the the "profits" are are people from from very very low lowincome sectors, living living at at the the margin and and using microloans as as a way a way to to improve their theirsmall incomes. This This is attracting many new new profit-seeking players with with access to tofunding and and technological advances that that genuine microcredit players will will find find very veryhard hard to to compete with. with.These new new players are are inducing "the "the poor" to to take take out out loans that that carry carry very very high highinterest rates rates for for short short term term consumer purposes, rather than than for for productive activitieswhich require serious loan loan repayment capacity and and lower interest rates. Consumerloans are are going to to purchase luxury items such such as as jewellery, ornaments, perfumes and andcosmetics, even even "wellness" products that that "poor women” sell sell to to other "poor women".In In countries with with large large populations living below the the poverty line line (Mexico, Brazil,Argentina to to name a few a few in in this this region) this this consumer lending mentality will will seriouslythreaten the the performance of of the the microcredit sector and, and, more importantly, will willproduce clients who who are are unable to to repay their their loans, who who end end up up in in credit risk riskbureaux, and and will will never again have have access to to a a loan. loan. In In the the meantime, the the new newplayers will will make enough profits so so that, that, when the the going gets gets tough, they they will will get get out outof of the the market and and no no one one will will care care about the the many who who are are left left in in "civic "civic death" on on the theway. way.Pilar Pilar RamirezGeneral managerLocfundBolivia“The initialobjective is is beingbrushed aside”by by little, to to MFIs putting profitability ahead of of social development objectives”. In InSyria, Namaan Adra, country manager of of the the Aga Aga Khan Agency for for Microfinance,feared that that “due “due to to pressure to to be be sustainable, MFIs will will change their their focus from frompoverty reduction to to profit-making. This This is is compounded by by the the increase in incompetition from the the commercial sector”. Prakash Raj Raj Sharma, general manager of ofNirdhan Utthan Bank in in Nepal, said said that that “in “in the the name of of sustainability, someinstitutions are are trying to to make themselves more commercial…I think the the challenge is isto to create a a balance between a a pro-poor system and and commercialisation”.This This Banana Skin Skin provoked dozens of of passionate responses, most most of of which blamedreturn-hungry investors for for turning up up the the commercial heat heat on on MFIs. A A respondentfrom from India said said investors were were pushing MFIs to to deliver “faster growth at at the the cost cost of ofsacrificing their their reach to to the the underprivileged community.”Jerome Aba, Aba, a amicrofinance expert at at PlaNet Finance in France, said said that that “too “too many financiers are areimposing their their diktats supposedly on on the the basis of of ‘sustainability’”. Malcolm Harper,an an independent researcher, said said that that microfinance was was in in danger of of becoming “just “justanother exploitative business which will will continue the the trend towards growinginequity, worldwide.”24 CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

C S F I / New York CSFIThe The consequence is is not not just just that that MFIs are are deserting their their original social missions, but butthat that they they are are being pushed into into business areas where they they may may not not have have the the right rightskills and and management tools. This This increases the the risk risk of of business failure. It It also alsoraises the the microfinance sector’s vulnerability to to a a change investment fashions. As Asmany respondents pointed out, out, the the flood of of investment could just just as as quickly flow flow out outagain as as investors pursue a new a new fad. fad.15. FraudMFIs are reluctantto to sharefraud experienceResponses to to this this Banana Skin Skin had had a a resigned tone tone to to them: “always with with us, us, a anatural business risk, risk, manageable etc…” But But a a number of of respondents felt felt therewere worrying trends. Some commented on on the the growth of of fraud by by staff staff and and whitecollar workers, others on on the the new new possibilities for for fraud opened up up by by MFI MFI movesinto into unfamiliar markets or or by by the the introduction of of new new but but unreliable technologies.Geographically, concerns about fraud were were strongest in in Asia. It It was was also also a a leadingconcern among investors in in North America and and Europe. One One US US investor felt felt the thefraud problem was was underplayed because MFIs were were frightened of of “airing their their dirty dirtylaundry”. Their reluctance to to share fraud experience meant that that other MFIs werecondemned to to repeat their their mistakes.But But many felt felt these concerns were were overdone, and and that that the the fraud experience of of MFIswas was not not exceptional in in the the financial field. Better controls and and a a stronger anti-fraudculture were were being introduced. A A South African respondent said said that that fraud was wasbeing mitigated by by “licensing, better governance and and best best practice organisations.”The trust factorThe The present situation looks 'to 'to good good to to be be true'. true'. I I sense that that every day day we we are are comingcloser to to a a failing institution (too (too high high portfolio at at risk, risk, or more likely, fraud). How How will willthe the market react react to to this? this? At At the the same time, time, every day day without such such an an eventconfirms the the trust trust people have have in in this this sector, and and the the likelihood increases that that they theywill will stay stay on. on.Els Els BoerhofManagerMicro and and Small Enterprise Fund FundFMO FMONetherlands16. StrategyWeaknesses in in MFIs’ strategic planning are are perceived to to be be only only a a middle level level risk, risk,but but nonetheless a a rising one one (No (No 6) 6) as as the the microfinance sector becomes morecomplex and and competitive. Many respondents felt felt that that strategy could soon soon become a asurvival issue.Philippe Serres, network director of of PlaNet Rating, said said this this was was a a major risk risk “giventhat that many institutions simply do do not not know how how to to plan plan or or are are too too ambitious”. XavierReille, manager with with CGAP in in France, saw saw MFIs suffering from a a “lack of ofCSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk 25

C S F I / New York CSFIawareness awareness of of competition and and market market developments”. A bank A bank regulator regulator said said that thatMFIs MFIs “lack “lack strategic strategic imperatives”.Some Some respondents felt felt that that MFIs MFIs were were too too hooked hooked on ideology on ideology when when it came it came to tostrategic strategic planning, planning, and and should should be more be more open-minded. Elissa Elissa McCarter, McCarter, director director of ofdevelopment finance finance at CHF at CHF International in the in US, the US, said said that that microfinance had hadaccumulated a very a very solid solid base base of of experience and and had had much much to applaud, to applaud, but “there but “there is islikely likely ‘more ‘more than than one one truth’…as truth’…as it develops it develops further!” further!” A Swiss A Swiss investor investor said said that that“those “those MFIs MFIs which which position position themselves in a in mature a mature market market will will be able be able to handle to handle the thechallenges challenges successfully”.17. 17. OwnershipAs more As more MFIs MFIs make make the transition the transition from from NGO-type NGO-type organisations to to commercialcompanies, potentially destabilising tensions tensions are arising are arising among among the different the different types types of ofowner. owner. These These surround surround key key issues issues such such as the as nature the nature of the of MFI’s the MFI’s mission, mission, the role the roleof profit, profit, whether whether to remain to remain local local or broaden or broaden out etc... out etc... Some Some respondents saw saw the theproblem problem in terms in terms of founding of founding owners owners trying trying to cling to cling to their to their original original missions, missions, others othersin terms in terms of new of new realities realities forcing forcing MFIs MFIs to move to move with with the times. the times. This This was was seen seen as a as arising rising problem problem in all in regions. all regions.Ira Ira Lieberman, president president of Lipam of Lipam International and and advisor an advisor to to microfinancefunds, funds, said said that that “new “new investors investors push push the market the market too fast”. too fast”. Yet Yet Deborah Deborah Drake, Drake, vicepresidenpresidentof ACCION of ACCION International, said said that that “’founder “’founder syndrome’ continues continues to tovice-plague plague the NGOs the NGOs transforming into into regulated regulated MFIs”. MFIs”. Another Another respondent said said that that“multi-stakeholder MFIs MFIs are still are still difficult”. difficult”.Some Some respondents saw saw the ownership the ownership issue issue in terms in terms of a of regulatory a regulatory bias bias which which forces forcesnew new ownership ownership structures structures on MFIs on MFIs or makes or makes it difficult it difficult for them for them to transform to transformthemselves into into regulated regulated entities. entities. Bob Bob Annibale, Annibale, global global director director of Citi of CitiMicrofinance, took took issue issue with with the view the view that that MFIs MFIs needed needed to transform to transform themselvesinto into for-profit for-profit banks banks in order in order to succeed. to succeed. In In Bangladesh it was it was BRAC BRAC the NGO, the NGO, not notBRAC BRAC Bank, Bank, that that completed completed an AAA an AAA rated rated securitisation “because “because of the of quality the quality of ofits its management”.18. 18. Back Back office operationsMany Many MFIs MFIs lack lack the the strong strong management and and accounting systems systems which which are arenecessary necessary to control to control risk risk and keep and keep costs costs down, down, particularly as they as they expand expand in size in size and andcomplexity. In general, In general, this this was was seen seen to be to a be middle a middle level level risk, risk, but not but on not the on rise the riseowing owing to the to amount the amount of work of work that that is being is being put into put into it. it.“Neglecting the theback back end…is not not a ahealthy trend” trend”Concerns Concerns focused focused particularly on larger on larger MFIs MFIs which which might might be be overwhelmed by rapid by rapidgrowth growth or which or which put back put back office office upgrading upgrading too low too low on their on their list of list priorities, of priorities, though thoughmany many smaller smaller MFIs MFIs were were also also seen seen to be to be dangerously under-equipped. Howard HowardBrady, Brady, president president and and CEO CEO of MFI of MFI Resources Resources in the in US, the US, said said that that “system “system providers providersare not are doing not doing a very a very good good job of job training of training and and implementing systems, systems, and and MFIs MFIs are arenot willing not willing to pay to the pay costs the costs of a of good a good MIS. MIS. The The result result is systems is systems that that are inferior are inferior and andare held are held together together with with frequent frequent patches patches that that create create more more problems”.Maria Maria Nerissa Nerissa Cochingco, an MF an MF consultant consultant in the in the Philippines, said said that that “as “as the thevolume volume of of transaction increases, increases, systems systems fail to fail adapt to adapt most most of the of time”. the time”. C.O. C.O. Joby, Joby,26 CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

C S F I / New York CSFIa a manager with with ICICI Bank in in India, said: said: “The whole concentration right right now now is is on onexpanding at at any any cost cost and and being everywhere possible. This This is not not a a healthy trend…neglecting the the back back end.”Weaknesses were were specially marked in in India and and Africa where respondents said said that thatunregulated MFIs tended to to put put their their faith faith in in social networks rather than than IT IT systems;this this held held back back modernisation.19. ReputationPotential for forbacklashThe The reputation of of the the microfinance sector looks vulnerable. Large profits, high highinterest rates rates and and unfulfilled promises have have attracted public interest and and adversepublicity.Gloomy responses on on this this issue tended to to come from investors in in the the developedworld rather than than practitioners in in the the developing. An An investor in in the the US US said said that thatmicrofinance’s image was was threatened by by “profits off off high high interest rates, misguidedexpectations and and a lack a lack of of studies demonstrating the the effectiveness of microfinance in inReputation at at riskThe The unwillingness of of larger MFIs MFIs (over (over $10m in in assets) to to keep keep serving the the poorerpopulations [would make] this this industry solely a a very very profitable emerging marketbusiness.Stephanie Cohn, Senior investment officer, PlaNet Finance, US USThe The extreme profits that that many MFIs MFIs are are generating through deceptive marketing of ofhigh-priced products will will generate a a backlash against the the image of microfinance as as a ameans to to alleviate poverty. Microfinance could become synonymous with with moneylending if we if we don't don't fight fight for for consumer protection.Chuck Waterfield, CEO, CEO, MFI MFI Solutions, US USToo Too much fragmentation leads to to more opportunity for for a a small failure to to taint taint the thewhole field field of microfinance.Michael Mainelli, Executive chairman, Z/Yen Group, UK UKpoverty alleviation”. A A Dutch investor said said that that there was was “potential for for backlash”.Jeremy Leach, executive director of of FinMark Trust in in South Africa, saw saw the the risk risk of of“consumer and and regulatory backlash against (a) (a) compulsory financial products (eg (egcredit life life insurance) (b) (b) high high interest rates rates (c) (c) sub-standard products (especiallycontractual savings products)”.Reports from practitioners tended to to be be more upbeat. A A Latin American respondentsaid said that that the the reputation of of MFIs was was safe safe “so “so long long as as management was was transparentand and profitable”.20. LiquidityLiquidity risk risk comes relatively low low on on the the risk risk scale because money was was – – at at least leastuntil until recently – – plentiful and and there were were few few cases of of difficulty in in the the commercialisedsector of of microfinance.MFIs have have also also become, as as one one respondent put put it, it, “moresavvy” in in the the management of of liquidity.Those MFIs making the the transition to toCSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk 27

C S F I / New York CSFIbanking status status have have gained gained access access to wider to wider funding funding options, options, while while the emergence the emergence of ofliquidity facilities such such as the as the Costa Costa Rica-based Emergency Liquidity Liquidity Facility Facility has set has setan an example that that others others might might follow. follow.Some Some respondents thought the the risk risk lay lay in MFIs in MFIs failing failing to to understand – as – the as world’s the world’sbiggest banks banks also also do do – that – that liquidity liquidity has has a nasty a nasty habit habit of drying of drying up when up when most mostneeded. Peter Peter Wall, Wall, executive director director of the of the Microfinance Information Information eXchange, Exchange,said said there there was was a risk a risk “to “to the the extent extent that that domestic domestic MFIs MFIs are are linking linking to in today'stoday'sextraordinary international liquidity liquidity levels, levels, and and get get used used to these.” to these.” Liquidity Liquidity risk riskcould could also also rise rise as as MFIs MFIs expand expand into into more more complex complex liability liability side side products. products. One One US USinvestor investor warned warned that that it would it would only only take take one one default default for for MFI MFI liquidity liquidity to be to more be morewidely widely affected. affected.Overfunding is astrongly Overfunding rising is risk astrongly rising riskSmaller Smaller MFIs MFIs face face greater greater liquidity liquidity risks risks because because of a of lack a lack of skills of skills and and restricted restrictedaccess access to to money money markets, markets, though though their their dependence dependence on outside on outside funding funding tends tends to be to belower. lower. There There was was little little geographical geographical variation variation in this in this risk. risk.21. 21. Too Too much much funding fundingAn excess of funding can create as much risk as a shortage. The flood of moneyAn excess of funding can create as much risk as a shortage. The flood of moneypouring into the MFI sector is stirring up irrational exuberance and underminingpouring into the MFI sector is stirring up irrational exuberance and underminingdiscipline. Though ranked low, this was seen as a strongly rising risk.discipline. Though ranked low, this was seen as a strongly rising risk.The profit imperativeRespondents feared that easyThe profit imperativemoneyRespondentswouldfearedencouragethat easyThe risk is that we fall short of the goal of uncontrolledmoneygrowthwouldandencouragebadmainstreaming The risk is that microfinance we fall short into the of the banking goal ofinvestment uncontrolled decisions. growth and An badsectors mainstreaming of poor countries, microfinance and create into the instead banking ainvestment investment officer decisions. with a G7 Ansocial sectors entrepreneurial of poor countries, space and that create produces instead aaid investment agency said: officer “This with is a G7programs social that entrepreneurial operate with minimal space profits that and produces noreal programs market-making that operate returns…This with minimal would profits retard and the no increasingly aid agency becoming said: “This a issupply real of market-making the largest number returns…This of financial would services retard to the critical increasingly issue. MFIs becoming need the athe supply broadest of the array largest of clients number around of financial the world. services to capacity critical issue. to effectively MFIs need theUS the investor broadest array of clients around the world. deploy capacity funds to on effectively aUS investorcommercially deploy funds sustainable on abasis. If funders focus their attention on a small group of MFIs, commercially there is a risk sustainable thatthese basis. MFIs If funders will lack focus the their systems, attention technology, on a small management group of MFIs, capability there and is a other risk thatresources these MFIs to prudently will lack deploy the systems, this capital.” technology, Several management respondents said capability this showed and otherthat resources the need to was prudently not for more deploy money, this capital.” but for a greater Several number respondents of commercial said this MFIs. showedthat the need was not for more money, but for a greater number of commercial MFIs.Respondents were also concerned about the hype. Peter Platan of Finnfund inFinland Respondents warned were that “a also bubble concerned might about be growing.” the hype. John Peter Wilson Platan of of Christian Finnfund inBrothers Finland Investment warned that Services “a bubble in the might US feared be growing.” that imprudent John lending Wilson would of bump Christianup Brothers defaults and Investment “lead to Services a decline in the confidence US feared of the that industry”. imprudent An lending analyst would in India bumpsaw up the defaults boom and leading “lead to to a bust decline which in confidence “could turn of off the the industry”. capital markets An analyst tap in for Indiasome saw time, the boom similar leading to what to happened a bust during which the “could Asian turn crisis off in the the capital mid-90s”. markets tap forsome time, similar to what happened during the Asian crisis in the mid-90s”.Excessive funding is also widening the tiers between the haves and the have-nots.Rakhat Excessive Uraimova, funding training is also and widening consulting the manager tiers between at the the Microfinance haves and Center the have-nots. forCentral Rakhat and Uraimova, Eastern Europe training and and the consulting NIC Kyrgyzstan, manager at said the that Microfinance the sector Center in her forpart Central of the and world Eastern “will see Europe a growing and the gap NIC between in Kyrgyzstan, very few large said MFIs that the created sector and in hersupportedpart of thebyworldinternational“will seenetworks,a growingdonorsgap betweenand financialvery few largeorganizations,MFIs createdandandemergingsupportedMFIsbyofteninternationalcreated by newnetworks,donor funding”.donors and financial organizations, andemerging MFIs often created by new donor funding”.28 CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

C S F I / New York CSFIThe risk also lies in the type of investor getting into microfinance. Matthew Gamser,principal operations officer at the International Finance Corporation in Hong Kong,said: “The quantity is not the problem, it's who is bringing the new money to thetable, The with risk also too little lies understanding the type of investor of the situation.” getting into microfinance. Matthew Gamser,principal operations officer at the International Finance Corporation in Hong Kong,But said: some “The respondents quantity is took not issue the problem, with the it's fact who that is there bringing was too the much new funding. money to A theColombian table, with practitioner too little understanding said: “No scenario of the exists situation.” with that type of funding supply.”“Profitable growthis only possiblefor “Profitable the growthtop is only 50-75 possible MFIs”for thetop 50-75 MFIs”But some respondents took issue with the fact that there was too much funding. AColombian practitioner said: “No scenario exists with that type of funding supply.”22. Profitability22. ProfitabilityThe profitability of MFIs is being squeezed by greater competition, though this is notseen as a risk everywhere. The picture painted by respondents was patchy withMFIs in some regions doing well, in others less so. Concerns were strongest inLatin The America profitability and of Africa, MFIs followed is being squeezed by Asia. by greater competition, though this is notseen as a risk everywhere. The picture painted by respondents was patchy withOne MFIs respondent in some said regions the sector doing was well, rich in in others “success less stories” so. Concerns but Jan Lamboo, were strongest CEO of inMFDAQ, Latin America the microfinance and Africa, capital followed market, by Asia. in Aruba, said that profitable growth wasonly possible for the top 50-75 MFIs. “Many of the other 3,000 MFIs need toupgrade One respondent in all managerial said the aspects sector was in order rich in to “success join the top.” stories” A but respondent Jan Lamboo, from CEO India ofsaid MFDAQ, that “increasing the microfinance competition capital leading market, to in falling Aruba, interest said that rates, profitable compounded growth by wasrising only costs, possible is leading for the to top a drop 50-75 in MFIs. margins.” “Many This of sense the other of imminent 3,000 MFIs profitability need todecline upgrade was in widely all managerial shared. aspects in order to join the top.” A respondent from Indiasaid that “increasing competition leading to falling interest rates, compounded byThe rising need costs, for MFIs is leading to focus to a more drop on in margins.” profitability This was sense a strong of imminent message. profitability AndrewPospielovsky, decline was widely general shared. manager of Microfinance Bank of Azerbaijan, said that “inorder to ensure their long-term sustainability, MFIs have to ensure that they areprofitable The need and for MFIs commercially to focus more viable on without profitability any technical was a strong assistance message. or Andrew otherPospielovsky, general manager of Microfinance Bank of Azerbaijan, said that “inorder to ensure their long-term sustainability, MFIs have to ensure that they areprofitable and commercially viable without any technical assistance or otherThe Compartamos affairCompartamos, the hugely successful Mexican MFI, is a living example thatmicrofinance can be commercially viable. But has it done more harm than good?The Compartamos affairFounded in the 1990s, Compartamos grew at breathtaking speed, achieving annualCompartamos, the hugely successful Mexican MFI, is a living example thatgrowth rates of 50 per cent and profits of $50m a year. By the time it was floated onmicrofinance can be commercially viable. But has it done more harm than good?the public markets in April 2007, it had over 600,000 borrowers. The flotation valuedthe bank at over $400m and made many of its shareholders millionaires.Founded in the 1990s, Compartamos grew at breathtaking speed, achieving annualgrowth rates of 50 per cent and profits of $50m a year. By the time it was floated onBut Compartamos also acquired a reputation for aggressive business tactics, chargingthe public markets in April 2007, it had over 600,000 borrowers. The flotation valuedits borrowers over 100 per cent a year, all of which made it highly controversial amongthe bank at over $400m and made many of its shareholders millionaires.our respondents.But Compartamos also acquired a reputation for aggressive business tactics, chargingAlthough many argued that MFIs must become more commercial, they feared thatits borrowers over 100 per cent a year, all of which made it highly controversial amongCompartamos had damaged the industry’s image and stoked investor expectations upour respondents.to unrealistic levels. A backlash might be in the offing. A US investor saw the dangerof greater political interference “due to deals like the Compartamos IPO where superAlthough many argued that MFIs must become more commercial, they feared thathigh profits are made on the back of very high interest rates.” Richard Rosenberg, aCompartamos had damaged the industry’s image and stoked investor expectations upsenior adviser with CGAP, said that the “disastrous publicity” generated byto unrealistic levels. A backlash might be in the offing. A US investor saw the dangerCompartamos showed that the industry needed to strike a better balance in itsof greater political interference “due to deals like the Compartamos IPO where super“double bottom line”.high profits are made on the back of very high interest rates.” Richard Rosenberg, asenior adviser with CGAP, said that the “disastrous publicity” generated byBut others drew encouragement from the strong commercial message inCompartamos showed that the industry needed to strike a better balance in itsCompartamos. A South African analyst said that successful MFI flotations would“double bottom line”.attract private capital to the sector. “This is a good thing as long as it does not meanexploitation of the end client through very high interest rates. What the sector needsBut others drew encouragement from the strong commercial message inis more competition to keep services appropriate and affordable, but also profitable.”Compartamos. A South African analyst said that successful MFI flotations wouldattract private capital to the sector. “This is a good thing as long as it does not meanCSFI / New York CSFI E-mail: info@csfi.org.uk exploitation Web: www.csfi.org.uk of the end client through very high interest rates. What the sector needs 29is more competition to keep services appropriate and affordable, but also profitable.”

C S F I / New York CSFIsubsidies”. A A risk risk analyst in in Peru Peru said: said: “Whenever possible, and and without affectingthe the soundness of of the the business, profitability should be be as as high high as as possible.”But But some respondents alluded to to the the Compartamos affair to to warn against excessiveprofitability (see (see box). A A respondent from from Bolivia said: said: “The vision of of quickprofitability is is the the highest risk risk for for this this field.” The The strength of of feeling about the thedangers of of mission drift drift (see (see No No 14) 14) suggests that that profitability needs to to know its itsplace.23. Macro-economic trends“There is is a a needto to manage for forthe eventualdownturn”The The localised nature of microfinance tends to to insulate it it from from wider economic trends,and and the the evidence is is that that MFIs have have weathered recent storms quite well. The Thegrowth of of local local funding sources has has helped, and and the the low low correlation with withdevelopments at at the the macro level level has has appealed to to outside investors. But But this this couldchange as as more MFIs move into into the the mainstream and and expose themselves to to forcesbeyond their their control, such such as as the the current global credit crunch.Furthermore, MFI MFI vulnerability to to macro trends may may not not have have been been fully fully testedbecause many emerging economies are are still still strong and and provide good conditions for forprofitable growth. This This too too could change. Chikako Kuno of of the the EBRD in in London,said: said: “Countries are are booming…[but there is is a] a] need need to to manage for for the the eventualdownturn.”Marcelino San San Miguel, president of of Fundacion San San Miguel Arcangel in in the theDominican Republic, said said that that MFIs were only only vulnerable to to macro trends in in the theshort term. “In “In the the medium and and long long terms, MFIs operate in in a a market that that dependsmore on on microeconomic conditions than than macro fluctuations, though macro trendsaffect everything ... ... But But I I do do not not believe that that this this determines the the survival and andoperational management of of a a successful MFI.”What about the the global credit crunch?Although MFIs MFIs are are traditionally seen seen to to be be insulated from from trends in in global markets,that that could change as as they they become more integrated with with mainstream banking and andtherefore more vulnerable to to “contagion”.Several respondents raised the the risk risk that thatliquidity and and investment might become harder for for MFIs MFIs if if global markets continue to todeteriorate. A A Canadian economist said said that that this this “could have have a a direct impact on on the thecost cost of of capital for for microfinance institutions leading to to a slow a slow down in in the the growth of of the thesector.”If If MFIs MFIs suffer, they they will will also also lose lose one one of of their their investment appeals: lack lack of of correlationwith with global markets. In In this this case case they they would have have to to find find “other elements of ofattractiveness” to to compensate, according to to one one MFI MFI investor. Such Such a a “dose of ofreality” might be be healthy for for an an overfed industry, said said another.30 CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

C S F I / New York CSFI24. 24. Product developmentCompetition is isspurring new newproductsDespite Despite all the all calls the calls for for microfinanciers to expand to expand their their services, services, the responses the responses to this to thisBanana Banana Skin Skin suggested suggested that that MFIs MFIs are doing are doing OK OK on the on product the product development front. front.The The great great majority majority of our of our respondents felt that felt that MFIs MFIs appreciated the need the need to widen to widentheir their product product range, range, and and were were able able to deliver, to deliver, whether whether it be it more be more sophisticated loans, loans,insurance, insurance, savings savings accounts accounts or products or products targeted targeted at particular at particular groups. groups. Competitionwas was the spur. the spur.A A practitioner at a at Latin a Latin American American women’s women’s bank bank said: said: “MFIs “MFIs understand the theimportance of having of having attractive attractive products products for niche for niche markets.” markets.” An investor An investor India in Indiasaid said a lot a of lot of innovation was was occurring occurring “at various “at various levels levels on on introducing new new types types of ofproducts”. products”. An investor An investor the in Netherlands said said that that “the “the trend trend away away from from ‘credit ‘creditonly’ only’ is firmly is firmly underway”.But But some some respondents felt that felt that MFIs MFIs were were risking risking losing losing customers customers by failing by failing to be to bemore more innovative. Perlat Perlat Sula, Sula, chief chief financial financial officer officer Partneri of Partneri Shqiptar Shqiptar ne neMikrokredi in Albania, in Albania, said said this this was was particularly the case the case in East in East Europe. Europe. Vanya VanyaPasheva, Pasheva, a student a student of microfinance at MIT, at MIT, said said that that MFIs MFIs would would have have to provide to provide a amore more diverse diverse product product offering offering but but “without “without losing losing efficiency efficiency and and increasing increasingtransactions costs”. costs”.Those Those respondents who who felt less felt less positively positively about about this this topic topic stressed stressed the high the high cost cost of ofproduct product development and and wondered wondered whether whether MFIs MFIs had had the necessary the necessary resources resources to tofund fund it or it were or were willing willing to spend to spend money money market on market research. research. An Indian An Indian investor investor said saidthat that “serious “serious investment has to has be to made be made in this in area…” this area…”One One straw straw in the in wind the wind blew blew in from in from Russia Russia where where a a respondent said said that that MFIs MFIs were wereexperiencing a decline a decline demand in demand for their for their services services as the as the self-employed segment segment of ofthe the workforce workforce advanced advanced to become to become business business owners owners with with larger larger and and more moresophisticated needs. needs.Wrong Wrong money, wrong wrong place placeAlthough Although capital capital for for microfinance is abundant, is abundant, it does it does not reach not reach everywhere.Respondents’ comments comments suggested suggested that that Latin Latin America America and the and Far the East Far East enjoy enjoy more more of ofit than it than Africa Africa and and Asia Asia where where a number a number of of practitioners complained of sourcing of sourcingdifficulties. difficulties. Teshome Teshome Dayesso, Dayesso, general general manager manager of Buusaa of Buusaa Gonofaa Gonofaa MFI in MFI Ethiopia, in Ethiopia,said said that that capital capital was was scarce scarce in countries in countries like like his “where his “where the financial the financial sector sector is not is notliberalized liberalized (no foreign (no foreign participation) and and banks banks are not are yet not convinced yet convinced that that MFIs MFIs are are'investment- or credit-worthy'”. A bank A bank inspector inspector Central in Central Africa Africa commented that that“many “many MFIs MFIs don't don't have have enough enough means means to obtain to obtain the required the required minimum minimum capital.” capital.”Generally, Generally, access access to capital to capital was was linked linked to size: to size: smaller smaller MFIs MFIs had greater had greater difficulty difficulty than thanlarge large ones. ones.The type The type of capital of capital was was also also an issue. an issue. Debt Debt financing financing tends tends to be to plentiful, be plentiful, long-term long-termequity equity financing financing less less so. so. But equity But equity financing financing comes comes with with strings: strings: it is expensive it is expensive and andcarries carries high high investor investor expectations. An Egyptian An Egyptian practitioner said said commercial capital capitalwas was available, available, but but with with came it came “a push “a push for for commercialisation and and higher higher profit profitmargins.” margins.” Lulzim Lulzim Sadrija, Sadrija, CEO CEO of Kreditimi of Kreditimi Rural Rural i Kosoves i Kosoves in Kosovo, in Kosovo, complained of of“the “the high high interest interest rate rate of financial of financial sources sources (9-12%)”. (9-12%)”.CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk 31

C S F I / New York CSFI25. 25. Capital availabilityThe The availability availability of capital of capital is not is a not a widespread problem problem for MFIs. for MFIs. An analyst An analyst in Mexico in Mexicosaid: said: “As “As microfinance becomes becomes increasingly profitable profitable and and transparent, capital capitalavailability availability is rising,” rising,” a view a view that was that was widely widely reflected reflected by other by other respondents who who saw saw the theproblem problem more more in terms in terms of MFI of MFI ability ability to absorb to absorb a strong a strong supply supply of capital. of capital. Timothy TimothyLyman, Lyman, advisor an advisor at CGAP, at CGAP, said said that “the that “the flood flood of of international capital, capital, coupled coupled with with new newdomestic domestic sources sources in many in many markets, markets, means means capital capital availability availability isn't isn't the problem. the problem. In fact In factover over abundance abundance presents presents a much a much bigger bigger risk”. risk”. A US A investor US investor thought thought availability availability would wouldonly only be difficult be difficult there if there were were “some “some high high profile profile failures failures or a public or a public backlash backlash against against high highinterest interest rates.” rates.”26. 26. Distribution channelsToo Too little little retail retailcapacity to to handlerapid rapid growthImprovements in in distribution channels channels are being are being driven driven by new by new technology such such as ascash cash machines machines and and mobile mobile phone phone banking, banking, but but also also by the by the microfinance sector’s sector’smission mission to reach to reach the the financially disadvantaged.Both Both of these of these drivers drivers pose pose challenges challenges which which our our respondents thought thought MFIs MFIs might might be bepressed pressed to meet. to meet. One One investor investor said: said: “Branchless banking banking and and other other technologieswill will hopefully hopefully bring bring delivery delivery costs costs down, down, but this but this very is very uncertain.” The The difficultieslie in lie the in cost the cost of of investment, the speed the speed of change, of change, the regulatory the regulatory environment (often (ofteninvolving involving several several different different regulators, regulators, finance, eg finance, electricity electricity and and telecoms) telecoms) and andsimply simply getting getting it right. it right. A Swiss A Swiss investor investor agreed; agreed; there there was was “too “too little little MFI MFI retail retailcapacity capacity for the for huge the huge amounts amounts of debt of debt funding funding becoming becoming available.” A particular A particularchallenge challenge is getting is getting distribution channels channels out to out remote to remote or poor or poor areas areas which which need need the theservice service but lack but lack the the infrastructure to support to support modern modern branches branches and and technology.Robert Robert Akode, Akode, director director of Papme of Papme in Benin, Benin, observed observed that that a common a common problem problem in inreaching reaching the markets the markets is that is that “the “the educational level level of the of customers the customers is very is very low” low” and andafter after sales sales service service is non-existent. But But as many as many respondents pointed pointed out, out, those those who whodo get do it get right it right should should reap reap cost cost savings savings and and competitive advantage.27. 27. Natural catastrophesMany Many MFIs MFIs operate operate in risk-prone in risk-prone regions, regions, and and have have been been affected affected by climate by climate change, change,earthquake and and tsunami. tsunami. Stephen Stephen Nnawuba, Nnawuba, chief chief accountant of Centenary of Centenary Bank Bankin Uganda, in Uganda, commented on the on the difficulty difficulty of working of working “the in “the drought-strickencountries countries of Africa”. of Africa”.The The impact impact of of catastrophe is not is always not always direct direct physical physical damage. damage. In the In the Philippines,Joy Joy Cadangen, Cadangen, manager manager of Cadangen of Cadangen Lending, Lending, said said that that government and and private privatesector sector lenders lenders were were imposing imposing tougher tougher terms terms on borrowers on borrowers living living in areas in areas affected affected by bynatural natural calamities. Daniel Daniel Kalbassou, general general manager manager of Credit of Credit du Sahel du Sahel in inCameroon, said said that that “the “the draught draught in the in the Sahelien Sahelien area area is resulting is resulting the in the nonrepaymenrepaymentof loans.” of loans.”non-But But can MFIs can MFIs do more do more to protect to protect themselves against against these these risks? risks? A A respondent from fromColombia Colombia said said that that MFIs MFIs there there were were “not “not prepared prepared or covered or covered for such for such afflictions”.From From Peru Peru a a respondent said said MFIs MFIs should should spread spread out out more more to avoid to avoid the risk the risk of of32 CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

C S F I / New York CSFIconcentration.Several respondents pointed out out that that the the risk risk can can be be mitigated by byinsurance or through use of of the growing number of of emergency funding facilities.Generally, though, the incidence of of natural catastrophes is is seen seen more more as a as cost a cost of doing ofbusiness doing business than as than a major as a major business business challenge. challenge.28. RefinancingMFIsMFIs facefacethetheriskriskthatthattheytheymaymaybebeunableunabletotorenewrenewfinancingfinancingcommitmentscommitmentsfromfromtheirtheir investorsinvestorswhenwhenthesethesefallfalldue.due.ButButthisthisriskriskwaswasgenerallygenerallyconsideredconsideredtotobebesmall. In cases where donors might fall away, private capital was ready to step in,small. In cases where donors might fall away, private capital was ready to step in,and where private capital was already there, it would renew its commitments forand where private capital was already there, it would renew its commitments forwell-run and profitable MFIs. Peruvian respondent saw difficulties “only in verywell-run and profitable MFIs. A Peruvian respondent saw difficulties “only in veryspecial circumstances and with due process”.special circumstances and with due process”.However some respondents felt that MFIs could encounter problems if they driftedHowevertoo far fromsometheirrespondentsmissions, orfelttookthatonMFIslarge amountscould encounterof term debt.problemsA USifaidtheyofficialdriftedtoo far from their missions, or took on largewarned:amounts“Itofistermverydebt.importantA USthataidMFIsofficialflight of fashion?develop warned: a funding “It is very plan important that incorporates that MFIsA flight of fashion?sufficient develop a financial funding flexibility.” plan that incorporatessufficient financial flexibility.”A heightened understanding of theA causes heightened and nature understanding of poverty will lead of the to Microfinance is currently very much incauses other and development nature of poverty interventions will lead to fashion, Microfinance which is means currently it very could much face inother replacing microfinance development as fashionable. interventions refinancing fashion, which problems means if investor it could interest facereplacing Allan Bussard microfinance as fashionable. moves refinancing elsewhere. problems if A investor US investor interestAllan Managing Bussard directorwarned: moves “right elsewhere. now microfinance A US investor is theManaging Integra Co-op directorhot warned: new “right thing now so microfinance the money is is theIntegra SlovakiaCo-opthere...[but]…there hot new thing will so be the a NEW money hot isSlovakianew thing soon”. A German practitioner agreed: there...[but]…there “Microfinance is will en be vogue a NEW now hot -new what thing happens soon”. if [international A German financial practitioner institutions’] agreed: “Microfinance interests shift to is other en vogue sectors?” now -what happens if [international financial institutions’] interests shift to other sectors?”Funding shortagesFunding are not a shortages generalare problem… not a generalproblem…29. Too little funding29. Too little fundingIf funding problems exist for MFIs, they are very selective. Respondents singledIf out funding MFIs which problems were exist small, for unprofitable, MFIs, they unregulated are very selective. or located Respondents in remote areas, singled orout those MFIs with which exclusive were missions small, unprofitable, that were unlikely unregulated to become or located commercial. in remote areas, Some orthose funding-starved with exclusive institutions missions also that operate were in unlikely countries to with become inhibiting commercial. political Some orfunding-starved regulatory environments, institutions particularly also operate in Africa in countries where large with numbers inhibiting of political MFIs are orregulatory “very small, environments, non-viable and particularly non-profitable” in Africa according where to one large respondent. numbers of MFIs are“very small, non-viable and non-profitable” according to one respondent.In Bangladesh, Moiz Ahmed Chowdhury, chief financial officer of the ShaktiIn Foundation Bangladesh, for Disadvantaged Moiz Ahmed Women, Chowdhury, said local chief MFIs financial had only officer “limited of the financial ShaktiFoundationresources” toformeetDisadvantaged“unlimited clientWomen,demand”.said localDueMFIsto thishadscarcity,only “limitedhe said, “manyfinancialresources”of our clientsto meetare leaving“unlimitedour organization”.client demand”.A practitionerDue to thisinscarcity,Guatemalahe said,said“manythatfinancial resources to take on more customers “will be limited”.of our clients are leaving our organization”. A practitioner in Guatemala said thatfinancial resources to take on more customers “will be limited”.Several respondents also said that the overabundance of funding for top tier MFIswas not trickling down to tiers two and three, though this was often because MFIsSeveral respondents also said that the overabundance of funding for top tier MFIswere reluctant to come to terms with market forces or obtain credit ratings whichwas not trickling down to tiers two and three, though this was often because MFIsmight open the door to capital investment.were reluctant to come to terms with market forces or obtain credit ratings whichmight open the door to capital investment.CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk 33

C S F I / New York CSFIGavin Oldham, chairman of The Share Foundation in the UK, said that fundingshortages could be due to “too many intermediaries extracting value from investorsand recipients.”34 CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

C S F I / New York CSFIPreparednessWe asked We asked respondents how how well well prepared prepared they they thought thought MFIs MFIs were were to handle to handle the risks the risksthey they had had identified. identified. Just Just over over a quarter a quarter thought thought they they were were well well prepared prepared with with good goodmanagement and and sound sound strategies. strategies. Only Only five five per cent per cent thought thought they they were were poorly poorlyprepared, prepared, usually usually because because they they lacked lacked management skills skills or sound or sound funding. funding. Over OverPoorly Poorly5% 5%Well Well27% 27%Just Just over over a a quarterof of respondentssay say that that MFIs MFIs are arewell well prepared to tohandle risks risksMixed Mixed68% 68%two two thirds thirds gave gave a mixed a mixed response, response, mainly mainly because because they they differentiated between between large largeMFIs MFIs which which were were on the on whole the whole better better prepared prepared than than small small ones, ones, or because or because they they saw sawsome some countries countries offering offering a better a better operating operating environment than than others. others.The The breakdown by type by type of of respondent shows shows a quarter a quarter of of practitioners and and analysts analyststhinking thinking that that MFIs MFIs were were well well prepared, prepared, but only but only a fifth a fifth of investors. of investors. Investors Investors also alsoled led those those who who gave gave a mixed a mixed rating. rating.Practitioners led led the the (small) (small) number number of ofrespondents who who thought thought they they were were poorly poorly prepared. prepared.Response by type by type of of respondent % %Practitioners Investors Investors Analysts Analysts Others OthersWell Well 25 25 20 20 25 25 37 37Mixed Mixed 69 69 75 75 71 71 59 59Poorly Poorly 6 6 5 5 4 4 4 4Many Many respondents felt felt that that present present trends trends of of competition, commercialisation and andgrowing growing dependence on on management and and technological skills skills would would widen widen the gap the gapbetween between MFIs MFIs that that were were well well prepared prepared and those and those that that were were not. not.CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk 35

C S F I / New York CSFICSFICENTRE FOR THE STUDY OF FINANCIAL INNOVATION5, Derby Street, London W1J 7AB, UKTel: +44 (0)20 7493 0173 Fax: +44 (0)20 7493 0190Microfinance Banana Skins 2007This survey seeks to identify the risks facing the microfinance industry (MFI) over the medium term, asseen by practitioners, investors and other close observers. Its focus is the commercial MFI sector, bywhich we mean institutions which are run for profit and have assets of more than US$5 million.Please read the accompanying guide for information on how to complete the questionnaire.Please complete and return this questionnaire to us by October 31st 2007NameInstitutionPositionCountryReplies are in confidence, but if you are willing to be quoted in our report, please tickWhat is your perspective on the microfinance industry?PractitionerRegulatorInvestorAnalystOther (please state)Question 1. Please describe the main risks you see facing the microfinance industry (bothindividual institutions and the sector as a whole) over the next two to three years.Please turn over36 CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

C S F I / New York CSFIQuestion 2. Here are some areas of risk which have been attracting attention. How do you ratetheir severity, and what is their trend: rising, steady or falling? Use the right hand column to addcomments. Insert more risks at the bottom if you wish.Severity Trend1=low Rising5=high SteadyCommentFalling1 Back office operations2 Capital availability3 Competition4 Corporate governance5 Cost control6 Credit risk7 Distribution channels8 Foreign exchange9 Fraud10 Funding - too little11 Funding - too much12 Inappropriate regulation13 Interest rates14 Liquidity15 Macro-economic trends16 Management quality17 Managing technology18 Mission drift19 Natural catastrophes20 Ownership21 Political interference22 Product development23 Profitability24 Refinancing25 Reputation26 Staffing27 Strategy28 Transparency29 Unrealisable expectations30Question 3. How well prepared do you think your own and other institutions are to handlethe risks you have identified?PoorlyMixedWellCSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk 37

C S F I / New York CSFIAppendix 2: Sector breakdownsPractitioners Analysts Investors ObserversBiggest risks1 Competition Corporate governance Management quality Corporate governance2 Cost control Management quality Corporate governance Staffing3 Inappropriate regulation Interest rates Foreign exchange Management quality4 Interest rates Managing technology Inappropriate regulation Transparency5 Credit risk Unrealisable expectations Staffing Inappropriate regulation6 Mission drift Mission drift Too much funding Interest rates7 Management quality Inappropriate regulation Political interference Competition8 Managing technology Ownership Managing technology Cost control9 Staffing Strategy Interest rates Managing technology10 Corporate governance Transparency Unrealisable expectations Strategy11 Macro-economic trends Staffing Reputation Back office operations12 Political interference Back office operations Transparency Reputation13 Fraud Product development Back office operations Unrealisable expectations14 Profitability Credit risk Cost control Ownership15 Foreign exchange Foreign exchange Ownership Too much funding16 Capital availability Liquidity Credit risk Political interference17 Strategy Political interference Competition Fraud18 Product development Competition Fraud Credit risk19 Liquidity Cost control Liquidity Liquidity20 Transparency Fraud Profitability Distribution channels21 Unrealisable expectations Capital availability Strategy Product development22 Too little funding Too much funding Mission drift Capital availability23 Ownership Refinancing Macro-economic trends Mission drift24 Reputation Too little funding Distribution channels Natural catastrophes25 Back office operations Reputation Refinancing Profitability26 Distribution channels Distribution channels Natural catastrophes Foreign exchange27 Natural catastrophes Natural catastrophes Product development Refinancing28 Refinancing Profitability Capital availability Macro-economic trends29 Too much funding Macro-economic trends Too little funding Too little fundingFastest risers1 Competition Competition Too much funding Competition2 Mission drift Too much funding Competition Staffing3 Credit risk Interest rates Political interference Ownership4 Political interference Unrealisable expectations Reputation Corporate governance5 Staffing Natural catastrophes Staffing Political interference6 Strategy Strategy Credit risk Strategy7 Managing technology Staffing Unrealisable expectations Interest rates8 Ownership Managing technology Strategy Reputation9 Interest rates Mission drift Ownership Too much funding10 Management quality Foreign exchange Interest rates Unrealisable expectations11 Cost control Liquidity Distribution channels Credit risk12 Corporate governance Inappropriate regulation Mission drift Mission drift13 Profitability Fraud Corporate governance Managing technology14 Foreign exchange Political interference Fraud Cost control15 Natural catastrophes Credit risk Managing technology Fraud16 Unrealisable expectations Ownership Natural catastrophes Product development17 Product development Product development Product development Back office operations18 Fraud Refinancing Management quality Inappropriate regulation19 Liquidity Reputation Foreign exchange Distribution channels20 Macro-economic trends Distribution channels Transparency Management quality21 Transparency Back office operations Cost control Profitability22 Refinancing Corporate governance Macro-economic trends Natural catastrophes23 Back office operations Management quality Inappropriate regulation Transparency24 Inappropriate regulation Cost control Profitability Macro-economic trends25 Distribution channels Profitability Back office operations Foreign exchange26 Reputation Macro-economic trends Liquidity Capital availability27 Capital availability Capital availability Refinancing Refinancing28 Too much funding Too little funding Too little funding Liquidity29 Too little funding Transparency Capital availability Too little funding38 CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

C S F I / New York CSFINorth America South America Europe AfricaBiggest risks1 Corporate governance Competition Management quality Too little funding2 Management quality Interest rates Corporate governance Management quality3 Inappropriate regulation Political interference Inappropriate regulation Credit risk4 Staffing Inappropriate regulation Staffing Managing technology5 Transparency Cost control Cost control Inappropriate regulation6 Interest rates Credit risk Fraud Corporate governance7 Unrealisable expectations Capital availability Managing technology Staffing8 Foreign exchange Profitability Too much funding Cost control9 Back office operations Product development Transparency Profitability10 Managing technology Managing technology Strategy Strategy11 Political interference Macro-economic trends Back office operations Capital availability12 Reputation Strategy Unrealisable expectations Distribution channels13 Cost control Natural catastrophes Competition Foreign exchange14 Too much funding Transparency Interest rates Macro-economic trends15 Ownership Staffing Credit risk Unrealisable expectations16 Liquidity Management quality Ownership Competition17 Competition Mission drift Foreign exchange Interest rates18 Fraud Corporate governance Reputation Political interference19 Credit risk Too little funding Profitability Fraud20 Mission drift Ownership Mission drift Liquidity21 Strategy Liquidity Macro-economic trends Mission drift22 Distribution channels Unrealisable expectations Political interference Ownership23 Profitability Distribution channels Liquidity Product development24 Refinancing Foreign exchange Capital availability Transparency25 Product development Fraud Product development Back office operations26 Natural catastrophes Reputation Distribution channels Reputation27 Macro-economic trends Back office operations Refinancing Natural catastrophes28 Capital availability Refinancing Natural catastrophes Refinancing29 Too little funding Too much funding Too little funding Too much fundingFastest risers1 Competition Competition Competition Competition2 Too much funding Political interference Too much funding Corporate governance3 Unrealisable expectations Strategy Credit risk Management quality4 Reputation Credit risk Unrealisable expectations Managing technology5 Political interference Interest rates Staffing Staffing6 Staffing Natural catastrophes Interest rates Distribution channels7 Ownership Foreign exchange Political interference Product development8 Interest rates Staffing Mission drift Profitability9 Strategy Ownership Reputation Strategy10 Mission drift Fraud Corporate governance Back office operations11 Corporate governance Mission drift Cost control Cost control12 Managing technology Capital availability Fraud Inappropriate regulation13 Credit risk Managing technology Strategy Mission drift14 Distribution channels Cost control Ownership Ownership15 Foreign exchange Product development Managing technology Transparency16 Management quality Refinancing Profitability Credit risk17 Inappropriate regulation Macro-economic trends Natural catastrophes Natural catastrophes18 Transparency Profitability Management quality Political interference19 Fraud Inappropriate regulation Product development Refinancing20 Natural catastrophes Distribution channels Macro-economic trends Reputation21 Liquidity Reputation Back office operations Unrealisable expectations22 Back office operations Transparency Liquidity Foreign exchange23 Cost control Too little funding Distribution channels Fraud24 Profitability Management quality Foreign exchange Interest rates25 Macro-economic trends Corporate governance Inappropriate regulation Liquidity26 Product development Liquidity Transparency Capital availability27 Refinancing Unrealisable expectations Refinancing Too little funding28 Capital availability Back office operations Capital availability Macro-economic trends29 Too little funding Too much funding Too little funding Too much fundingCSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk 39

C S F I / New York CSFIAsia Far East Middle EastBiggest risks1 Managing technology Foreign exchange Staffing2 Management quality Unrealisable expectations Capital availability3 Corporate governance Cost control Competition4 Staffing Competition Inappropriate regulation5 Competition Inappropriate regulation Interest rates6 Mission drift Management quality Mission drift7 Fraud Political interference Managing technology8 Reputation Credit risk Corporate governance9 Strategy Natural catastrophes Macro-economic trends10 Credit risk Mission drift Political interference11 Product development Distribution channels Ownership12 Foreign exchange Ownership Credit risk13 Liquidity Interest rates Too little funding14 Ownership Liquidity Foreign exchange15 Profitability Macro-economic trends Fraud16 Back office operations Staffing Liquidity17 Interest rates Too little funding Management quality18 Political interference Managing technology Product development19 Cost control Product development Profitability20 Inappropriate regulation Transparency Refinancing21 Transparency Back office operations Strategy22 Macro-economic trends Corporate governance Transparency23 Unrealisable expectations Fraud Cost control24 Too little funding Too much funding Back office operations25 Refinancing Capital availability Distribution channels26 Natural catastrophes Refinancing Too much funding27 Capital availability Reputation Unrealisable expectations28 Distribution channels Profitability Natural catastrophes29 Too much funding Strategy ReputationFastest risers1 Competition Competition Competition2 Staffing Ownership Mission drift3 Credit risk Credit risk Staffing4 Mission drift Distribution channels Capital availability5 Strategy Mission drift Interest rates6 Interest rates Political interference Unrealisable expectations7 Fraud Staffing Inappropriate regulation8 Product development Too little funding Political interference9 Managing technology Management quality Strategy10 Corporate governance Managing technology Credit risk11 Foreign exchange Natural catastrophes Fraud12 Ownership Product development Liquidity13 Political interference Reputation Management quality14 Cost control Unrealisable expectations Product development15 Natural catastrophes Corporate governance Profitability16 Liquidity Liquidity Back office operations17 Too much funding Refinancing Corporate governance18 Back office operations Strategy Cost control19 Macro-economic trends Back office operations Foreign exchange20 Profitability Cost control Too little funding21 Refinancing Foreign exchange Too much funding22 Management quality Too much funding Macro-economic trends23 Transparency Capital availability Managing technology24 Unrealisable expectations Inappropriate regulation Natural catastrophes25 Too little funding Macro-economic trends Ownership26 Inappropriate regulation Transparency Refinancing27 Reputation Interest rates Reputation28 Distribution channels Profitability Transparency29 Capital availability Fraud Distribution channels40 CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

C S F I / New York CSFIAppendix 3: Respondent countries by regionAfrica Asia Europe Far East MiddleEastNorthAmericaLatinAmericaAngolaBeninCameroonEthiopiaGuinea-ConakryRwandaSouthAfricaUgandaZimbabweAfghanistanAzerbaijanBangladeshIndiaKyrgyzstanMongoliaNepalPakistanSri LankaTajikistanAlbaniaBelgiumBosnia &HerzegovinaDenmarkFinlandFranceGermanyItalyKosovoLuxembourgMontenegroNetherlandsNorwayRomaniaRussiaSlovakiaSwedenSwitzerlandUKAustraliaCambodiaChinaHong KongPhilippinesEgyptJordanLebanonMoroccoPalestineSudanSyriaUnited ArabEmiratesCanadaUSArgentinaArubaBoliviaBrazilColombiaCosta RicaDominicanRepublicEcuadorEl SalvadorGuatemalaHaitiHondurasMexicoNicaraguaParaguayPeruVenezuelaCSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk 41

CSFI PUBLICATIONS1. “Financing the Russian safety net”: A proposal for Western funding of social security in Russia, coupled with £40/$65guarantee fund for Western investors.By Peter Ackerman/Edward Balls. September 19932. “Derivatives for the retail client”: A proposal to permit retail investors access to the risk management aspects of £10/$15financial derivatives, currently available only at the wholesale level.By Andrew Dobson. Nov 1993 (Only photostat available)3. “Rating environmental risk”: A proposal for a new rating scheme that would assess a company’s environmental £25/$40exposure against its financial ability to manage that exposure.By David Lascelles. December 19934. “Electronic share dealing for the private investor”: An examination of new ways to broaden retail share ownership, £25/$40inter alia, by utilising ATM networks, PCs, etc.By Paul Laird. January 19945. “The IBM dollar”: A proposal for the wider use of “target” currencies, i.e. forms of public or private money that can be £15/$25used only for specific purposes.By Edward de Bono. March 19946. “UK financial supervision”: A radical proposal for reform of UK financial regulation, (prepared pseudononymously £25/$40by a senior commercial banker).May 19947. “Banking banana skins”: The first in a periodic series of papers looking at where the next financial crisis is likely £25/$40to spring from.June 19948. “A new approach to capital adequacy for banks”: A proposal for a market-based alternative, using the concept of £25/$40‘value-at-risk’, to the present mechanistic Basle approach to setting bank capital requirements.By Charles Taylor. July 19949. “New forms of Euro-Arab cooperation”: A proposal for a new public/private development finance corporation to £25/$40promote employment-generating projects in the Arab world.By Jacques Roger-Machart. October 199410. “Banking banana skins II”: Four leading UK bankers and a senior corporate treasurer discuss lessons for the future £25/$40from the last banking crisis.November 199411. “IBM/CSFI essay prize”: The two winning essays for the 1994 IBM/CSFI Prize. £10/$15November 199412. “Liquidity ratings for bonds”: A proposed methodology for measuring the liquidity of issues by scoring the most £25/$40widely accepted components, and aggregating them into a liquidity rating.By Ian Mackintosh. January 199513. “Banks as providers of information security services”: Banks have a privileged position as transmitters of secure £25/$40data: they should make a business of it.By Nick Collin. February 199514. “An environmental risk rating for Scottish Nuclear”: An experimental rating of a nuclear utility. £25/$40By David Lascelles. March 199515. “EMU Stage III: The issues for banks”: Banks may be underestimating the impact of Maastricht’s small print. £25/$40By Malcolm Levitt. May 199516. “Bringing market-driven regulation to European banking”: A proposal for eliminating systemic banking risk by £10/$15using cross-guarantees.By Bert Ely (Only photostat available). July 199517. “The City under threat”: A leading French journalist worries about complacency in the City of London. £25/$35By Patrick de Jacquelot. July 199518. “The UK building societies: Do they have a future?”: A collection of essays on the future of UK building societies £10/$15and mutuality.September 1995 (Only photostat available).19. “Options and currency intervention”: A radical proposal on the use of currency option strategies for central banks. £20/$35By Charles Taylor. October 199520. “Twin peaks”: A regulatory structure for the new century” A proposal to reform UK financial regulation by splitting £25/$40systemic concerns from those involving consumer protection.By Michael Taylor. December 199521. “Banking banana skins III”: The findings of a survey of senior UK figures into where the perceived risks in the £25/$40financial system lie.March 199622. “Welfare: A radical rethink - The Personal Welfare Plan”: A proposal (by a banker) for the private funding of health, £25/$40education, unemployment etc. through a lifetime fund.By Andrew Dobson. May 199623. “Peak Practice”: How to reform the UK’s regulatory structure. Implementing “Twin Peaks”. £25/$40By Michael Taylor. October 199624. “Central bank intervention: a new approach”: A radical approach to central bank £25/$40intervention – without foreign exchange reserves.By Neil Record. November 1996

25. “The Crash of 2003: An EMU fairy tale.”: An all too plausible scenario of what might happen if EMU precedes £25/$40economic convergence.By David Lascelles. December 199626. “Banking Banana Skins: 1997”: A further survey showing how bankers might slip up over the next two or three years. £25/$40April 199727. “Foreign currency exotic option”: A trading simulator for innovation dealers in foreign currency (with disc). £25/$40Winner of the 1997 ISMA/CSFI Prize for financial innovation.By Stavros Pavlou. September 199728. “Call in the red braces brigade... The case for electricity derivatives”: Why the UK needs an electricity derivatives £25/$40market, and how it can be achieved.By Ronan Palmer and Anthony White. November 199729. “The fall of Mulhouse Brand”: The City of London’s oldest merchant bank collapses, triggering a global crisis. Can the £25/$40regulators stave off the disaster? A financial thriller based on a simulation conducted by the CSFI, with Euromoney andPA Consulting Group, to test the international system of banking regulation.By David Shirreff. December 199730. “Credit where credit is due: Bringing microfinance into the mainstream”: Can lending small amounts of money to £25/$40poor peasants ever be a mainstream business for institutional investors?By Peter Montagnon. February 199831. “Emerald City Bank... Banking in 2010”: The future of banking by eminent bankers, economists and technologists. £25/$40March 1998. (Only photostat available).32. “Banking Banana Skins: 1998”: The fifth survey of possible shocks to the system. £25/$40July 199833. “Mutuality for the 21st Century”: The former Building Societies Commissioner argues the case for mutuality, and £25/$40proposes a new legislative framework to enable it to flourish.By Rosalind Gilmore. July 199834. “The role of macroeconomic policy in stock return predictability”: The 1998 ISMA/CSFI prizewinning dissertation £25/$40analyses how government policies affect stock values in markets in Japan and the Far East.By Nandita Manrakhan. August 199835. “Cybercrime: tracing the evidence”: A working group paper on how to combat Internet-related crime. £6/$10By Rosamund McDougall. September 199836. “The Internet in ten years time: a CSFI survey”: A survey of opinions about where the Internet is going, what the £25/$40main obstacles are and who the winners/losers are likely to be.November 199837. “Le Prix de l’Euro… Competition between London, Paris and Frankfurt”: This report sizes up Europe’s leading £25/$40financial centres at the launch of monetary union.February 199938. “Psychology and the City: Applications to trading, dealing and investment analysis”: A social psychologist looks £25/$40at irrationality in the financial services sector.By Denis Hilton. April 199939. “Quant & Mammon: Meeting the City’s requirements for post-graduate research and skills in financial £25/$40engineering”. A study for the EPSRC on the supply of and demand for quantitative finance specialists in the UK,and on potential areas of City/academic collaboration.By David Lascelles. April 199940. “A market comparable approach to the pricing of credit default swaps”. Winner of the 1999 ISMA/CSFI prize for £25/$40financial innovation.By Tim Townend. November 199941. “Europe’s new banks”: The non-bank phenomenon”. A report for euro-FIET on the threat posed by new technology £25/$40to European banks’ traditional franchise.By David Lascelles. November 199942. “In and Out: Maximising the benefits/minimising the costs of (temporary or permanent) non-membership of £25/$40EMU”. A look at how the UK can make the best of its ambivalent euro-status.November 199943. “Reinventing the Commonwealth Development Corporation under Public-Private Partnership”. £25/$40By Sir Michael McWilliam, KCMG. March 200044. “Internet Banking: A fragile flower” Pricking the consensus by asking whether retail banking really is the Internet’s “killer app”. £25/$40By Andrew Hilton. April 200045. “Banking Banana Skins 2000” The CSFI’s latest survey of what UK bankers feel are the biggest challenges facing them. £25/$40June 200046. “iX: Better or just Bigger?” A sceptical look at the proposed merger between the Deutsche Boerse and the London £25/$40Stock Exchange.By Andrew Hilton and David Lascelles. August 200047. “Bridging the equity gap: a new proposal for virtual local equity markets” A proposal for local stock exchanges, £25/$40combining Internet technology and community investment.By Tim Mocroft and Keith Haarhoff.48. “Waking up to the FSA” How the City views its new regulator. £25/$40By David Lascelles. May 2001

49. “The Short-Term Price Effects of Popular Share Recommendations” Winner of the 2001 ISMA/CSFI Essay Prize. £25/$40By Bill McCabe. September 200150. “Bumps on the road to Basel: An anthology of views on Basel 2” This colleaction of sixteen (very brief) essays £25/$40offers a range of views on Basel 2.Edited by Andrew Hilton. January 200251. “Banana Skins 2002: A CSFI survey of risks facing banks” What bankers are worrying about at the beginning of 2002. £25/$40Sponsored by PricewaterhouseCoopers.By David Lascelles. February 200252. “Single stock futures: the ultimate derivative” A look at a new product being introduced almost simultaneously on £25/$40each side of the Atlantic.By David Lascelles. February 2002.53. “Harvesting Technology: Financing technology-based SMEs in the UK” DTI Foresight sponsored report, which £25/$40examines what has been done (and what will be done) on the financing tech-based SMEs.By Craig Pickering. April 200254. “Waiting for Ariadne: A suggestion for reforming financial services regulation” A new proposal for fund management. £25/$40/€40By Kevin James. July 200255. “Clearing and settlement: Monopoly or market?” An argument for breaking the monopoly mindset for ACHs. £25/$40/€40By Tim Jones. October 2002. ISBN 0-9543145-1-4.56. “The future of financial advice in a post-polarisation marketplace” A discussion of the structure of financial advice £25/$40/€40post-CP121 and post-Sandler, with support from Accenture.By Stuart Fowler. November 2002. ISBN 0-9543145-2-257. “Capitalism without owners will fail: A policymaker’s guide to reform” A comprehensive look at the debate over £25/$40/€40transatlantic corporate governance, with detailed recommendations.By Robert Monks and Allen Sykes. November 2002. ISBN 0-953145-3-0.58. “Who speaks for the city? Trade associations galore” A survey of trade association effectiveness. £25/$40/€40By David Lascelles and Mark Boleat. November 2002. ISBN 0-9583145-4-9.59. “A new general approach to capital adequacy: A simple and comprehensive alternative to Basel 2” £25/$40/€40By Charles Taylor. December 2002. ISBN 0-9583145-4-9.60. “Thinking not ticking: Bringing competition to the public interest audit” A paper discussing how the system for £25/$40/€40auditing large company financial statements can be made better.By Jonathan Hayward. April 2003. ISBN 0-9543145-6-5.61. “Basel Lite”: recommendations for the European implementation of the new Basel accord” £25/$45/€40By Alistair Milne. April 2003. ISBN 0-954145-8-1.62. “Pensions in crisis? Restoring confidence: A note on a conference held on February 26, 2003” £25/$45/€40May 2003. ISBN 0-954145-7-3.63. “The global FX industry: coping with consolidation” £25/$45/€40Sponsored by Reuters.By Christopher Swann. May 2003. ISBN 0-9545208-0-7.64. “Banana Skins 2003” What bankers were worrying about in the middle of 2003. £25/$45/€40Sponsored by PricewaterhouseCoopers.By David Lascelles. September 2003. ISBN 0-9545208-1-5.65. “The curse of the corporate state: Saving capitalism from itself”: A proposal, by a leading US corporate activist, £25/$45/€40for winning back control of the political process from big corporations, and for giving stakeholders a real say in howbusiness is run.By Bob Monks. January 2004. ISBN 0-9545208-2-3.66. “Companies cannot do it alone: An investigation into UK management attitudes to Company Voluntary £25/$45/€40Arrangements” A survey into why CVAs (the UK’s equivalent of the US Chapter XI) have failed to take off.By Tim Mocroft (with Graham Telling and Roslyn Corney). July 2004. ISBN 0-9545208-3-1.67. “Regulation of the non-life insurance industry: Why is it so damn difficult?” A serious look at the problems of £25/$45/€40regulating insurance by a senior practitioner. It is not like banking.By Shirley Beglinger. November 2004. ISBN 0-9545208-4-X.68. “Betting on the future: Online gambling goes mainstream financial” A look at the future of online gambling and £25/$45/€40its convergence with conventional finance - particularly insurance.By Michael Mainelli and Sam Dibb. December 2004. ISBN 0-9545208-5-8.69. “Banana Skins 2005” Our latest survey of where bankers, regulators and journalists see the next problems coming from. £25/$45/€40Sponsored by PricewaterhouseCoopers.By David Lascelles. February 2005. ISBN 0-9545208-6-6.70. “Not waving but drowning: Over-indebtedness by misjudgement” A former senior banker takes an iconoclastic look £25/$45/€40at the bottom end of the consumer credit market.By Antony Elliott. March 2005. ISBN 0-9545208-7-4.71. “Surviving the “dogfood years”: Solutions to the pensions crisis” New thinking in the pensions area (together with £25/$45/€40a nifty twist by Graham Cox).By John Godfrey (with an appendix by Graham Cox). April 2005. ISBN 0-9545208-8.72. “The perversity of insurance accounting: In defence of finite re-insurance” An industry insider defends finite re-insurance £25/$45/€40as a rational response to irrational demands.By Shirley Beglinger. September 2005. ISBN 0-9545208-9-0.

73. “Banking Banana Skins 2006” The latest survey of risks facing the banking industry. £25/$45/€40Sponsored by PricewaterhouseCoopers.By David Lascelles. April 2006. ISBN 0-9551811-0-0.74. “Big Bang: Two decades on” City experts who lived through Big Bang discuss the lasting impact of the de-regulation £25/$45/€40of London’s securities markets.Sponsored by Clifford Chance.February 2007. ISBN 978-0-9551811-1-5.75. “Insurance Banana Skins 2007” A survey of the risks facing the insurance industry. £25/$45/€40Sponsored by PricewaterhouseCoopers.By David Lascelles. May 2007. ISBN 978-0-9551811-3-9.76. “Principles in Practice” An antidote to regulatory prescription. The report of the CSFI Working Group on £25/$50/€40Effective Regulation.June 2007. ISBN 978-0-9551811-2-2.77. “Web 2.0:” How the next generation of the Internet is changing financial services. £25/$50/€40By Patrick Towell, Amanda Scott and Caroline Oates. September 2007. ISBN 978-0-9551811-4-6.78. “A tough nut...” Basel 2, insurance and the law of unexpected consequences. £25/$50/€40By Shirley Beglinger. September 2007. ISBN 978-0-9551811-5-3.79. “Informal money transfers:” Economic links between UK diaspora groups and recipients ‘back home’. £25/$50/€40By David Seddon. November 2007. ISBN 978-0-9551811-5-3.

SponsorshipThe CSFI receives general support from many public and private institutions, and that support takes different forms.In 2007 and the first quarter of 2008, we received unrestricted financial support from:Barclays GroupCitigroupJPMorgan ChaseAbbeyAberdeen Asset ManagementAccentureAlliance & LeicesterAVIVA plcAXABank of EnglandBT GlobalBuilding Societies AssociationCity of LondonEuroclear SA/NVDeloitteDTCCDTIErnst & YoungEuronext.liffeEvershedsFidelity InvestmentsFinance and Leasing AssociationFinancial Services AuthorityFitch RatingsFutures & Options AssociationHalifax plcMorgan Stanley InternationalPricewaterhouseCoopersHM TreasuryHSBC Holdings plcInternational Capital Market AssociationKPMGLaw Debenture Corporation plcLloyd’s of LondonLloyds TSBLogicaCMGLondon Stock ExchangeMan Group plcMcKinsey & CoMonitiseMoody’s Investors Service LtdNomura Institute of Capital Markets ResearchPA ConsultingPrudential plcRecord Currency ManagementReutersRoyal Bank of ScotlandStandard & Poor’sSwiss ReZ/YenZurich Financial Services1776 Consulting LandesBank BerlinAssociation of Corporate TreasurersLombard Street ResearchBank of ItalyNM Rothschild & SonsBanking Code Standards BoardThe Housing Finance CorporationBrigade ElectronicsThe Share CentreChown Dewhurst LLPThreadneedle InvestmentsFSA SolutionsWatson WyattInternational Financial Services, London Winterflood Securities LimitedWe also received important support in kind from, inter alia:EFG Private BankFinancial TimesGISE AGLinklatersThe CSFI also received special purpose support during 2007/08 from, inter alia:Bank of AmericaBVCABrunswick GroupCGAPCitigroupCityforumClifford ChanceEdgar MillerFarrer & CoFOAifs School of FinanceInternational Capital Market AssociationJPMorganMartin HallMorgan StanleyOpen EuropeOptimum Population TrustPricewaterhouseCoopersRegistered Charity Number 1017353Registered Office: North House, 198 High Street, Tonbridge, Kent TN9 1BECSFI Registered in England and Wales limited by guarantee. Number 2788116