Microfinance Banana Skins 2008 - Citigroup

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