Microfinance Banana Skins 2008 - Citigroup

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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 <strong>Microfinance</strong> 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
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