Microfinance Banana Skins 2008 - Citigroup

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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.”
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Microfinance Banana Skins 2008 - Citigroup

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