Microfinance Banana Skins 2008 - Citigroup

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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 this<strong>Banana</strong> <strong>Banana</strong> 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
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Microfinance Banana Skins 2008 - Citigroup

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