Microfinance Banana Skins 2008 - Citigroup

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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
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