Microfinance Banana Skins - Citi Bank

Microfinance Banana Skins 2011 The CSFI survey of microfinance risk

Losing its fairy dust

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CSFI

Centre for the Study of Financial Innovation

C S F I / New York CSFI The Centre for the Study of Financial Innovation is a non-profit think-tank, established in 1993 to look at future developments in the international financial field – particularly from the point of view of practitioners. Its goals include identifying new areas of business, flagging areas of danger and provoking a debate about key financial issues. The Centre has no ideological brief, beyond a belief in open markets. Trustees Minos Zombanakis (Chairman) David Lascelles Sir David Bell Robin Monro-Davies Sir Brian Pearse Staff Director – Andrew Hilton Co-Director – Jane Fuller Senior Fellow – David Lascelles Programme Coordinator – Lisa Moyle

Governing Council Sir Brian Pearse (Chairman) Sir David Bell Geoffrey Bell Robert Bench Rudi Bogni Philip Brown Peter Cooke Bill Dalton Sir David Davies Abdullah El-Kuwaiz Prof Charles Goodhart John Heimann John Hitchins Rene Karsenti Henry Kaufman Angela Knight Sir Andrew Large David Lascelles Robin Monro-Davies Rick Murray John Plender David Potter Mark Robson David Rule Sir Brian Williamson Peter Wilson-Smith Minos Zombanakis

CSFI publications can be purchased through our website www.bookstore.csfi.org.uk or by calling the Centre on +44 (0) 207 493 0173 Published by Centre for the Study of Financial Innovation (CSFI) Email: [email protected] Web: www.csfi.org.uk ISBN: 978-0-9563888-6-5 Printed in the United Kingdom by Heron, Dawson & Sawyer

CSFI / New York CSFI E-mail: [email protected] Web: www.csfi.org.uk


C S F I / New York CSFI

C S F I / New York CSFI NUMBER NINETY NINE



FEBRUARY 2011





THIS is the third “Banana Skins” survey of the global microfinance industry that the CSFI – primarily in the form of its Senior Fellow, David Lascelles with the assistance of Sam Mendelson – has prepared. Like its predecessors, it is funded by Citi and the Consultative Group to Assist the Poor (CGAP); we are very grateful to all of them.  THIS is the third “Banana Skins” survey of the global microfinance industry that the CSFI – primarily in the form of its series. The reason is simple: Until very In my opinion, this is Lascelles by far thewith mostthe interesting important – of the Senior Fellow, David assistance– and of Sam Mendelson – has prepared. Like its predecessors, it is recently, was raised against microfinance. It waswe regarded governments, by academics and, funded byscarcely Citi and athevoice Consultative Group to Assist the Poor (CGAP); are veryby grateful to all of them. increasingly, by the wider public as an unalloyed public good – and its most public face, Grameen’s Mohammed Yunus, received this a well-deserved his efforts. Theimportant only problem one of scale. How could the ‘bottom-up’ the series. The reason is simple: Until very In my opinion, is by far theNobel most for interesting – and – of was approach of microfinance (which depends on tiny loans to poor people in small communities) be replicated widely recently, scarcely a voice was raised against microfinance. It was regarded by governments, by academics and, enough to make significant dent inastheanglobal problem of poverty? increasingly, by athe wider public unalloyed public good – and its most public face, Grameen’s Mohammed Yunus, received a well-deserved Nobel for his efforts. The only problem was one of scale. How could the ‘bottom-up’ aid Iapproach still believe in microfinance – notdepends least, because it seems to me truecommunities) that the conventional top-down of microfinance (which on tiny loans to poorunequivocally people in small be replicated widely model things have changed in the couple of years. enoughistobroken. make a But significant dent certainly in the global problem of last poverty? people, who are in close to the top-down microfinance As thisbelieve reportinmakes clear, a lot of least, peoplebecause – well-meaning, aid I still microfinance – not it seems tothoughtful me unequivocally true that theorconventional industry are nowBut worried has taken a wrong turn, of that it has drifted away from its original mission, model is –broken. thingsthat havemicrofinance certainly changed in the last couple years. that it has been co-opted (or even corrupted) by the pursuit of size and profitability, that it has become a political plaything etc etc. This is new as David’s report makesthoughtful clear, it leaves microfinance individual people, who are in and or close to the microfinance As this report makes clear, a lotand, of people – well-meaning, institutions at now a ‘tipping point’. Will the industry continue to evolve - toit grow, to offer new products, to move upindustry – are worried that microfinance has taken a wrong turn, that has drifted away from its original mission, market – until is essentially indistinguishable conventional institutions consumer finance that it has beenitco-opted (or even corrupted) by from the pursuit of size financial and profitability, that (banks, it has become a political companies etc)? will rediscover its rootsreport as a more small-scale credit to a relatively limited plaything etc etc. Or This is itnew and, as David’s makesmodest clear, itsource leavesofmicrofinance and individual microfinance market amongst generally countries? institutions at a lower-income ‘tipping point’.groups Will inthe industrypoor continue to evolve - to grow, to offer new products, to move upmarket – until it is essentially indistinguishable from conventional financial institutions (banks, consumer finance Inevitably, will go oneitsway, but it isofclear that the credit sector to as aa relatively whole is coming companies some etc)? institutions Or will it rediscover rootsand as others a moreanother modest– source small-scale limited under harsher scrutiny. groups After years in which, essentially, marketmuch amongst lower-income in generally poor countries?it got a ‘free pass’ from most donor governments and agencies (as well as from the authorities in the countries in which microfinance institutions operate), the climate has become very different – and our –survey show, concerns Inevitably, some institutions will agolot oneless way,forgiving. and others As another but it isresults clear that the sector as aabout wholereputation, is coming competitiveness, governance, management competence and politicisation abound, and there is a high degreeand of under much harsher scrutiny. After years in which, essentially, it got a ‘free pass’ from most donor governments cynicism about what at least a sizeable chunk of the industry. agencies (as well as motivates from the authorities in the countries in which microfinance institutions operate), the climate has become very different – and a lot less forgiving. As our survey results show, concerns about reputation, But don’t throw the baby out with the bathwater. Many ofand the politicisation problems that abound, the industry the products competitiveness, governance, management competence andfaces thereareis just a high degree of its success; it iswhat no longer beneath thea radar, either domestically or internationally, and it must expect to be held to cynicism about motivates at least sizeable chunk of the industry. higher standards than it was in its earlier days. It remains one of the most promising vehicles for getting money to those people whothe need it most and who can use it most But don’t throw baby out with the bathwater. Manyproductively. of the problems that the industry faces are just the products of its success; it is no longer beneath the radar, either domestically or internationally, and it must expect to be held to So let’sstandards hope that than its current can be overcome, and that nextmost survey paints a vehicles much more picture. higher it wasproblems in its earlier days. It remains one the of the promising for optimistic getting money to In thepeople meantime meitrestate my who thanks ourit friends at Citi and CGAP for their sponsorship, to Deborah Drake of those wholet need most and cantouse most productively. the Council of Microfinance Equity Funds (CMEF) for advice and support, to the MIX for the data and to Zach Grafe whose the online questionnaire helped immeasurably with what paints has become andoptimistic away the picture. biggest So let’smanagement hope that its of current problems can be overcome, and that the next survey a muchfar more survey of its kind.let me restate my thanks to our friends at Citi and CGAP for their sponsorship, to Deborah Drake of In the meantime the Council of Microfinance Equity Funds (CMEF) for advice and support, to the MIX for the data and to Zach Grafe Andrew Hilton whose management of the online questionnaire helped immeasurably with what has become far and away the biggest Director, survey of CSFI its kind. Andrew Hilton Director, CSFI

This report was written by David Lascelles and Sam Mendelson Cover by Joe Cummings This report was written by David Lascelles and Sam Mendelson Cover by Joe Cummings


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�� The Microfinance Banana Skins report, now in its third year, reflects changing perceptions of risk in a dynamic and fast-moving industry. This year’s report shows that microfinance has come of age, and with that, new issues have arisen. In an increasing number of markets, the rapid rate of growth and outreach means that microfinance is confronting the same forces of competition, credit cycles, and consolidation seen in other sectors. The survey mirrors this evolution, highlighting the need for increased focus on clients’ needs and related credit risk, as opposed to institutional risks such as funding and liquidity. Responses also reflect an industry that is at different stages of development in different regions of the world. Microfinance is only reaching 150m borrowers worldwide - a fraction of the global need. More than 2.7bn people still have no access to formal financial services that are cheaper and more reliable than the informal alternatives. In a few markets, particularly where many microfinance institutions serve the same communities, some respondents to the survey expressed concern about an oversupply of credit and over-indebtedness. In other markets, we see the emergence of deposit-taking institutions, credit bureaus, comprehensive regulatory oversight, and credit expansion accompanied by savings, insurance, and other services. Reputation risk and political risk are both placed more highly in the ratings this year. Notwithstanding recent questioning of the ability of microfinance, and particularly microcredit, to lift millions out of poverty, microfinance remains central to achieving financial inclusion, by enabling families to manage their household finances more effectively - allowing them to build assets, smooth consumption, and insure against risk. This year’s survey also reflects an evolving microfinance industry. The volume of concern may be amplified by recent events in a few markets, notably in the Indian state of Andhra Pradesh. But the questioning is undoubtedly healthy, and should lead microfinance practitioners to reassess the business models, and the practices and products that will most effectively serve the needs of low income people. In many markets, MFIs and investors have already taken notice of the changing risks. MFI growth has slowed, lending standards have been strengthened, and more attention is being given to social performance. In several countries, the rate of increase in non-performing loans at MFIs is easing and more sustainable growth models are emerging. Most regulators now acknowledge the valuable contribution that the microfinance sector is making to financial inclusion, and see it as part of their country’s financial infrastructure. But more needs to be done. The industry needs to accelerate reform to shore up support in the face of growing reputation risk. MFIs need to further strengthen their lending standards, particularly with regard to over-indebtedness among borrowers. And in many countries, improved regulation will be essential to achieve financial inclusion. A vision of financial inclusion that encompasses the majority of the world’s population goes well beyond what is captured in this report. But it is clear from the survey that the landscape of access to finance will look significantly different five years from now. As the microfinance industry continues to evolve, new players and new business models are emerging. The opportunity - and the need - is immense. We are grateful to the 533 participants from 86 countries who contributed to the survey. We would like to thank David Lascelles and Sam Mendelson for distilling participants’ feedback and presenting it in such a cogent manner. We thank Deborah Drake at the Council of Microfinance Equity Funds, Philip Brown at Citi Microfinance, and Xavier Reille at CGAP for their contributions to the success of this survey. Robert Annibale Global Director of Citi Microfinance

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Tilman Ehrbeck CGAP CEO



 Microfinance Banana Skins 2011 describes the risks facing the microfinance industry as seen by an international sample of practitioners, investors, regulators and observers. It updates previous surveys carried out in 2008 and 2009. This survey was conducted in November and December 2010 and is based on 533 responses from 86 countries and multinational institutions. The questionnaire (reproduced in the Appendix) was in three parts. In the first, respondents were asked to describe, in their own words, their main concerns about the microfinance sector over the next 2-3 years. In the second, they were asked to rate a list of potential risks – or Banana Skins – both by severity and whether they were rising, steady or falling. In the third, they were asked to rate the preparedness of microfinance institutions to handle the risks they identified. Replies were confidential, but respondents could choose to be named. The views expressed in this survey are those of the respondents and do not necessarily reflect those of the CSFI or its sponsors. The breakdown by type of respondent was as follows:

Other 27%

Practitioners 37%

Regulators 3% Analysts 13%

Investors 20%

Just over half (55 per cent) of the practitioners represented deposit-taking institutions. The “other” category included aid officials, academics, accountants, lawyers, consultants etc..


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C S F I / New York CSFI The distribution of responses by region was as follows:

Multinational 2% North America Far East 4% 16% Asia 20%

Latin America 11%

MENA 7% Africa 19%

CEE 3%

Western Europe 18%

The responses by country were as follows North America Canada US

4 89

Latin America Bolivia Brazil Colombia Costa Rica Dominican Rep. Ecuador El Salvador Guatemala Haiti Mexico Nicaragua Paraguay Peru Uruguay Venezuela

1 2 10 3 1 2 2 1 3 14 2 5 7 1 2

Western Europe Austria Belgium Finland France Germany Italy Luxembourg Netherlands Spain Sweden Switzerland UK

4

Central & Eastern Europe

1 4 1 16 10 3 4 21 2 1 7 17

Azerbaijan Bosnia & Herzegov. Kazakhstan Poland Romania Russia Tajikistan Africa Benin Burkina Faso Burundi Cameroon Congo Brazzaville Côte d'Ivoire Ethiopia Gabon Ghana Guinea Kenya Madagascar Mali Mauritania Niger Nigeria RD Congo Rwanda Senegal South Africa Tanzania The Gambia Togo Uganda

1 5 1 1 2 3 2

5 4 1 13 1 7 2 2 7 1 5 3 6 2 2 5 11 2 7 1 1 1 10 6

Middle East & North Africa Egypt Iraq Jordan Lebanon Morocco Palestine Syria Tunisia UAR Yemen Asia Afghanistan Bangladesh India Nepal Pakistan Sri Lanka Far East Australia Cambodia China Fiji Hong Kong Laos New Zealand Philippines Vietnam Multinational

8 2 3 4 6 2 1 1 2 5

1 6 82 4 13 1

3 2 4 1 1 1 2 8 1 13



  survey explores the risks facing the microfinance industry a time ThisThis survey explores the risks facing the microfinance industry at a at time whenwhen hardhard questions are being asked its future, prompted by growing doubts questions are being asked aboutabout its future, prompted by growing doubts aboutabout its its effectiveness a source of small finance for poor. the poor. of respondents our respondents effectiveness as a as source of small scalescale finance for the One One of our summed up significance the significance of these doubts, saying “dissipate the fairy summed up the of these doubts, saying theythey couldcould “dissipate the fairy has historically coated everything related to microfinance”. Many of the dust dust that that has historically coated everything related to microfinance”. Many of the explored in this report the heart of debate the debate where microfinance risksrisks explored in this report reachreach the heart of the aboutabout where microfinance goesgoes next.next. Originally created a grass-roots movement to provide credit to neediest, the neediest, Originally created as aasgrass-roots movement to provide credit to the microfinance grown enormously 20 years is now firmly microfinance has has grown enormously overover the the last last 20 years and and is now firmly established a major supplier a wide of financial services to millions established as a as major supplier of a of wide rangerange of financial services to millions of of people in emerging the emerging world. thousand-plus microfinance institutions people in the world. The The one one thousand-plus microfinance institutions (MFIs) report to Microfinance the Microfinance Information eXchange (MIX) (MFIs) that that report to the Information eXchange (MIX) havehave 88m88m borrowers and 76m savers, and numbers are growing byper 20 cent per cent a year, borrowers and 76m savers, and numbers are growing by 20 a year, moremore in in somesome countries. TotalTotal assets of these MFIsMFIs amount to $60bn. countries. assets of these amount to $60bn.

Many Many of the of the risks risks gogo to the to the heart heart of of thethe microfinance microfinance debate debate

However in last the two last two years, microfinance has found its enviable reputation under However in the years, microfinance has found its enviable reputation under attack a number of perceived reasons: its growing commercialism, as evidenced attack for afor number of perceived reasons: its growing commercialism, as evidenced an increasing on size and profitability, a decline in standards, particularly by anbyincreasing focusfocus on size and profitability, a decline in standards, particularly in in the area of lending, a sense the industry be drifting the area of lending, and and a sense that that the industry maymay be drifting awayaway fromfrom its its original “double bottom purpose. All have combined to cast microfinance original “double bottom line”line” purpose. All have combined to cast microfinance in a in a and unflattering and have raised doubts the continued willingness new new and unflattering light,light, and have raised doubts aboutabout the continued willingness of of donors and investors to provide the support it crucially needs. donors and investors to provide the support it crucially needs. serious are these developments? arenew the new the industry faces? HowHow serious are these developments? WhatWhat are the risksrisks that that the industry faces? Is microfinance coming a crossroads its evolution, and so, what should Is microfinance coming to a to crossroads in itsinevolution, and if so,ifwhat should be itsbe its direction? new new direction? survey results The The survey results survey, the third inseries, the series, conducted to seek answers to these questions ThisThis survey, the third in the was was conducted to seek answers to these questions and the put risks the risks perspective. Its focus on MFIs in assets and put into into perspective. Its focus is onisMFIs withwith moremore thanthan $5m$5m in assets which are profitable capable of commercial growth. These number which are profitable and and capable of commercial growth. These number aboutabout 600,600, according to estimates account for bulk the bulk of microfinance assets according to estimates fromfrom MIX,MIX, and and account for the of microfinance assets globally. globally. survey asked a series of experts on microfinance (practitioners, analysts, The The survey asked a series of experts on microfinance (practitioners, analysts, regulators, investors to identify comment on biggest the biggest or “Banana regulators, investors etc.)etc.) to identify and and comment on the risks,risks, or “Banana Skins”, which facing the microfinance sector the next to three Skins”, which theythey saw saw facing the microfinance sector overover the next two two to three years. of them 86 countries the largest response to any years. OverOver 500 500 of them fromfrom 86 countries tooktook part,part, the largest response to any Microfinance Banana survey so far. on p.6 shows Microfinance Banana SkinsSkins survey so far. The The tabletable on p.6 shows howhow theythey responded: it ranks theBanana 24 Banana identified to severity responded: it ranks the 24 SkinsSkins theythey identified bothboth as toasseverity and and howhow strongly are seen be rising. strongly theythey are seen to betorising. overall message the survey is that the immediate posed by the The The overall message fromfrom the survey is that the immediate risksrisks posed by the global economic receded – but replaced by larger global economic crisiscrisis havehave receded – but havehave beenbeen replaced by larger concerns about the future direction of industry. the industry. concerns about the future direction of the


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C S F I / New York CSFI Microfinance MicrofinanceBanana BananaSkins Skins2011 2011 (2009 (2009 position position in brackets) in brackets)

Biggest Biggest risks risks

Fastest Fastest risers risers

Credit risk risk (1)(1) 1 1Credit Reputation (17) (17) 2 2Reputation Competition (9)(9) 3 3Competition Corporate governance governance (7)(7) 4 4Corporate Political interference interference (10) (10) 5 5Political Inappropriate regulation regulation (13) (13) 6 6Inappropriate Management quality quality (4)(4) 7 7Management Staffing (14) (14) 8 8Staffing Mission drift drift (19) (19) 9 9Mission Unrealisable expectations expectations (18) (18) 1010Unrealisable Managing technology technology (15) (15) 1111Managing Profitability (12) (12) 1212Profitability Back office office (22) (22) 1313Back Transparency (16) (16) 1414Transparency Strategy (-)(-) 1515Strategy Liquidity (2)(2) 1616Liquidity Macro-economic trends trends (3)(3) 1717Macro-economic Fraud (20) (20) 1818Fraud Product development development (24) (24) 1919Product Ownership (17) (17) 2020Ownership Interest rates rates (11) (11) 2121Interest Too much much funding funding (25) (25) 2222Too Too little little funding funding (6)(6) 2323Too Foreign exchange exchange (8)(8) 2424Foreign

1 1Competition Competition (3)(3) 2 2Credit Credit risk risk (1)(1) 3 3Reputation Reputation (11) (11) 4 4Political Political interference interference (7)(7) 5 5Mission Mission drift drift (13) (13) 6 6Strategy Strategy (-)(-) Staffing (20) (20) 7 7Staffing 8 8Unrealisable Unrealisable expectations expectations (17) (17) 9 9Profitability Profitability (9)(9) 1010Inappropriate Inappropriate regulation regulation (22) (22) 1111Corporate Corporate governance governance (12) (12) 1212Management Management quality quality (18) (18) 1313Ownership Ownership (16) (16) 1414Liquidity Liquidity (5)(5) 1515Product Product development development (24) (24) 1616Macro-economic Macro-economic trends trends (2)(2) Managing technology technology (23) (23) 1717Managing 1818Interest Interest rates rates (10) (10) 1919Fraud Fraud (14) (14) Transparency (21) (21) 2020Transparency 2121Back Back office office (19) (19) 2222Too Too much much funding funding (25) (25) 2323Too Too little little funding funding (6)(6) Foreign exchange exchange (8)(8) 2424Foreign

The key finding of of thethe survey is is that credit risk constitutes thethe biggest threat to to thethe The key finding survey that credit risk constitutes biggest threat industry industryover overthis thisturbulent turbulentperiod. period. Although Althoughthis thisresult resultis isunchanged unchangedfrom fromthethe previous survey in in 2009, thethe reasons behind it have shifted sharply. previous survey 2009, reasons behind it have shifted sharply.

Credit Creditrisk riskisis still stilltop topofof the thelist list

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The earlier result was largely explained byby thethe difficulties facing borrowers during The earlier result was largely explained difficulties facing borrowers during thethe economic crisis. This time, thethe reasons have multiplied. There is is still economic economic crisis. This time, reasons have multiplied. There still economic stress, stress,butbutalso alsogrowing growingevidence evidenceof ofcompetitive competitivepressures pressuresin inthethemicrofinance microfinance market, poor credit management MFIs, greater cynicism among borrowers, market, of of poor credit management byby MFIs, of of greater cynicism among borrowers, andof ofincreasing increasinginterference interferencein inthethecredit creditprocess processbyby politicalforces. forces.Above Aboveall,all, and political credit risk is is seen to to reflect thethe fast-growing problem of of overindebtedness among credit risk seen reflect fast-growing problem overindebtedness among millions microfinance customers: poor people who have accumulated larger debts millions of of microfinance customers: poor people who have accumulated larger debts thanthey theywill willever everbebeable ableto torepay, repay,often oftenas asa result a resultof ofpressure pressurefrom frombusinessbusinessthan hungry MFIs.The The potential large microfinance loan losses seen high hungry MFIs. potential forfor large microfinance loan losses is is seen to to bebe high in in some markets, bringing a dramatic change industry which always prided some markets, bringing a dramatic change to to anan industry which hashas always prided itself “99 cent” repayment record. itself onon itsits “99 perper cent” repayment record.


C S F I / New York CSFI Many Many of of thethe toptop Banana Banana Skins Skins areare linked linked to to this this finding. finding.The The surge surge in in concern concern about about reputation reputationrisk risk(up(upfrom fromNo. No.1717to toNo. No.2) 2)directly directlyreflects reflectsview viewthat thatMFIs MFIshave have brought credit risk upon themselves through their aggressive lending and their desire brought credit risk upon themselves through their aggressive lending and their desire forfor growth. This also accounts forfor thethe rise in in thethe risk of of mission drift (up(up from No. growth. This also accounts rise risk mission drift from No. 1919 to to No. 9) 9) because of of thethe perception that MFIs areare abandoning their commitment No. because perception that MFIs abandoning their commitment to to poverty alleviation in in favour of of financial profit. poverty alleviation favour financial profit.

AAsurge surgeinin concern concernabout about reputation reputation risk risk

Anotherlink linkis iswith withthetherise riseof ofpolitical politicalinterference interference(from (fromNo. No.1010to toNo. No.5) 5)as as Another governmentsin insome somecountries countriesrespond respondto tothethegrowing growingunpopularity unpopularityof ofMFIs MFIsbyby governments imposing interest rate caps and encouraging repayment strikes. Although current imposing interest rate caps and encouraging repayment strikes. Although thethe current focus Indian state Andhra Pradesh where there have been severe political focus is is onon thethe Indian state of of Andhra Pradesh where there have been severe political tensions over behaviour MFIs, concern that political risk spreading. tensions over thethe behaviour of of MFIs, thethe concern is is that political risk is is spreading. Oneof ofthethemajor majorreasons reasonsbehind behindMFIs’ MFIs’more moreaggressive aggressiveapproach approachto tobusiness businessis is One widely seen intensity competition microloan market from No. widely seen to to bebe thethe intensity of of competition in in thethe microloan market (up(up from No. No.3) 3)caused causedbyby ready availability capitalforforMFI MFIexpansion expansionand andthethe 9 9to toNo. thetheready availability of ofcapital entry well-heeled commercialbanks banksarmed armed withmass mass marketing skills and new entry of of well-heeled commercial with marketing skills and new banking technology. same time, MFIs seen institutionally weak banking technology. AtAt thethe same time, MFIs areare seen to to bebe institutionally weak in in areasof ofcorporate corporategovernance governance(No. (No.4),4),management managementquality quality(no. (no.7) 7)and and thetheareas staffing (No. meaning that they may lack resource and know-how handle staffing (No. 8),8), meaning that they may lack thethe resource and know-how to to handle competitive pressures.A A further contributor inappropriate regulation from competitive pressures. further contributor is is inappropriate regulation (up(up from No. No. which failing provide right framework keep MFIs No. 1313 to to No. 6) 6) which is is failing to to provide thethe right framework to to keep MFIs onon track. track.

The Thebig bigmovers movers UPUP Reputation: Reputation: thethe good good name name of of microfinance microfinance increasingly increasingly under under attack attack Competition: Competition: undermining undermining business business and and ethical ethical standards standards Corporate Corporate governance: governance: showing showing weakness weakness under under stress stress Political Political interference: interference: backlash backlash against against MFI MFI lending lending practices practices Inappropriate Inappropriate regulation: regulation: failing failing to to provide provide a healthy a healthy environment environment DOWN DOWN Macro-economy: Macro-economy: ebbing ebbing concern concern about about thethe global global crisis crisis Liquidity: Liquidity: cash cash shortages shortages easing easing Too Too little little funding: funding: investors investors returning returning to to thethe market market Foreign Foreign exchange: exchange: “currency “currency wars” wars” notnot a major a major concern concern Interest Interest rates: rates: lower lower and and less less volatile volatile

Other areas institutional weakness seen back office from No. Other areas of of institutional weakness areare seen to to lielie in in thethe back office (up(up from No. No. and management technology from No. No. 11), both 2222 to to No. 13)13) and thethe management of of technology (up(up from No. 1515 to to No. 11), both whichmay maybebecontributing contributingto tothetheproblem problemof ofimprudent imprudentlending lendingthrough throughpoor poor of ofwhich controls. controls. Buta number a numberof ofrisks risks– –mainly mainly thosethrust thrustto tothethetoptopof ofthetherankings rankingsin inthethe last But those last survey global crisis – have fallen away quite sharply.Liquidity Liquidity risk, which survey byby thethe global crisis – have fallen away quite sharply. risk, which came No. 2 last time because fears that MFIs would lose their access working came No. 2 last time because of of fears that MFIs would lose their access to to working funds, slumped No. general MFIs, particularly larger and healthier funds, hashas slumped to to No. 16.16.In In general MFIs, particularly thethe larger and healthier ones,areareback backin infunds fundsagain. again. Similarly, Similarly,concern concernabout abouttootoolittle littlefunding fundinghashas ones, subsided, down from No. 6 to No. fact, only riser this risks subsided, down from No. 6 to No. 23.23.In In fact, thethe only riser in in this setset of of risks is is tootoo much funding, marking a return concern that over-supply cash may fuel much funding, marking a return of of concern that anan over-supply of of cash may fuel thethe risksof ofcompetition competitionand andoverlending. overlending.Similarly, Similarly,concerns concernsabout aboutthethestate stateof ofthethe risks macro-economy, interest rates and foreign exchange markets remain very low. macro-economy, interest rates and thethe foreign exchange markets remain very low.


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C S F I / New York CSFI A Abreakdown breakdownof ofresponses responsesbybytype typeshows showsmicrofinance microfinancepractitioners practitionersdeeply deeply concerned concernedabout aboutthethegrowth growthof ofcredit creditand andreputation reputationrisk riskwhich whichthey theyseeseemainly mainly caused byby “unfair” competition and poor regulation. in in thethe microfinance caused “unfair” competition and poor regulation.Investors Investors microfinance industry industryhave havesimilar similarconcerns, concerns,though thoughthey theyarearealso alsoworried worriedabout aboutpolitical political interference interferencein inthetheindustry, industry,and andweakness weaknessin incorporate corporategovernance. governance. The Themain main concerns concernsof ofregulators regulatorslieliein inthetheareas areasof oftransparency, transparency,internal internalcontrols controlsand andthethe availabilityof offunding. funding.Geographically, Geographically,credit creditrisk, risk,competition competitionand andreputation reputation availability topped concerns most regions with exception Asia where focus was topped thethe concerns of of most regions with thethe exception of of Asia where thethe focus was political risk.AsAs previous surveys, management issues ranked high Africa. onon political risk. in in previous surveys, management issues ranked high in in Africa.

Some Somerisks risksare are local, local, some someglobal global

Globalversus versuslocal. local.This Thissurvey surveyalso alsopoints pointsupupa distinction a distinctionbetween betweenrisks risksthat that Global apply industry general, and those that more localised.The The anecdotal apply to to thethe industry in ingeneral, and those that arearemore localised. anecdotal responses show that credit risk very widespread, gaining a mention cent responses show that credit risk is is very widespread, gaining a mention in in 7575 perper cent respondent countries. The impact competition more localised, though can of of respondent countries. The impact of of competition is is more localised, though it it can usually traced similar causes: excessive funding and pressure from commercial usually bebe traced to to similar causes: excessive funding and pressure from commercial banks. The risk political interference also local, impact wide because banks. The risk of of political interference is is also local, butbut itsits impact is is wide because negativemedia mediacoverage. coverage.Regulatory Regulatoryrisk riskis islocal, local,though thoughthetheindustry industrysuffers suffers of ofnegative fromthethegeneralised generalisedperception perceptionthat thatmicrofinance microfinanceregulation regulationstill stillneeds needsto tobebe from “fixed”. Institutional issues such management and staffing local.Risks Risks “fixed”. Institutional issues such as as management and staffing areare local. in in thethe area funding also depend MFI type and location, though there a new concern area of of funding also depend onon MFI type and location, though there is is a new concern that global reputation risk could damage microfinance “asset class” more widely. that global reputation risk could damage thethe microfinance “asset class” more widely. How well prepared are MFIs handle these risks?OnOn a scale 1 (poorly) How well prepared are MFIs to to handle these risks? a scale of of 1 (poorly) to to 55 (well), respondents gave a score 2.7, which slightly better than middling, with (well), respondents gave a score of of 2.7, which is is slightly better than middling, with Latin America seen best prepared and Asia worst. Among respondent Latin America seen to to bebe thethe best prepared and Asia thethe worst. Among respondent types, practitioners were most optimistic and regulators least. types, practitioners were thethe most optimistic and regulators thethe least. TheMicrofinance MicrofinanceBanana BananaSkins SkinsIndex Indexprovides providesa picture a pictureof ofchanging changing“anxiety “anxiety The levels” microfinance business. The line shows average score given levels” in in thethe microfinance business. The toptop line shows thethe average score given to to risk over last three years, and bottom line average risks. thethe toptop risk over thethe last three years, and thethe bottom line thethe average of of allall thethe risks. Bothlines linesshow showa aclear clearworsening worseningin insentiment sentimentover overthat thattime, time,and andsuggest suggestthat that Both anxietyover overthethepresent presentructions ructionsin inmicrofinance microfinanceis ishigher higherthan thanit itwas wasover overthethe anxiety global economic crisis. global economic crisis. 4.54.5 4 4

Management Management quality quality

Credit Credit riskrisk

Credit Credit riskrisk

Score Score

3.53.5

Top Top riskrisk Average score Average score

3 3

2.52.5 2 2 2008 2008

2009 2009

2010 2010

Healthwarning. warning.A Anumber numberof ofpoints pointsshould shouldbebeborne bornein inmind mindwhen whentaking taking Health messagesfrom fromthis thisreport. report.One Oneis isthat thatthetheresults resultsreflect reflectthetheperceptions perceptionsof of messages respondents and forecasts measures likelihood. There also a tendency, respondents and areare notnot forecasts or or measures of of likelihood. There is is also a tendency, surveys this sort, focus negative and overlook positive, which in in surveys of of this sort, to to focus onon thethe negative and overlook thethe positive, of of which thereis isstill stilla alotlotin inmicrofinance. microfinance.Linked Linkedto tothis thisis isthetherisk riskof ofgeneralisation: generalisation: there microfinance enormously varied business, and condition differs greatly from microfinance is is anan enormously varied business, and itsits condition differs greatly from onemarket marketto toanother. another.Nonetheless, Nonetheless, broadtrends trendsthis thisreport reportdescribes describessuggest suggest one thethebroad that microfinance faces a very testing period. that microfinance faces a very testing period.

8



  

Practitioners Practitioners–people –people who who run run oror work work inin MFIs MFIs Biggest Biggest risks risks 1 1 Credit Credit risk risk 2 2 Competition Competition 3 3 Reputation Reputation 4 4 Inappropriate Inappropriate regulation regulation 5 5 Staffing Staffing 6 6 Corporate Corporate governance governance 7 7 Mission Mission drift drift 8 8 Political Political interference interference 9 9 Management Management quality quality 1010 Profitability Profitability

Fastest Fastest risers risers 1 1 Competition Competition 2 2 Credit Credit risk risk 3 3 Reputation Reputation 4 4 Mission Mission drift drift 5 5 Political Political interference interference 6 6 Staffing Staffing 7 7 Strategy Strategy 8 8 Profitability Profitability 9 9 Liquidity Liquidity 1010 Macro-economic Macro-economic trends trends

The The main main concern concern of of practitioners practitioners is is with with credit credit risk risk and and thethe pressing pressing problem problem of ofoverindebtedness overindebtednesswhich whichthey theyseeseeresulting resultingfrom fromexcess excesscapacity capacityin inthethe microlending market and thethe intensity of of competition from commercial banks. microlending market and intensity competition from commercial banks. They also high risks inappropriate regulation, particularly where They also seesee high risks in in inappropriate regulation, particularly where it it is is weak and obstructive, and hinders healthy development industry. weak and obstructive, and hinders thethe healthy development of of thethe industry. Jose Ramon, finance director Finca Perú, MFI Peru, said greatest Jose Ramon, finance director at at Finca Perú, anan MFI in in Peru, said thethe greatest riskfacing facinghishisindustry industrywas wasthethegrowth growthof of“indebtedness “indebtednessdue dueto tohigh high risk competition market and lack regulation limit this behaviour.” competition in in thethe market and thethe lack of of regulation to to limit this behaviour.”

Practitioners Practitioners worry worryabout about bad baddebts debts

However, change practitioners’ perceptions this year sharp rise However, thethe bigbig change in in practitioners’ perceptions this year is is thethe sharp rise reputationrisk, risk,upupfrom fromNo. No.1818to toNo. No.3, 3,a adirect directconsequence consequenceof ofthethe in inreputation mounting controversy over MFIs’ lending practices. Linked this a stronger mounting controversy over MFIs’ lending practices. Linked to to this is is a stronger risk mission drift because commercialisation pressures, and growth risk of of mission drift because of of commercialisation pressures, and thethe growth concern about political interference. Competition seen fastest of of concern about political interference. Competition is is seen to to bebe thethe fastest rising risk facing industry, more urgent than credit risk. rising risk facing thethe industry, more urgent than credit risk. Thereis isalso alsostrong strongconcern concernamong amongpractitioners practitionersabout aboutinternal internalissues, issues, There specifically corporate governance, management and staffing. This reflects specifically corporate governance, management and staffing. This reflects a a growingawareness awarenesswithin withinMFIs MFIsthat thattheir theirinstitutional institutionalstrength strengthneeds needscloser closer growing attention. attention. contrast, many risks which were driven high levels last time ByBy contrast, many of of thethe risks which were driven to to high levels last time byby thethe financialcrisis crisishave haveebbed ebbedaway. away.Concerns Concernsabout aboutthethemacro-economy, macro-economy, financial liquidityand andfunding fundingareareoutoutof ofthetheTop TopTen. Ten.More Moreworryingly worryinglypossibly, possibly, liquidity given difficulties facing microfinance, strategic risk seen lower order given thethe difficulties facing microfinance, strategic risk is is seen as as lower order (No. 12), looming issues area technology management (No. (No. 12), as as areare looming issues in in thethe area of of technology management (No. and product development (No. 17). 13)13) and product development (No. 17).


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C S F I / New York CSFI Investors – people who invest in MFIs Biggest risks 1 2 3 4 5 6 7 8 9 10

Credit risk Reputation Competition Political interference Corporate governance Inappropriate regulation Management quality Unrealisable expectations Mission drift Staffing

Fastest risers 1 2 3 4 5 6 7 8 9 10

Reputation Competition Credit risk Political interference Inappropriate regulation Mission drift Unrealisable expectations Ownership Strategy Staffing

The risk perceptions of investors in microfinance have changed sharply since our last survey in 2009. Back then, their top concerns were linked to the impact of the financial crisis: credit risk, funding, liquidity and the state of the global economy. Today, concern with credit risk remains high, but most of the other risks in the Top Ten are linked to microfinance’s tarnished image and issues of institutional strength. Investors are increasingly concerned about the industry’s reputation and allegations that it may be failing in its mission to assist the poor. They are also worried about bad regulation and political interference, about the strength of management and corporate governance, all of which directly affect the quality of the business. A US investor said: “The main risk over the next 2-3 years appears to be the state of the social compact between MFIs and clients. While growth of the industry is good in terms of extending access and creating innovative products, if it leads to overindebtedness via harassment, then microfinance is not delivering on one of its main objectives: to create real and sustaining social and economic value for low-income persons. There have been examples of this in certain markets, most of which did not have the regulatory controls in place to check the rapid growth of MFIs.” In another big shift, investors increasingly see competition as a risk to the industry (up from No. 15 to No. 3) where previously they saw it providing a stimulus to efficiency and innovation. A US-based investor said that competition “is likely to lead to poor management decisions. We see this as a high risk.” On the other hand, investors’ earlier concerns with liquidity and funding have eased with the passing of the crisis. Macro-economic risk has slipped from No. 4 to No. 16. They are also less concerned with strategic issues such as product development and technology. But while investors are watching certain types of risk carefully, notably in the areas of credit, reputation and management, there is little in their responses to support fears that they are preparing to scale down their commitment to the industry. This is reflected in the low position given to funding risk (No. 23).

10


C S F I / New York CSFI Regulators – government officials and those who regulate MFIs Biggest risks 1 2 3 4 5 6 7 8 9 10

Transparency Credit risk Back office Managing technology Too little funding Profitability Staffing Corporate governance Management quality Reputation

Fastest risers 1 2 3 4 5 6 7 8 9 10

Credit risk Competition Too little funding Profitability Interest rates Mission drift Strategy Managing technology Ownership Transparency

Regulators take a very different view of the risks from other respondent groups. Their main concern is unchanged from our last survey: the lack of transparency in the industry, both as to the quality of MFIs’ reporting and to their openness about the terms and pricing of lending. Regulators worry that inadequate disclosure could erode the confidence of investors and customers. Their concern about credit risk is also strong: it stands at No. 2, and is also their fastest-rising risk because of the problem of overindebtedness. The inadequacy of funding for the industry is a growing worry. Their ranking on this score has risen sharply (up from No. 18 to No. 5), mainly because of the fall-out from the financial crisis, and is the highest of any respondent group. Fatoum Deen-Touray, deputy director of the Central Bank of The Gambia, was concerned about “the recapitalization of MFIs, especially as sources of funds dwindle particularly from international funding agencies including donors, banks, etc.”. Another strong area of concern is operational risk: weakness in the back office, the management of technology, and the quality of staff. Strategic issues are also on their minds. Alexander G. Cera of the Central Bank of the Philippines said that “regulated MFIs must contend with increasing competition, and provide a wider scope and range of services while aiming for sustainability. MFIs must deal with these issues with a long term perspective.” Regulators tended to be less concerned than other groups about reputation risk, and associated issues such a mission drift, focusing instead on the potential consequences, particularly in the area of funding. Two issues where they see less risk compared to other respondent groups are inappropriate regulation and political interference.


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C S F I / New York CSFI Deposit-takers – people who run or work in deposit-taking MFIs Biggest risks 1 2 3 4 5 6 7 8 9 10

Credit risk Reputation Inappropriate regulation Profitability Competition Management quality Staffing Managing technology Mission drift Fraud

Fastest risers 1 2 3 4 5 6 7 8 9 10

Competition Credit risk Reputation Mission drift Macro-economic trends Staffing Strategy Political interference Profitability Liquidity

MFIs which take deposits share other MFIs’ concerns about the high level of personal indebtedness among their customers and the consequent threat of credit risk. They are also worried about the negative impact of competitive pressures, and mounting attacks on the industry’s reputation over bad lending practices. In Russia, the director of a deposit-taking MFI said that commercial banks were “aggressively moving ‘down’ to increase margins, bringing with them retail experience, instruments, and financial resources which microfinance organisations cannot compete with”. These MFIs see a high risk of inappropriate regulation: rules governing deposit-takers are often tougher than those for non-deposit-taking institutions, and can create a competitive handicap. This is seen as a sharply rising risk, up from No. 19 to No. 3. They are also more concerned about the problem of fraud. On the other hand, this group is less worried than the lending side about the rise of political interference. Among institutional risks, deposit-taking MFIs focus particularly on the quality of management and staffing issues. One respondent said that there was “a leadership deficit in this industry.” A special concern is the danger of a flight of deposits in countries which lacked deposit insurance. An African respondent said that a crisis “can create a systemic risk of no confidence with massive withdrawals of deposits, reduced resources and a general slowdown in the financial sector.” Funding issues are relatively less pressing for deposit-takers so long as they can tap people’s savings. However some respondents, particularly in Africa, are worried that savings might decline as a consequence of the global recession. A respondent from Côte d'Ivoire said that “poverty is gaining more and more ground. This will result in shrinkage in the collection of deposits”.

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C S F I / New York CSFI North America Biggest risks 1 2 3 4 5 6 7 8 9 10

Corporate governance Reputation Credit risk Management quality Political interference Competition Staffing Managing technology Back office Unrealisable expectations

Fastest risers 1 2 3 4 5 6 7 8 9 10

Reputation Competition Political interference Strategy Credit risk Unrealisable expectations Product development Staffing Management quality Corporate governance

North American respondents were mostly investors and members of microfinance networks. There has been a dramatic turnaround in the risk perceptions of this group. Last time their Top Ten was dominated by concerns about the crisis fall-out: funding and liquidity risks, the state of the global economy, turmoil in the financial markets. These have all disappeared except for credit risk. But even this risk is seen to be less urgent than institutional risks such as governance and reputation. Peg Ross, director at the Human Capital Center of the Grameen Foundation, saw “a lack of next generation leaders who can step into senior roles, and a lack of focus on strategic human capital management practices. MFIs still don’t uniformly understand the risk of not adopting these”. The growing reputational controversy over microfinance is a top level concern, with political risk seen to be fast-rising. A director of a US-based microfinance network said that there was “a risk of mission drift as microfinance institutions go for commercial sources of funding, with the concomitant drive to push for profitability/high returns. This in turn could lead to predatory practices, unfair treatment of clients, including exorbitant pricing. This is a risk we will be very alert to for all our MFIs.” Strategic issues are also on the up. A major US investor said: “Some of the main risks in my view are managing increasing competition, introduction of new products, and incorporation of new technologies, such as branchless banking, that create opportunity but also new risks.” The problem of poor regulation – a key concern for practitioner-dominated regions – is seen as less pressing, though rising. Interestingly, North Americans are much less concerned about financial issues such as the profitability of MFIs, and their ability to access liquidity and funding. The view is that funding will continue to be available to strong and well-managed MFIs.


13

C S F I / New York CSFI Latin America Biggest risks 1 2 3 4 5 6 7 8 9 10

Competition Credit risk Political interference Staffing Inappropriate regulation Profitability Unrealisable expectations Reputation Mission drift Managing technology

Fastest risers 1 2 3 4 5 6 7 8 9 10

Competition Credit risk Political interference Profitability Reputation Mission drift Staffing Inappropriate regulation Unrealisable expectations Too much funding

Latin American respondents were mostly practitioners, which gave their response a strong “front line” feel. As in previous Banana Skin surveys, their greatest concern is with “external” issues, i.e. ones linked to the operating environment. Chief among these is the impact of competition and the resulting pressures on profitability and credit standards. Many respondents said they faced “unfair competition” from commercial banks armed with ample resources but lacking “market knowledge”. Claudia Valladares, vice-president of community banking at Banesco in Venezuela, said that “with the rise of microfinance in many regions and countries, many MFIs tend to compete for the same customers and that carries the risk of over-indebtedness if there is no effective credit bureau”. The other mounting risk is political interference, and the rise of populist regimes with an anti-MFI agenda: interest rate caps and the “no pago” movement in countries like Nicaragua. Marcelo A. Romero, a financial controller at Banco Pichincha in Ecuador, said this posed a huge risk to MFIs “because it completely changes [customers’] perceptions of their need to comply with their obligations”. These concerns are linked to the other major risk in the region, overindebtedness which is widespread, and likely to throw up large loan losses. This is also due to the inadequacy of regulation in some countries. Frederic de Mariz, vice president of equity research at JPMorgan in Brazil, said that “incomplete and/or unfriendly regulations are a key risk for the sector”. A set of fast-rising concerns surrounds reputation risk: the problems of mission drift and unrealisable expectations, all of which are up strongly. Luis Fernando Sanabria, general manager of the Fundación Paraguaya in Paraguay, said that “undoubtedly the main risk is mission drift. The average size of credits continues to rise and the resulting reduction in margins will increase this risk because institutions will be ‘tempted’ to solve their profitability problems by serving customers in even larger amounts”.

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C S F I / New York CSFI Western Europe Biggest risks 1 2 3 4 5 6 7 8 9 10

Reputation Credit risk Competition Unrealisable expectations Management quality Mission drift Political interference Corporate governance Inappropriate regulation Staffing

Fastest risers 1 2 3 4 5 6 7 8 9 10

Credit risk Reputation Competition Political interference Mission drift Unrealisable expectations Ownership Strategy Management quality Profitability

The Western European response was led by investors and groups supporting MFIs, such as professional firms and NGO networks. One of their top concerns is with the growth of overindebtedness and the impact of this on the industry’s balance sheets and reputation. Matthias Adler, principal sector economist at KfW, the German development bank, said that “due to unhealthy competition and the impact of the financial crisis, the problem of client overindebtedness in microfinance has become virulent in a number of countries. While this is still limited to particular submarkets and the overall sector remains robust in terms of shock resilience and responsibility of service provision, this may develop into a series of overreactions from the press, policy makers and, ultimately, from funders”. There was a big rise in Western European concern with reputation risk (up from No. 11 to No. 1) and the consequent risk of political interference (up from No. 9 to No. 7). Dinos Constantinou, managing partner of the Swissbased consultancy Microfinance Strategy SARL, said that a worsening reputation “could take away the basis on which much of the development of the sector (at least in its early phases) has relied - namely the support of the development community”. Respondents see these developments stemming from overexpansion of microfinance markets, leading to excess capacity, fierce competition and a decline in lending standards. Linked to this is concern about the inadequacy of management and corporate governance in MFIs, particularly in the area of risk management. Lars-Olof Hellgren, CEO of Nordic Microcap Investment in Sweden, saw “a lack of capability to assess risks and to have sufficient internal control systems in place [because] MFIs tend to underestimate these aspects when they grow to a size where they must rely on systems.” Europeans are less concerned about funding issues such as access to liquidity and capital. In fact, they see a greater risk in over-funding for the industry. Strategic issues such as technology management and product development are also seen as lower level risks.


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C S F I / New York CSFI Central and Eastern Europe Biggest risks 1 2 3 4 5 6 7 8 9 10

Credit risk Macro-economic trends Profitability Reputation Inappropriate regulation Managing technology Competition Unrealisable expectations Product development Foreign exchange

Fastest risers 1 2 3 4 5 6 7 8 9 10

Reputation Competition Inappropriate regulation Product development Macro-economic trends Unrealisable expectations Management quality Managing technology Corporate governance Ownership

Respondents from Central and Eastern Europe consisted mostly of practitioners plus a number of analysts, investors and suppliers of services to the industry. Their biggest concern is credit risk in the context of difficult economic conditions. Several respondents pointed out that their economies were still in recession, but competition was intensifying and profitability was under pressure. A respondent from Russia described the overall picture: “Crises will affect microfinance markets in various countries - clients' overindebtedness, the lack of consumer protection, high interest rates - which may result in disappointment in microfinance among policy makers and the public”. Reflecting fast-rising concern about reputation risk, she added that “there needs to be more realisation that microfinance is not a magic wand, and its potential to fight poverty or create jobs is limited”. An additional problem in many countries is the absence of good microfinance regulation, adding to what Andrew Pospielovsky, CEO of Accessbank in Azerbaijan, described as “a challenging business environment for microbusiness”. Part of that challenge is dealing with competition from commercial banks which are entering many markets in the region. The Top Ten also reflect concern about the quality of management and specific issues such as managing technology. Corporate governance was seen to be a low but fast-rising risk. Sadina Bina, director of MCF EKI in Bosnia and Herzegovina, said that MFIs had “weak risk departments, a narrow range of products (more or less only loans) and weak internal controls”. Strikingly absent from the high level risks – compared to other regions - is concern about political interference, though this gets a strong score in specific countries such as Bosnia and Herzegovina where political tensions run high. Funding and liquidity risks ranked low.

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C S F I / New York CSFI Africa Biggest risks 1 2 3 4 5 6 7 8 9 10

Credit risk Corporate governance Managing technology Management quality Reputation Transparency Profitability Staffing Back office Competition

Fastest risers 1 2 3 4 5 6 7 8 9 10

Competition Credit risk Reputation Mission drift Liquidity Strategy Managing technology Macro-economic trends Staffing Management quality

Respondents from Africa were mostly practitioners, plus some investors, regulators and analysts. As in other regions, the most pressing concern is on the credit front and the rise of overindebtedness and delinquency. The failure of a number of MFIs in Africa has added urgency to both these issues. This marks a change from the last survey in 2009 when Africa was the only region which did not put credit risk at the top of its concerns at the height of the financial crisis. The bulk of Top Ten risks listed by African respondents this time centres on internal issues at MFIs such as the strength of corporate governance and management, and related issues such as staffing and the effectiveness of control systems. This is in line with previous surveys which have shown persistent concern about the robustness of African microfinance institutions. A respondent from West Africa said: “The quality of governance and management remains a key risk for the majority of microfinance institutions in Africa. The failures of several deposit-taking institutions in Nigeria and Cameroon have exemplified this pattern”. The pressures of competition are relatively low at No. 10, but they are making themselves increasingly felt, and scored top among rising risks. Many respondents reported that commercial banks were moving aggressively into their markets. Reputation risk has risen strongly since last time (from No. 20 to No. 5) but mission drift at No. 13 remains a lower issue than elsewhere, and political interference at No. 22 scarcely puts in an appearance. Concerns about access to funding have eased considerably. Too little funding has slipped from No. 8 to No. 14, and liquidity risk from No. 6 to No. 12, though the availability of funding is patchy: many of our respondents reported difficulties. The same with inappropriate regulation: while scoring relatively low at No. 15, it is plainly issue in particular markets.


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C S F I / New York CSFI Middle East and North Africa Biggest risks 1 2 3 4 5 6 7 8 9 10

Credit risk Corporate governance Reputation Unrealisable expectations Management quality Political interference Mission drift Competition Liquidity Staffing

Fastest risers 1 2 3 4 5 6 7 8 9 10

Competition Mission drift Credit risk Reputation Staffing Corporate governance Unrealisable expectations Liquidity Macro-economic trends Interest rates

Respondents from the Middle East and North Africa were mostly practitioners. As in other regions, their top concern was with credit risk: the rise of personal indebtedness and its wider consequences. Mohammed Khaled, CGAP’s representative in the region, saw a “growing vulnerability of the sector…because of repayment problems which are due not only to multiple loans but to governance and internal control issues etc..” This raised questions “about the whole future of the sector and the issue of access for the poor to financial services”. Much of respondents’ high level concern centred on the commercial pressures confronting MFI management and the temptation to veer away from its social mission. Many respondents thought that MFIs were expanding their loan businesses dangerously fast under pressure from competition and hungry investors. One said that loan officers were becoming “mere distributors of funds” out to grab as many clients as possible. These trends are sharpening the risk of political interference, up strongly from No. 18 to No. 6. The weakness of management and corporate governance is another top level concern. Yusef Yakubi, executive director of the Aden Microfinance Foundation in the Yemen, said that “most MFI boards have no experience of the microfinance industry and are usually appointed by influential bodies who do not normally care whether these boards have had training or exposure to the industry”. The risks in liquidity (No. 9) and funding (No. 17) are seen to be quite widespread, and higher than in many other regions. Amalik Aimane, internal controller at INMAA in Morocco, said that “after the global crisis, lenders and investors have lost confidence in the microfinance sector, so MFIs should monitor very closely the quality of their portfolio and take whatever measures are necessary”. Respondents from other countries such as Iraq, Egypt and Syria said that funding difficulties were holding back the industry. Compared to other regions, the quality of regulation (No. 13) emerged as less of an issue.

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C S F I / New York CSFI Asia Biggest risks 1 2 3 4 5 6 7 8 9 10

Political interference Reputation Credit risk Liquidity Inappropriate regulation Competition Mission drift Corporate governance Management quality Product development

Fastest risers 1 2 3 4 5 6 7 8 9 10

Credit risk Competition Political interference Mission drift Liquidity Reputation Inappropriate regulation Interest rates Strategy Unrealisable expectations

About half the respondents from Asia were practitioners, the remainder being analysts, investors and lenders to the industry. The bulk of the respondents were from India and Pakistan with a sprinkling from Nepal, Sri Lanka and Bangladesh. With the turmoil sparked by events in Andhra Pradesh, it is no surprise that political interference made it to the top of the list. Swapnil Kant Neeraj, senior microfinance specialist at the International Finance Corporation in India, said that “”overzealous local politicians have still to reconcile themselves with the fact that microfinance can be done on a commercial basis. They will try to capitalise on the smallest aberrations by MFIs and … generalise things instead of taking a reasonable stand and isolating the rogue MFIs”. Respondents are very concerned about the regulatory backlash and popular discontent. Brij Mohan, chairman of Access Development Services, said that local intervention “will cripple growth and hurt the poor”. The impact to the industry’s reputation is also severe (up from No. 21 to No. 2). Respondents see this damaging the business and frightening away investors, both of the commercial and ethical kind. Although liquidity risk has fallen a few places, it remains much higher in this region than elsewhere (No.4). Risks of the political and reputational kind are seen as more severe than credit risk which tops the ranking in most other regions. Even so, overindebtedness is a major problem in this area, made worse by economic uncertainty, food price inflation and, in a country like Pakistan, a difficult security situation. There is also concern about the institutional strength of MFIs. Although these risks have been edged out of the high positions they occupied last time, the quality of management and corporate governance remain in the Top Ten. A respondent in India said that “MFIs must juggle a significantly larger number of tasks and expectations as compared to the past. This will require a much higher level of management and leadership potential.”


19

C S F I / New York CSFI Far East Biggest risks 1 2 3 4 5 6 7 8 9 10

Competition Credit risk Inappropriate regulation Reputation Corporate governance Management quality Mission drift Unrealisable expectations Back office Political interference

Fastest risers 1 2 3 4 5 6 7 8 9 10

Competition Reputation Credit risk Mission drift Management quality Strategy Managing technology Political interference Staffing Fraud

Respondents in the Far East included practitioners, investors, regulators and support professionals. The negative impact of competition remains much the most pressing concern in the region. It is seen to be encouraging bad lending practices and declining business ethics. In particular, it is contributing to the widespread problem of overindebtedness, with the risk of potentially severe loan losses for MFIs. Ruben C. De Lara, executive director of TSPI Development Corporation in the Philippines, said that the market was characterised by “a lack of credit discipline and an aggressiveness by some MFIs to grow their own business that tends to sidestep the value of credit education among their staff and clients as well”. A respondent from Laos said that the main risk in that market was “a desire for fast big growth which is not managed properly”. The growth in over-lending is already affecting the industry’s reputation (No. 2 among the rising risks), and leading to concerns about mission drift (up from No. 20 to No. 7). This could affect funding prospects. In the Philippines, a microfinance manager said that over-rapid growth “has caused traditional lenders to take a wary look on the sector, and hence they are extending financial support too cautiously.” This is also a risk singled out by respondents from China. Another of the region’s preoccupations is with the institutional strength of MFIs. Management quality and corporate governance are both among Top Ten risks. One respondent said “This is a sector that bleeds skills”. Another high level institutional risk is the back office (up from No. 15 to No. 9) because of the strain placed on systems by the hectic pace of growth. However the region seemed more optimistic than most about its economic prospects. Macro-economic risk was placed at the bottom of the list.

20


C S F I / New York CSFI 1. 1. Credit Credit risk risk (1)(1) A STARK indication of the facing microfinance is theistop occupied by by A STARK indication oftests the tests facing microfinance the position top position occupied credit in this survey. an industry which prided onenviable its enviable credit risk risk in this survey. For For an industry which onceonce prided itselfitself on its repayment record, strength persistence of this Banana loan loan repayment record, the the strength and and persistence of this Banana SkinSkin is a is a worrying trend. worrying trend. Credit topthe of list the in listour in last our survey last survey conducted in depths the depths of 2009 the 2009 Credit risk risk was was top of conducted in the of the economic when, to some extent, it could be explained bydifficulties the difficulties facing economic crisiscrisis when, to some extent, it could be explained by the facing borrowers a period of economic stress. the reasons for high its high borrowers in a inperiod of economic stress. But But this this time,time, the reasons for its position multiplied. There is still economic stress, but also growing evidence position havehave multiplied. There is still economic stress, but also growing evidence of of competitive pressures, of recklessness among borrowers, competitive pressures, of recklessness among MFIsMFIs and and theirtheir borrowers, and and of of interference incredit the credit process by political forces. interference in the process by political forces.

Overindebtedness Overindebtedness is becoming is becoming a bigger a bigger problem problem

breadth of concern credit revealed by this survey is very striking. The The breadth of concern aboutabout credit risk risk revealed by this survey is very striking. It It the 1No. 1 Banana fortypes all types of respondents except regulators ranked was was the No. Banana SkinSkin for all of respondents except regulators whowho ranked it 2. No.Geographically 2. Geographically it was a high all regions, suggesting similar it No. it was a high levellevel risk risk in allinregions, suggesting that that similar forces are endangering microfinance portfolios in many different markets. forces are endangering microfinance loanloan portfolios in many different markets. Of these, the most prominent is problem the problem of overindebtedness: Of these, muchmuch the most prominent is the of overindebtedness: largelarge numbers of poor people accumulated bigger numbers of poor people whowho havehave accumulated bigger debtsdebts thanthan theythey will will ever ever be be to repay, the prospect to write off and suffer able able to repay, withwith the prospect that that MFIsMFIs will will havehave to write themthem off and suffer heavy losses.ThisThis problem is now so broad it has the makings heavy loanloan losses. problem is now so broad that that it has the makings of a of a worldwide social/economic phenomenon. Moses Ochieng, regional representative worldwide social/economic phenomenon. Moses Ochieng, regional representative for CGAP/DFID in East Southern Africa, warned a possible “implosion for CGAP/DFID in East and and Southern Africa, warned of a of possible “implosion of of of key the players” key players” unless measures to deal A respondent somesome of the unless measures werewere takentaken to deal withwith it. Ait.respondent of the European funding banks “Increased delinquencies, fromfrom one one of the largelarge European funding banks said:said: “Increased delinquencies, program deterioration, damage to clients’ well-being…We're seeing program deterioration, damage to clients’ well-being…We're seeing this this issueissue cropcrop up into too many markets.” up into too many markets.” Respondents identified causes of overindebtedness. On lending the lending Respondents identified manymany causes of overindebtedness. On the side,side, therethere the intensity of competition a business where growth is now key objective is theisintensity of competition in a in business where growth is now a keya objective for for MFIs. Elissa McCarter, director of development finance at CHF International manymany MFIs. Elissa McCarter, director of development finance at CHF International in US, the US, tendency to focus on growth to generate the profits in the said said that that “the “the tendency to focus on growth alonealone to generate the profits shareholders anticipate a weakening of microloan underwriting that that shareholders anticipate has has led led to atoweakening of microloan underwriting standards greater of delinquency, fraud, undercapitalised institutions standards and and greater risk risk of delinquency, fraud, and and undercapitalised institutions become exposed during crises”. that that become exposed during crises”. is leading to problem the problem of multiple lending strictly, multiple ThisThis is leading to the of multiple lending (or, (or, moremore strictly, multiple borrowing) microfinance customers advantage of competition among borrowing) whenwhen microfinance customers take take advantage of competition among lenders and lack the lack of centralised credit information to many tap many lenders at once. lenders and the of centralised credit information to tap lenders at once. In In Colombia, the managing director of MFI an MFI reported the number of microColombia, the managing director of an reported that that the number of microlenders toaverage the average customer had grown 1.54,toand 4, that and that 75 cent per cent lenders to the MFIMFI customer had grown fromfrom 1.5 to 75 per of of customers borrowing institutions, mostly commercial banks MFIMFI customers werewere borrowing fromfrom otherother institutions, mostly commercial banks which had entered the field. which had entered the field. Another reason is the weakness of internal controls at MFIs, incentive Another reason is the weakness of internal controls at MFIs, poorpoor incentive structures for loan officers, misdirected management objectives. Edmond structures for loan officers, and and misdirected management objectives. Edmond Atangana Evina of ministry the ministry of finance in Cameroon in many Atangana Evina of the of finance in Cameroon said said that that in many casescases “the “the failure of MFIs cantraced be traced to enormous granted to clients, in breach of the failure of MFIs can be to enormous loansloans granted to clients, in breach of the checks balances necessary to those institutions’ survival”. to know checks and and balances necessary to those institutions’ survival”. The The needneed to know client an associated Many respondents reported youryour client is anisassociated issue.issue. Many respondents reported that that loansloans werewere beingbeing without proper credit checks or client information – and deliberately in order mademade without proper credit checks or client information – and deliberately in order


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C S F I / New York CSFI to meet to meet business business targets. targets. A UK-based A UK-based consultant consultant said that said“many that “many MFIsMFIs do not dohave not have a good understanding of theofborrowers’ financial position and repayment capacity.” a good understanding the borrowers’ financial position and repayment capacity.” ThenThen therethere is political interference in countries wherewhere the lending practices of MFIs is political interference in countries the lending practices of MFIs have have comecome underunder publicpublic scrutiny, leading to officially inspired borrowing binges and and scrutiny, leading to officially inspired borrowing binges repayment strikes. Although the Indian state state of Andhra Pradesh is theisspecific focusfocus repayment strikes. Although the Indian of Andhra Pradesh the specific of concern, this concern, respondents identified countries this awas a problem, of this respondents identified manymany countries wherewhere this was problem, including Nicaragua, Azerbaijan, and Bosnia and Herzegovina. In Rwanda, a including Nicaragua, Azerbaijan, and Bosnia and Herzegovina. In Rwanda, a banking regulator saidborrowers that borrowers developing “a culture of non-repayment”. banking regulator said that were were developing “a culture of non-repayment”. Although respondents stressed thatseverity the severity of credit risk differed greatly Although somesome respondents stressed that the of credit risk differed greatly among institutions and markets, this Banana the dominant among institutions and markets, this Banana Skin Skin lookslooks set toset beto thebedominant issue issue forindustry the industry overnext the few nextyears. few years. for the over the

HowHow a borrower a borrower thinks… thinks… P.N. Vasudevan, P.N. Vasudevan, managing managing director director of Equitas of Equitas MicroMicro Finance Finance in India, in India, described described the the mindset of many overindebted borrowers: in operation, mindset of many overindebted borrowers: “With“With more more MFIs MFIs in operation, clientsclients are are getting more more options to borrow, and since loans loans are unsecured, the tendency of most getting options to borrow, and since are unsecured, the tendency of most people is to borrow more more than their need need and toand justify it by saying that they people is to borrow than immediate their immediate to justify it by saying that they will use for some 'good''good' purpose, and that be sure will itbewill available later later willituse it for some purpose, andthey that cannot they cannot beitsure be available whenwhen they might reallyreally need need it. This the borrower's familyfamily peacepeace whichwhich is they might it. can Thisdestroy can destroy the borrower's is what what MFIs are supposed to promote!” MFIs are supposed to promote!”

2. Reputation 2. Reputation (17) (17) NO SURPRISE NO SURPRISE that this that Banana this Banana Skin Skin has soared has soared after after the torrent the torrent of bad of publicity bad publicity surrounding microfinance the world’s media, and events in Andhra Pradesh surrounding microfinance in theinworld’s media, and events in Andhra Pradesh in in particular. Reputation 15 places thesurvey last survey few farparticular. Reputation risk isrisk up is15upplaces from from the last whenwhen only only a fewafarsighted respondents waved redabout flag about the dangers of growing commercialism. sighted respondents waved a red aflag the dangers of growing commercialism.

Microfinance’s Microfinance’s reputation reputation ‘will‘will never never be be thethe same’ same’

Microfinance is becoming a punch bag from all sides – accused of exploiting Microfinance is becoming a punch bag from all sides – accused of exploiting the the burdensome of losing its social mission, of putting profits poor poor with with burdensome debt, debt, of losing sight sight of itsofsocial mission, of putting profits before poverty reduction, AP most notably - though elsewhere - of driving before poverty reduction, and inand APinmost notably - though elsewhere too - too of driving people to suicide through loan terms and strong-arm debt collection practices. people to suicide through toughtough loan terms and strong-arm debt collection practices. Gil Lacson, relationship manager at Women’s World Banking, Gil Lacson, relationship manager at Women’s World Banking, said said that that “the “the industry will aface a huge reputational risk with the growing between opposing industry will face huge reputational risk with the growing clashclash between opposing ideology and expectations. Is microfinance primarily financial inclusion ideology and expectations. Is microfinance primarily aboutabout financial inclusion or or poverty alleviation? Is microfinance primarily a business opportunity poverty alleviation? Is microfinance primarily a business opportunity or aor a development intervention? microfinance financial and social development intervention? DoesDoes microfinance reallyreally meet meet both both financial and social expectations? Is it‘either an ‘either or’?has Ormicrofinance has microfinance Whatever returnreturn expectations? Is it an or’? Or manymany faces?faces? Whatever the answers, the industry's reputation will never the same”. the answers, the industry's reputation will never be thebesame”. Reputation riskmany has many angles. For some respondents, it iscommercialisation the commercialisation Reputation risk has angles. For some respondents, it is the of microfinance, as in seen the growing importance of profit as a goal, andhighthe highof microfinance, as seen theingrowing importance of profit as a goal, and the flotation of MFIs the stock market. Last year’s IPO of SKS, India’s largest valuevalue flotation of MFIs on theonstock market. Last year’s IPO of SKS, India’s largest a ready for respondents the world as a watershed, MFI,MFI, was awas ready themetheme for respondents the world over.over. SomeSome saw itsaw as ait watershed, drawing popular attention the profits now being extracted microfinance. drawing popular attention to thetoprofits now being extracted from from microfinance. others, is unethical practices as evidenced by huge the huge growth For For others, it is it unethical practices as evidenced by the growth in in indebtedness among customers, the result of aggressive marketing indebtedness among MFI MFI customers, muchmuch of it of theitresult of aggressive marketing of loans whose true is costobscured. is obscured. Michaël de Groot, regional director of loans whose true cost Michaël de Groot, regional director of theof the

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C S F I / New York CSFI Rabobank Rabobank Foundation Foundation in The in The Netherlands, Netherlands, said said that that “top-end, “top-end, commercially-driven commercially-driven MFIsMFIs and and banks banks are are becoming becoming the the new new loanloan sharks”. sharks”. Raksa Raksa Pheng, Pheng, business business development development manager manager at Visionfund at Visionfund in Cambodia, in Cambodia, said said that that defaulters defaulters tooktook to to “running “running awayaway fromfrom theirtheir homes. homes. In some In some cases, cases, I could I could see that see that theythey reduced reduced theirtheir foodfood to save to save money money to repay to repay theirtheir debts, debts, or inorothers, in others, theythey forced forced theirtheir children children to to dropdrop out from out from school school to find to find jobs jobs to earn to earn moremore income income to support to support the repaying the repaying of of debts”. debts”.   Another symptom is the of “consumer lending” as a asprime product to to Another symptom is emergence the emergence of “consumer lending” a prime product replace the business lending for which microfinance was was originally devised. Xavier replace the business lending for which microfinance originally devised. Xavier Reille, manager at CGAP in France, said said that that “previously, microcredit was was seenseen as a as a Reille, manager at CGAP in France, “previously, microcredit money lending a bad thing. the increased on short goodgood thingthing and and money lending as a as bad thing. WithWith the increased focusfocus on short termterm profitprofit in several markets, the lines are blurring and and the reputation of the in several markets, the lines are blurring the reputation of sector the sector is tarnished. on MFIs to show are following responsible is tarnished. The The onusonus is onis MFIs to show that that theythey are following responsible practices”. practices”.

The The industry industry faces faces thethe backlash backlash

For others the exposure of microfinance “a sham”, its social For others still still it is ittheis exposure of microfinance as “aassham”, withwith its social bonabona no longer a given. Joachim a senior consultant the Frankfurt School fidesfides no longer a given. Joachim Bald,Bald, a senior consultant at theatFrankfurt School of of Finance and and Management, said said that that a backlash was was nownow on the “We“We tendtend to to Finance Management, a backlash on cards. the cards. celebrate overpriced to poor people a life-changing breakthrough celebrate everyevery overpriced smallsmall loanloan to poor people as a as life-changing breakthrough in access to finance. But where the evidence microfinance borrowers on their in access to finance. But where is theis evidence that that microfinance borrowers on their tenthtenth cyclecycle are better off than theirtheir peerspeers whowho did not access to microcredit?” are better off than didhave not have access to microcredit?” The The consequences of reputation risk risk are potentially severe. A US warned consequences of reputation are potentially severe. A investor US investor warned that that “if studies continue to show that that microfinance is ‘not working’ and and if news “if studies continue to show microfinance is ‘not working’ if news stories of overindebtedness, clientclient harassment, excessive riches and and otherother bad bad stories of overindebtedness, harassment, excessive riches behaviour continue to make headlines, the industry the moral ground, behaviour continue to make headlines, the industry will will lose lose the moral highhigh ground, and with it donors, investors and talent”. and with it donors, investors and talent”.

TheThe consumer consumer lending lending boom boom A bigAconcern in theinindustry is microfinance’s shift shift fromfrom tiny, tiny, uncollateralised business big concern the industry is microfinance’s uncollateralised business loansloans for micro-entrepreneurs - “microenterprise finance” - to general lending to the for micro-entrepreneurs - “microenterprise finance” - to general lending to the unbanked for consumption purposes. This This is widely seenseen as evidence of “mission drift”,drift”, unbanked for consumption purposes. is widely as evidence of “mission and and couldcould harmharm the industry’s reputation for poverty alleviation. It’s happening for for the industry’s reputation for poverty alleviation. It’s happening several reasons: competition fromfrom commercial banks, pressure for for short-term several reasons: competition commercial banks, pressure short-term profitability, and the voiced needneed for “product development”. profitability, andfrequently the frequently voiced for “product development”. Chikako Kuno, director of capital markets at FINCA International, said:said: “There are are Chikako Kuno, director of capital markets at FINCA International, “There reputational risks risks as new commercial entrants, attracted by the and profitability reputational as new commercial entrants, attracted byvolume the volume and profitability of microfinance, comecome in without a clear double bottom-line objective and and blur blur the the of microfinance, in without a clear double bottom-line objective boundary between predatory consumer finance and and true true microfinance”. Daniel boundary between predatory consumer finance microfinance”. Daniel Schriber, director of investment analysis at Symbiotics in Switzerland, thought that that the the Schriber, director of investment analysis at Symbiotics in Switzerland, thought movemove towards consumer lending constituted “a huge reputational risk for towards consumer lending constituted “a huge reputational riskthe for whole the whole industry”. industry”.


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C S F I / New York CSFI 3. 3.Competition Competition (9)(9) ALTHOUGH competition in the microfinance market can can deliver benefits to to ALTHOUGH competition in the microfinance market deliver benefits customers in form the form of keener pricing better service, is more customers in the of keener pricing and and better service, it is itmore oftenoften seenseen as as something creating instability encouraging dubious practices. In line something bad, bad, creating instability and and encouraging dubious practices. In line withwith earlier surveys, Banana is high on list the this list this is seen a rising earlier surveys, this this Banana SkinSkin is high on the year,year, and and is seen as a as rising problem because ofproliferation the proliferation of microfinance providers in most markets. problem because of the of microfinance providers in most markets. Geographically, a widespread concern: a high ranking in most regions, Geographically, this this is a is widespread concern: it gotit agot high ranking in most regions, and was top level riskrespondent by respondent types, practitioners in particular. and was also also seenseen as a as topalevel risk by types, practitioners in particular. Competition is seen as dangerous because it can market disruption, squeeze Competition is seen as dangerous because it can causecause market disruption, squeeze margins, to take greater Several respondents referred margins, and and spurspur MFIsMFIs to take greater risks.risks. Several respondents referred to to competition as “unhealthy” and “unfair”. In particular, competition is widely competition as “unhealthy” and “unfair”. In particular, competition is widely seenseen as as the prime of irresponsible lending overindebtedness. A respondent the prime causecause of irresponsible lending and and overindebtedness. A respondent fromfrom the Philippines presence of many too many competitors encourages the Philippines said said that that “the “the presence of too competitors encourages somesome to become laximplementing in implementing policies rather a challenge MFIMFI staffstaff to become lax in policies rather thanthan take take it as ita as challenge to to improve products and services”. improve products and services”.

Competition Competition is is eroding eroding business business and and ethical ethical standards standards

Competition is also squeezing margins. A microfinance banker in Ecuador Competition is also squeezing margins. A microfinance banker in Ecuador complained “prices are going and everywhere”, driven by new complained that that “prices are going downdown everyevery year year and everywhere”, driven by new competitors “without knowledge”. Jaime Nieto, director of treasury at Camesa competitors “without knowledge”. Jaime Nieto, director of treasury at Camesa in in Mexico, markets in accessible all “saturated” suffering Mexico, said said that that markets in accessible areasareas werewere all “saturated” and and suffering a a Others competition driving to reach riskier “rate“rate war”.war”. Others saw saw competition driving MFIsMFIs to reach into into new new and and riskier markets in search of business. A respondent Tanzania “as more markets in search of business. A respondent fromfrom Tanzania said said that that “as more players as banks the industry, the tendency to move towards untapped players suchsuch as banks enterenter the industry, the tendency is toismove towards untapped market segments which is little is known”. market segments aboutabout which is little is known”. Respondents regretted competition encouraging to adopt Respondents also also regretted that that competition was was encouraging MFIsMFIs to adopt unethical practices as loan pushing, poaching clients deceptive unethical practices suchsuch as loan pushing, poaching clients and and staff,staff, and and deceptive advertising. Vaidyanath Yerraguntla, a consultant at Coromandel Infotech in India, advertising. Vaidyanath Yerraguntla, a consultant at Coromandel Infotech in India, pressures on field the field collection teams translating said said therethere was was “very“very highhigh pressures on the collection teams translating into into 'loan-sharking' behaviour the borrower/s”. 'loan-sharking' behaviour withwith the borrower/s”. A feature of competition is that it pushes to focus on parts of market the market A feature of competition is that it pushes MFIsMFIs to focus on parts of the that that are already served ignore are not, usually the neediest and those are already wellwell served and and ignore thosethose that that are not, usually the neediest and those outthe in country. the country. A respondent Colombia banks exhibiting out in A respondent fromfrom Colombia said said banks werewere exhibiting “herd“herd behaviour” concentrating economic performance behaviour” and and concentrating “on “on areasareas withwith goodgood economic performance withwith aggressive credit offers”. aggressive credit offers”. reasons for greater competition include the ready availability of funding The The reasons for greater competition include the ready availability of funding to to expand capacity, anddownscaling the downscaling by large banks the microfinance market, expand capacity, and the by large banks into into the microfinance market, a trend is visible in most regions. Other competitive threats a trend that that is visible in most regions. Other competitive threats comecome fromfrom subsidised government lending programmes increasingly, telecoms subsidised government lending programmes and, and, increasingly, fromfrom telecoms companies to access market through branchless banking. Boon, companies able able to access the the market through branchless banking. HansHans Boon, managing director at Postfinance International Development in The Netherlands, managing director at Postfinance International Development in The Netherlands, scenarios of ‘branchless’ banking larger banks downscaling said said that that “new“new scenarios of ‘branchless’ banking withwith larger banks downscaling via via mobile internet technology franchise formulas for agents heavily mobile and and internet technology and and franchise formulas for agents couldcould heavily impact existing MFIs”. impact existing MFIs”. others competition a good because put MFIs on their mettle. But But others saw saw competition as a as good thingthing because it putit MFIs on their mettle. A A US consultant competition “could net positive as MFIs are forced US consultant said said that that competition “could be a be netapositive as MFIs are forced to beto be innovative provide higher customer service. moremore innovative and and provide higher customer service. MostMost MFIsMFIs knowknow howhow to to handle this Ibut am sure markets be overheated andcarried get carried away”. handle this but amIsure somesome markets will will be overheated and get away”.

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C S F I / New York CSFI 4. 4. Corporate Corporate governance governance (7)(7) CONCERN aboutabout the the quality of corporate governance in MFIs is growing, CONCERN quality of corporate governance in MFIs is growing, reflecting – seen in earlier Banana surveys – that reflecting the the viewview – seen in earlier Banana SkinSkin surveys – that this this risk risk is is fundamental to business, the business, which the MFIs themselves can address. fundamental to the and and one one which onlyonly the MFIs themselves can address. However the ranking of this generally higher among outside However the ranking of this risk risk was was generally higher among thosethose outside the the industry (investors analysts) among microfinance practitioners tended industry (investors and and analysts) thanthan among microfinance practitioners who who tended to play it down. example, North American respondents – investors mainly to play it down. For For example, North American respondents – investors mainly – – ranked it No. 1 while Central Eastern European respondents – mostly ranked it No. 1 while Central and and Eastern European respondents – mostly practitioners in well-established and commercial it a lowly No. 21. practitioners in well-established and commercial MFIsMFIs – put–itput a lowly No. 21.

Weak Weak governance governance is making is making thethe credit credit crisis crisis worse worse

region where concern corporate governance particularly strong One One region where concern aboutabout corporate governance was was particularly strong was was Africa, where it ranked 2. Marie-Jose Ndaya Ilunga, deputy director of the Africa, where it ranked No. No. 2. Marie-Jose Ndaya Ilunga, deputy director of the central of RD the RD Congo, “poor governance creates management central bankbank of the Congo, said said that that “poor governance creates management problems, mainly in area the area of lending. which in RDC the RDC problems, mainly in the of lending. MostMost MFIsMFIs which closeclose downdown in the run into governance problems”. havehave run into governance problems”. of concern is only not only the quality of MFI boards, but risk the risk of conflicts The The focusfocus of concern is not the quality of MFI boards, but the of conflicts of interest, of lack of independence and poor accountability, and other issues of interest, of lack of independence and poor accountability, and other issues suchsuch as as nepotism, cronyism, domineering personalities... Although passing of the nepotism, cronyism, domineering personalities... Although the the passing of the economic has taken immediate pressure off MFIs, the new difficulties facing economic crisiscrisis has taken immediate pressure off MFIs, the new difficulties facing on reputational the reputational credit fronts strong corporate governance themthem on the and and credit fronts couldcould makemake strong corporate governance crucial. Slocum, regional coordinator for Middle the Middle eveneven moremore crucial. BrianBrian Slocum, regional coordinator for the East East and and Africa the Grameen Foundation, “weak corporate governance has been Africa at theat Grameen Foundation, said said that that “weak corporate governance has been a a factor in existing portfolio crises, it will likely be one in future crises key key factor in existing portfolio crises, and and it will likely be one in future crises as as well.” well.” concern is that themselves do not One One concern is that MFIsMFIs themselves do not devote enough attention governance devote enough attention to to governance because are dominated by self-interested because theythey are dominated by self-interested directors or view as inconvenient. Diego directors or view it asit inconvenient. Diego Guzman, regional director for Latin America Guzman, regional director for Latin America “Too“Too manymany conferences conferences whichwhich at ACCION International in Colombia, International in Colombia, said said take take the best MFI MFI leaders awayawayat ACCION the best leaders “MFIs believe a game that that “MFIs believe this this is a is game and and you you do do fromfrom theirtheir desks”. desks”. not need to invest in field”. this field”. not need to invest in this

One One reason reason why why governance governance is weak is weak

Project leader Project leader Microfinance network Microfinance network The Netherlands The Netherlands

Several respondents is enough not enough Several respondents said said that that it is itnot for governance standards merely to remain for governance standards merely to remain because the evolution of sector the sector staticstatic because the evolution of the will will require boards of ever higher calibre. Many referred to “the challenging require boards of ever higher calibre. Many referred to “the moremore challenging environment”, exposure of sector the sector to media” the media” “growing industry environment”, “the “the exposure of the to the and and “growing industry complexity”. complexity”. However, is wrong to generalize particular respondents However, it is itwrong to generalize aboutabout this this particular risk,risk, and and somesome respondents positive trends emerging. professionals becoming involved, saw saw moremore positive trends emerging. MoreMore professionals werewere becoming involved, investors pressing for higher standards, regulators taking a closer investors werewere pressing for higher standards, and and regulators werewere taking a closer interest in problem. the problem. Santhanam Srinivasan, a development finance consultant interest in the Santhanam Srinivasan, a development finance consultant in in India, stricter regulation, this area improve”. India, said said that that “with“with stricter regulation, this area will will improve”.


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C S F I / New York CSFI 5.5.Political Politicalinterference interference(10) (10) The Theturmoil turmoilin inAndhra AndhraPradesh Pradeshpropelled propelledthis thisBanana BananaSkin Skinto toa new a newhigh highin inthethe rankings microfinance sector assessed a whole new risks coming from rankings as as thethe microfinance sector assessed a whole new setset of of risks coming from a a direction that was previously benign. direction that was previously benign. However response was very varied. Asians, surprisingly, overall, However thethe response was very varied. Asians, notnot surprisingly, putput it it toptop overall, andLatin LatinAmericans Americansat atNo. No.3. 3.But ButAfricans Africansand andCentral Centraland andEastern EasternEuropeans Europeans and ranked way down No. Among respondent types most concerned were ranked it it way down at at No. 22.22.Among respondent types thethe most concerned were investors and analysts (No. regulators it was No. investors and analysts (No. 4),4), butbut forfor regulators it was No. 22.22.

Interference Interferenceby by politicians politiciansisis growing growing

Although severe political interference only affected a few countries directly, it is Although severe political interference hashas only affected a few countries directly, it is nonethelesscausing causinghuge hugedamage damageto tothetheindustry industryworldwide worldwidebecause becauseof ofintense intense nonetheless media coverage. Almost respondents commented one way another. media coverage. Almost allall ourour respondents commented onon it itone way or or another. internationalinvestor investorfrom fromEgypt Egyptsaid saidthat that“political “politicalinterference interferencein inseveral several AnAninternational markets turning public against microfinance industry general.” markets is is turning thethe public against microfinance industry in in general.” Political interference takes many forms. The most widespread usury laws capping Political interference takes many forms. The most widespread is is usury laws capping interest rates that MFIs can charge their borrowers.Previously Previously decline, these thethe interest rates that MFIs can charge their borrowers. in in decline, these now increase again Indian sub-continent, Latin America, Africa and areare now onon thethe increase again in in thethe Indian sub-continent, Latin America, Africa and CentralEurope, Europe,and andpose posea direct a directthreat threatto toMFI MFIprofitability. profitability.But Butwhile whilerate ratecaps caps Central benefitMFI MFIborrowers borrowersin inthetheshort shortrun, run,they theymay mayalso alsodamage damagethethemicrolending microlending benefit marketfurther furtherout. out.Pierre-Marie Pierre-MarieBoisson, Boisson,chairman chairmanof ofSogesol Sogesolin inHaiti, Haiti,said saidthey they market “could reverse years progress driving MFIs millions access “could reverse 3030 years of of progress byby driving MFIs to to cutcut millions outout of of access to to credit, forcing majority moneylenders a higher interest rate”. credit, forcing thethe majority to to useuse moneylenders at at a higher interest rate”. Moreimmediately immediatelydamaging damagingarearethethepopulistic populistic“no “nopago” pago”campaigns campaignsseen seenin in More countries like Nicaragua, Pakistan and India where governments have told borrowers countries like Nicaragua, Pakistan and India where governments have told borrowers repaytheir theirloans loansbecause becausetheir theirinterest interestrates ratesareareextortionate. extortionate.These Thesecould could notnotto torepay drive MFIs business altogether. drive MFIs outout of of business altogether. Politicalinterference interferencecan cantake takeother otherforms formsas aswell: well:product productlimitations, limitations,directed directed Political lendingto to“priority “prioritysectors” sectors”and andsubsidised subsidisedcompetition competitionfrom fromgovernment governmentloan loan lending programmes and state-supported banks.A A respondent from Mali said that state programmes and state-supported banks. respondent from Mali said that thethe state was“directing “directingresources resourcestowards…high-risk towards…high-riskcustomers customersthrough throughthethedisposition dispositionof of was public funds with little technical selection criteria”. public funds with little technical selection criteria”. Therisks risksin inpolitical politicalinterference interferenceareareseen seento tolieliemainly mainlyononthethefunding fundingside: side:thethe The concern that investorswill will frightenedoffoffbyby bad publicity.Eric Eric Savage, concern that investors bebe frightened allallthethe bad publicity. Savage, president Unitus Capital India, wrote that “there a very real risk that many president of of Unitus Capital in in India, wrote that “there is is a very real risk that many of of largestMFIs MFIs India could begin defaulting their debt coming days, thethe largest in in India could begin defaulting onon their debt in in thethe coming days, weeks and months…Political risk made it more challenging attract funding weeks and months…Political risk hashas made it more challenging to to attract funding at at reasonable rates, some cases, all”. reasonable rates, or or in in some cases, at at all”. But could also threaten MFIs squeezing margins, taking away their business, But it it could also threaten MFIs byby squeezing margins, taking away their business, andhalting haltingtheir theirgrowth. growth.AsAsone onerespondent respondentsaid: said:“A“Apersistent persistentnon-profit, non-profit,creditcreditand only overly politicised self-help group) sector will simply stop industry where only (or(or overly politicised self-help group) sector will simply stop thethe industry where it is now”. it is now”. Many respondentssaid saidthat thatpolitical politicalrisk riskresulted resultedfrom froma failure a failure understanding, Many respondents of ofunderstanding, wilful otherwise, about value microfinance.AsAs one respondent said: “We wilful or or otherwise, about thethe value of of microfinance. one respondent said: “We winningthethewar warof ofideas”. ideas”.Risk Riskmitigation mitigationmust mustlieliein ingetting gettinga abetter better arearenotnotwinning message across about benefits microfinance.But But many respondents thought message across about thethe benefits of of microfinance. many respondents thought that industry had brought this risk upon itself through aggressive lending and that thethe industry had brought this risk upon itself through itsits aggressive lending and

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C S F I / New York CSFI IPOs: IPOs: good good or greedy? or greedy? FEWFEW EVENTS EVENTS havehave turned turned public public opinion opinion against against microfinance microfinance moremore than than the lucrative the lucrative InitialInitial Public Offerings (IPOs) of MFI on the market. The resulting “windfall” Public Offerings (IPOs) of shares MFI shares onstock the stock market. The resulting “windfall” gainsgains reaped by shareholders seemseem inappropriate for anfor industry with with a social purpose. reaped by shareholders inappropriate an industry a social purpose. ManyMany respondents said that IPOsIPOs werewere adding to the and reputation risks risks in thein the respondents said that adding topolitical the political and reputation industry, and would hasten a regulatory crackdown. Gert Gert van Maanen, chairman of of industry, and would hasten a regulatory crackdown. van Maanen, chairman Microfinance Centre in Poland, said said that that microfinance’s “original concept of ‘How to to Microfinance Centre in Poland, microfinance’s “original concept of ‘How enable poorpoor people to earn a living' is moving towards ‘How‘How to accommodate investors enable people to earn a living' is moving towards to accommodate investors in their wish wish to earn an attractive dividend and -and if an- ifIPO feasible - a windfall in their to earn an attractive dividend an isIPO is feasible - a windfall profit’. profit’. MostMost popular popular support support for microfinance for microfinance is based is based on its onsocial its social relevance, relevance, not on notthe on the earnings it brings to investors. IPOsIPOs implyimply that that investment considerations are taking earnings it brings to investors. investment considerations are taking over over and calling the shots”. and calling the shots”. Marcus Fedder, managing partner of Agora Microfinance Partners in thein UK, that that Marcus Fedder, managing partner of Agora Microfinance Partners the said UK, said IPOsIPOs also also risked attracting the wrong sort sort of people into into microfinance, “…people who who risked attracting the wrong of people microfinance, “…people are driven moremore by the model of fast and big through an early are driven by business the business model of growth fast growth andbucks big bucks through an early IPO than by sustainable, client-driven services for the In theInlong run, this likely IPO than by sustainable, client-driven services forpoor. the poor. the long run, isthis is likely to (a)tolead to a sub-prime like bubble, (b) give a bada name to the industry and (c) (a) lead to a sub-prime like bubble, (b) give bad name towhole the whole industry and (c) probably deterdeter socially-minded investors”. probably socially-minded investors”. But some respondents saw good in stock market flotations. Shadab Rizvi,Rizvi, who who runs runs the the But some respondents saw good in stock market flotations. Shadab microfinance business unit unit at Darashaw & Co., an Indian investment house, said said that that microfinance business at Darashaw & Co., an Indian investment house, MFI owners werewere “incapable of mobilising hugehuge sumssums of equity on their own.own. Gradually MFI owners “incapable of mobilising of equity on their Gradually we'll we'll see private equity investors becoming owners of many MFIs,MFIs, especially if theifMFI see private equity investors becoming owners of many especially the isMFI is IPO-bound”. IPO-bound”.

highhigh profile profile IPOs. IPOs. For them, For them, the risk the risk needed needed to betomanaged be managed by halting by halting mission mission driftdrift and refocusing the business its philanthropic goals. and refocusing the business on itsonphilanthropic goals. There this risk subside. It may grow. respondent There was was littlelittle sensesense that that this risk will will subside. It may eveneven grow. One One respondent gloomily: “I fear misinformed boycott spread outside of Andhra said said gloomily: “I fear this this misinformed boycott will will spread outside of Andhra Pradesh and India torest the of restthe ofworld.” the world.” Pradesh and India to the

6. 6.Inappropriate Inappropriate regulation regulation (13) (13)

Many Many countries countries stillstill lack lack good good microfinance microfinance regulation regulation

QUALITY of regulatory the regulatory environment for microfinance is a rapidly rising THETHE QUALITY of the environment for microfinance is a rapidly rising concern, up seven places sincesince the last The The problem varies greatly fromfrom one one concern, up seven places the survey. last survey. problem varies greatly region to another: countries regulation, others region to another: somesome countries havehave goodgood regulation, others havehave poorpoor or or obstructive regulation. the general is that the problem is growing rather obstructive regulation. But But the general sensesense is that the problem is growing rather shrinking. than than shrinking. Regulation on list the for list practitioners, for practitioners, particularly in Latin America, Regulation was was highhigh on the particularly in Latin America, the the where fast-growing microfinance industries CEE,CEE, AsiaAsia and and the the Far Far EastEast where fast-growing microfinance industries are are increasingly running regulatory obstacles. increasingly running into into regulatory obstacles. a typical comment, Richards, an associate at Developing World Markets, In a In typical comment, ScottScott Richards, an associate at Developing World Markets, a a microfinance investment “many countries microfinanceUS US microfinance investment firm,firm, said said that that “many countries lack lack microfinancespecific regulations, andour in experience, our experience, the regulatory regimes in place to govern specific regulations, and in the regulatory regimes in place to govern deposit-taking banks financial institutions do not or effectively deposit-taking banks and and otherother financial institutions do not fullyfully or effectively address the specific regulatory needs ofmicrofinance the microfinance industry.” address the specific regulatory needs of the industry.”


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C S F I / New York CSFI Many Many respondents respondentssaw saw regulation regulation failing failing to to take take account account of of microfinance’s microfinance’s special special character: itsits social role, itsits ownership structure, itsits different cost base. or or noncharacter: social role, ownership structure, different cost base.Bad Bad nonexistent regulation was hindering thethe growth and profitability of of microfinance, it was existent regulation was hindering growth and profitability microfinance, it was stifling stiflingMFIs, MFIs,holding holdingback backinnovation, innovation,preventing preventingit itfrom fromcompeting competingwith withnew new entrants like commercial banks where regulation was more highly developed. entrants like commercial banks where regulation was more highly developed. respondent from East Africa said that poor regulation already taking AA respondent from East Africa said that poor regulation “is“is already taking itsits tolltoll onon regulatedMFIs MFIsin inmany manycountries countriesand andis isdiscouraging discouragingmovement movementtowards towards[a [a regulated regulated industry] others”.Bassem Bassem Khanfar, CEO National Microfinance regulated industry] in in others”. Khanfar, CEO of of thethe National Microfinance Bank Jordan, said that unclear legislation and lack professionalism could “put Bank in in Jordan, said that unclear legislation and lack of of professionalism could “put industry underconstraints constraints andeliminate eliminate growth”, andthat that was“better “better thethe industry under and itsitsgrowth”, and it itwas to to live without a law rather than live with a bad law”. Some respondents said that live without a law rather than to tolive with a bad law”. Some respondents said that poorregulation regulationwas wasundermining underminingconfidence confidencein inmicrofinance, microfinance,which whichwould wouldaffect affect poor clients and investors.It was It was also driving smaller MFIs business. clients and investors. also driving smaller MFIs outout of of business. Muchinappropriate inappropriateregulation, regulation,such suchas asinterest interestrate ratecaps, caps,springs springsfrom frompolitical political Much interference.But But respondents also saw bad regulation jeopardising MFIs making interference. respondents also saw bad regulation jeopardising MFIs byby making difficultforforthem themto todiversify diversifyaway awayfrom fromthetheincreasingly increasinglyrisky riskybusiness businessof of it itdifficult lending, example offering newproducts productsor oraccessing accessing people’ssavings. savings.The The lending, forforexample byby offering new people’s CEO MFI Pakistan said that microfinance was stagnating there because half CEO of of anan MFI in in Pakistan said that microfinance was stagnating there because half industry wasnotnotallowed allowedto totake takedeposits. deposits.“The “Theindustry industry cannotand andwill willnotnot thetheindustry was cannot grow unless a window made available from regulator commercial rates.The The grow unless a window is is made available from thethe regulator at at commercial rates. industry potential circa 30m while current outreach less than 2m”. industry potential is is circa 30m while thethe current outreach is is less than 2m”.

The Therisks risksininregulation regulation Microfinance Microfinance needs needs to to find find itsits place place in in thethe global global financial financial system. system. Either Either there there hashas to to bebe a clear regulatory environment distinguishing and recognising microfinance sector, a clear regulatory environment distinguishing and recognising thethe microfinance sector, or orthethe industry needs mainstream thethe banking or or non-banking industry needsto to mainstreamitself itselfas aspart partof of banking non-banking segment segmentas asthethecase casemay maybebein ineach eachcountry. country.The Theriskriskof ofananunclear unclearregulatory regulatory environment is probably thethe main riskrisk at at thethe moment. environment is probably main moment. Prashant Prashant Thakker Thakker Global business head – microfinance Global business head – microfinance Standard Chartered Bank Standard Chartered Bank

The Theproblem problemofof ‘unfair’ ‘unfair’ competition competition

increasingly pressing regulatory question creation a level playing field AnAn increasingly pressing regulatory question is is thethe creation of of a level playing field betweenMFIs MFIsand andcommercial commercialbanks banksto todeal dealwith withthetheproblem problemof of“unfair” “unfair” between competition. Many respondents that poor MFI regulation was putting them competition. Many respondents feltfelt that poor MFI regulation was putting them at at a a disadvantage vis-à-vis these new entrants, example range products they disadvantage vis-à-vis these new entrants, forfor example in in thethe range of of products they could offer and their access funding, and even their ability move into new could offer and in in their access to to funding, and even their ability to to move into new areaslike likemobile mobilebanking. banking.Godwin GodwinKihuguru, Kihuguru,microfinance microfinancespecialist specialistin inUganda, Uganda, areas saidthat thatregulators regulatorswere were“finding “findingit itdifficult difficultto tokeep keeppace pacewith withadvances advancesin in said microfinanceservice servicedelivery”. delivery”. In Insome somecountries countriesthere thereis isa areverse reverseproblem: problem: microfinance regulators over-protecting microfinance against new competition, and causing regulators over-protecting thethe microfinance against new competition, and causing it it stultify. to to stultify. different sort regulatory risk was raised some respondents: absence AA different sort of of regulatory risk was raised byby some respondents: thethe absence of of good consumer protection legislation many markets.This This allowing growth good consumer protection legislation in in many markets. is is allowing thethe growth overindebtedness and increasing risk reputation damage microfinance of of overindebtedness and increasing thethe risk of of reputation damage to to thethe microfinance industry.The The growing number loan defaults also exposing inadequacy industry. growing number of of loan defaults is is also exposing thethe inadequacy of of many legalsystems systemsin inthethearea areaof ofloan loanrecovery recovery andliquidation. liquidation.A Amicrofinance microfinance many legal and practitioner Côte d'Ivoire saidthat thatin in country “apartfrom from calling practitioner in inthethe Côte d'Ivoire said herhercountry “apart calling in in thethe bailiffs, there law that obliges borrowers repay their loans”. bailiffs, there is is nono law that obliges borrowers to to repay their loans”.

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C S F I / New York CSFI However However thethe patchiness patchiness of of regulatory regulatory risk risk was was highlighted highlighted byby a number a number of of dissenting dissenting views which gave a more positive picture. MFI respondent from Peru said that views which gave a more positive picture.AnAn MFI respondent from Peru said that regulation regulationthere therewas wasencouraging encouragingbetter bettercontrols controlsand andrisk riskmanagement, management,and andothers others said that regulators were increasingly professional and constructive. said that regulators were increasingly professional and constructive.

7.7.Management Managementquality quality(4) (4) CONCERN about quality management MFIs eased a bit, still CONCERN about thethe quality of of management in in MFIs hashas eased a bit, butbut is is still in in TopTen. Ten.It Itwas wasa aleading leadingproblem problemforformost mostrespondent respondenttypes, types,though though thetheTop practitioners tended to to rank it less high than outsiders. concern was practitioners tended rank it less high than outsiders.Geographically, Geographically, concern was strongest strongestamong amonginvestor investorcountries countriesin inNorth NorthAmerica Americaand andWestern WesternEurope, Europe,and and lowestamong amongpractitioner practitionercountries countries(Latin (LatinAmerica Americaplaced placedit itNo. No.18)18)except exceptforfor lowest Africa where it ranked No. Africa where it ranked No. 4. 4.

Still Stilltoo toomany many ‘will-do-good’ ‘will-do-good’ people peopleinin microfinance microfinance

earliersurveys, surveys,thethefocus focusremains remainsononthethelack lackof ofprofessionalism professionalismand and AsAsin inearlier technical expertise MFIs, leading poor internal controls, ineffective strategies, technical expertise in in MFIs, leading to to poor internal controls, ineffective strategies, andpoor poormanagement managementof ofincreasingly increasinglyimportant importantareas areassuch suchas asrisk, risk,product product and developmentand andtechnology. technology.AsAsone onerespondent respondentsaid: said:“There “Therearearestill stilltootoomany many development ‘will-do-good’people peoplewith withnonoreal realmanagement managementskills”. skills”.Essma EssmaBen BenHamida, Hamida,co-co‘will-do-good’ founder and executive director Enda Inter-Arabe Tunisia, said there was lack founder and executive director of of Enda Inter-Arabe in in Tunisia, said there was “a“a lack local skills working MFIs, particularly senior levels with experience of of local skills forfor working in in MFIs, particularly at at senior levels with experience of of financeand andbanking bankingto toensure ensurestrong strongmanagement managementand andsuccession successionto tothetheolder older finance generation”. generation”. African market, where managementcapacity capacity seen most stretched, In Inthethe African market, where management is is seen to to bebe most stretched, a a respondentfrom fromGhana Ghanasaid saidthat that“the “thequality qualityof ofgovernance governanceand andmanagement management respondent remains a key risk majority microfinance institutions Africa.The The failure remains a key risk forfor thethe majority of of microfinance institutions in in Africa. failure several deposit-taking institutions Nigeria and Cameroon have exemplified this of of several deposit-taking institutions in in Nigeria and Cameroon have exemplified this pattern.Regulators Regulators doing enough hold managers accountable, especially pattern. areare notnot doing enough to to hold managers accountable, especially insider lending.This This could damage credibility microfinance institutions forfor insider lending. could damage thethe credibility of of microfinance institutions among depositors”. among depositors”.

Growing Growingpains pains ForFor many many respondents, respondents, thethe risks risks facing facing microfinance microfinance could could bebe summed summed upup in in one one word: word: growth.The The hectic pace which microfinance grown over recent years is arguably growth. hectic pace at at which microfinance hashas grown over recent years is arguably thethe cause of of many of of thethe difficulties it now faces: anan overindebted clientele, stressed cause many difficulties it now faces: overindebted clientele, stressed management and back office, loss of of sense of of mission, and anan increasingly uneven management and back office, loss sense mission, and increasingly uneven distribution of of resources within thethe industry. one respondent said: “Managing distribution resources within industry. AsAs one respondent said: “Managing growth hashas proven to to bebe a risk area. AtAt one end, you have institutions in in specific country growth proven a risk area. one end, you have institutions specific country contexts that areare growing in in anan unsustainable fashion and willwill overheat. AtAt thethe other contexts that growing unsustainable fashion and overheat. other end, you have institutions in in other country contexts where growth hashas been very slow end, you have institutions other country contexts where growth been very slow relative to to thethe business opportunity and thethe development need.” relative business opportunity and development need.”

But Buta agrowing growingconcern concernis isthat thatas asbusiness businessbecomes becomesmore moredifficult difficultand andthetheMFIs MFIs themselvesbecome becomemore morecomplex, complex,management managementwill willincreasingly increasinglyfailfailto tocutcutthethe themselves mustard. respondent large mustard.A A respondentfrom fromone oneof ofthethe largeinternational internationalinvestor investornetworks networkssaid said thatgood goodmanagement management“is“isgoing goingto tobecome becomemuch muchmore moreimportant. important. MFIs MFIsmust must that jugglea significantly a significantly largernumber numberof oftasks tasksand andexpectations expectationsas ascompared comparedto tothethe juggle larger past.This This will require a much higher level management and leadership potential.” past. will require a much higher level of of management and leadership potential.” consequence theserising rising demands that skills, already shortsupply, supply,will will A Aconsequence of of these demands is isthat skills, already in inshort becomeharder harderto tofind findand andmore moreexpensive. expensive.A AUSUSrespondent respondentexpected expectedto toseesee“a“a become


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C S F I / New York CSFI dramatic dramatic increase increase in competition in competition for good for good quality quality people, people, potentially potentially leading leading to to increased staffstaff acquisition costs”. Linked to this is the expressed by Eric increased acquisition costs”. Linked to this is fear, the fear, expressed by Eric Duflos, senior microfinance specialist at CGAP in France, that that “many institutions Duflos, senior microfinance specialist at CGAP in France, “many institutions not have the capacity internally to deliver the growth promised will will not have the capacity internally to deliver the growth ratesrates theythey havehave promised to their boards and their investors, and thus will will fail”.fail”. to their boards and their investors, and thus credit reputation growing, be needed in risk WithWith credit and and reputation risk risk bothboth growing, skillsskills will will also also be needed in risk management, particularly in lending, public relations, a relatively management, particularly in lending, and and public relations, a relatively new new area area for for MFIs. A risk manager at one of large the large microfinance investment companies MFIs. A risk manager at one of the microfinance investment companies said said “in stressful situations, we have management incapable of addressing that that “in stressful situations, we have seenseen management incapable of addressing problems”. problems”. However respondents things improving on management the management However somesome respondents felt felt that that things werewere improving on the which be why has fallen notches in rankings. the rankings. As of onethem of them front,front, which maymay be why it hasit fallen a fewa few notches in the As one is an notarea an area where generalisation is possible: is primarily an MFI said,said, this this is not where generalisation is possible: “This“This is primarily an MFI specific - although the economic pressures over-indebtedness in mature specific risk risk - although the economic pressures and and over-indebtedness in mature microfinance markets impose greater pressures”. microfinance markets will will impose muchmuch greater pressures”.

8. 8.Staffing Staffing (14) (14) A wider A wider range range of skills of skills is is now now required required

STAFFING STAFFING risksrisks are on are the on rise the rise againagain afterafter falling falling in earlier in earlier surveys, surveys, perhaps perhaps because the crisis-related Banana which displaced in 2009 the 2009 survey because the crisis-related Banana SkinsSkins which displaced themthem in the survey receded. risk was ranked by practitioners, regulators, American havehave receded. ThisThis risk was ranked highhigh by practitioners, regulators, LatinLatin American and African respondents, suggesting is more a concern to those closely involved and African respondents, suggesting it is it more of a of concern to those closely involved inmanagement the management of MFIs to investors and analysts. in the of MFIs than than to investors and analysts. Perceptions of this varied. capability a recurring theme, several Perceptions of this risk risk varied. StaffStaff capability was was a recurring theme, withwith several respondents bemoaning the scarcity of good people withwith expertise in microfinance. respondents bemoaning the scarcity of good people expertise in microfinance. of “talent” “competent manpower” up frequently. Diego The The lack lack of “talent” and and “competent manpower” camecame up frequently. Diego Villalobos, an analyst ACCION in US, the US, “finding the right people Villalobos, an analyst withwith ACCION in the said said that that “finding the right people to to promote the growth sustainability an MFI is very difficult. consultants promote the growth and and sustainability of anofMFI is very difficult. FromFrom consultants to managers, a very source to choose from.” As microfinance to managers, MFIsMFIs havehave a very smallsmall source to choose from.” As microfinance becomes commercialised, is also a growing to balance different becomes moremore commercialised, therethere is also a growing needneed to balance different of skills: social and business. typestypes of skills: social and business. growing of technology is creating demands. On On the the skillsskills front,front, the the growing role role of technology is creating new new demands. Mayuni Ozaki, a finance specialist at the Asian Development in the Mayuni Ozaki, a finance specialist at the Asian Development BankBank in the Philippines, technology-based branchless or mobile banking expand Philippines, said said that that technology-based branchless or mobile banking will will expand rapidly the coming years, however “many MFIs, regulators, and policy-makers rapidly overover the coming years, however “many MFIs, regulators, and policy-makers the sufficient and capacity”. don’tdon’t havehave the sufficient skillsskills and capacity”. others the problem retention. A respondent at National the National For For others the problem was was staffstaff retention. A respondent at the BankBank of of Rwanda pointed to low as reason the reason cannot recruit retain qualified Rwanda pointed to low pay pay as the MFIsMFIs cannot recruit and and retain qualified Poaching is another problem created by rising competition. Another Another staff.staff. Poaching is another problem created by rising competition. respondent “In Afghanistan joba as a loan officer to being respondent said:said: “In Afghanistan theythey jokejoke that that a joba as loan officer leadsleads to being a branch manager a bank job then and then to Canada. is extreme, but not a branch manager leadsleads to a to bank job and to Canada. ThisThis is extreme, but not by much”. by much”. Other which respondents associated staffing fraud, credit Other risksrisks which respondents associated withwith staffing werewere fraud, credit risk risk (undertrained officers not understanding borrowers), regulation as ill(undertrained loanloan officers not understanding theirtheir borrowers), and and regulation as illequipped grapple increasingly complex microfinance legislation. equipped staffstaff grapple withwith increasingly complex microfinance legislation.

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C S F I / New York CSFI 9.9.Mission Missiondrift drift(19) (19) THE RISK of of mission drift is is upup sharply, in in line with other risks in in this area such as as THE RISK mission drift sharply, line with other risks this area such Reputation. It Itranked high in in most sectors Africa where it it was No. 13,13, and Reputation. ranked high most sectorsexcept except Africa where was No. and Central and Eastern Europe where it came down at at No. 19.19. Central and Eastern Europe where it came down No. Theissue issuein inthis thisrisk riskis isthethegrowing growingconflict conflictbetween betweenthethesocial socialand andcommercial commercial The goals microfinance, and risk MFIs if they switch their focus from first goals of of microfinance, and thethe risk to to MFIs if they switch their focus from thethe first to to second some from a double a single “bottom line”. But many thethe second or,or, as as some putput it, it, from a double to to a single “bottom line”. But forfor many people, mission drift about more than focusing profit rather than poverty.It It people, mission drift is is about more than focusing onon profit rather than poverty. is is also structural, epitomised shift from “good” microlending “bad” consumer also structural, epitomised byby thethe shift from “good” microlending to to “bad” consumer finance, finance,and andthethehuge hugegrowth growthin inpersonal personalindebtedness indebtednessthat thatthis thisis isseen seento tohave have caused.The The“rapid “rapid rise consumer finance, whether disguised housing loans, caused. rise of of consumer finance, whether disguised as as housing loans, education loans, loans whatever ‘funder-fashionable’ purpose”, pulling education loans, or or loans forfor whatever ‘funder-fashionable’ purpose”, is is pulling thethe sector from itsits purpose of of poverty alleviation and financial inclusion, according to to a a sector from purpose poverty alleviation and financial inclusion, according microfinance advisor Netherlands. microfinance advisor in in thethe Netherlands. further shift from rural poor already well-served urban masses. Jeffrey AA further shift is is from thethe rural poor to to thethe already well-served urban masses. Jeffrey Ashe,director directorof ofcommunity communityfinance financeat atOxfam OxfamAmerica, America,said saidthat that“the “themajor major Ashe, challengefaced facedbyby commercialmicrofinance microfinanceis…the is…theongoing ongoingissue issueof ofleaving leavingoutout challenge commercial approximately cent market, essentially rural poor, and developing approximately 8080 perper cent of of thethe market, essentially thethe rural poor, and developing effective tools mobilising savings”. effective tools forfor mobilising savings”.

Mission Missiondrift driftisis a arisk riskthat thatneeds needs totobe beactively actively managed managed

Butthethenotion notionof ofmission missiondrift driftbegs begsthethe question:from fromwhat whatmission missionis isthethesector sector But question: drifting?AsAsone onerespondent respondentputputit, it,“One “Oneperson’s person’s‘mission ‘missiondrift’ drift’is isanother’s another’s drifting? ‘productline lineextension’. extension’.The The key ensure that valuesareare reflected strategy, ‘product key is isto toensure that values reflected in in strategy, operations, management and governance”. operations, management and governance”. The consequences mission drift already The consequences of of mission drift areare already plain to to see: see: political political backlash, backlash, plain disillusionment among among supporters, supporters, severe severe disillusionment reputationdamage damage– –and andconfusion confusionamong among reputation microfinance’s investors. investors. Paul Paul DiLeo, DiLeo, “The “Thebigger; bigger;thethemore morecommercommer- microfinance’s presidentof ofGrassroots GrassrootsCapital CapitalManagement, Management, president cial; cial; thethe more more mission mission drift”. drift”. wondered whether whether thethe purpose purpose of of wondered Microfinance Microfinance policy policy adviser adviser microfinancewas was“social “socialimpact impactand andsocial social microfinance The The Netherlands Netherlands change,or orfinancial financialreturn returnto toinvestors? investors?The The change, two aren’t mutually exclusive, and some may two aren’t mutually exclusive, and some may prioritise one over other. But practitioners need clear where their priority prioritise one over thethe other. But practitioners need to to bebe clear where their priority lies”. lies”.

AAsimple simpleguide guidetoto mission missiondrift drift

Many respondents that risk mission drift required active management, like Many respondents feltfelt that thethe risk of of mission drift required active management, like any other risk.A A respondent from a major Western European microfinance investor any other risk. respondent from a major Western European microfinance investor thoughtthat thatthethe testforforMFIs MFIsnow nowlaylay “socialperformance performancemanagement managementrather rather thought test in in“social than institutional and financial sustainability”. than in in institutional and financial sustainability”. But,like likemany manyBanana BananaSkins, Skins,this thisis isone onewhere wheregeneralisation generalisationshould shouldbeberesisted. resisted. But, Theamount amountof ofmission missiondrift driftvaries variesgreatly greatly fromcountry country country.A Arespondent respondent The from to tocountry. from one largest Mexican MFIs said that cases mission drift were “isolated; from one of of thethe largest Mexican MFIs said that cases of of mission drift were “isolated; moreoverwewehave havea alarge largenumber numberof ofintermediaries intermediariesthat thatmaintain maintaintheir theiroriginal original moreover mission”. mission”.


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C S F I / New York CSFI 10. Unrealisable expectations (18) This Banana Skin is sharply up on last time, like the related risks of mission drift and reputation, reflecting a fundamental theme of this survey: doubts about microfinance’s effectiveness. But there was no clear pattern to the responses: Western Europeans ranked it No. 4, Africans No. 19.

Microfinance is no magic wand

This Banana Skin isn’t about microfinance performing poorly. It is about its failure to meet expectations – both social and financial. So the risk lies in the perceptions that people have of microfinance, and the gap between these and reality: if people conclude that microfinance is not meeting expectations, it is judged a failure. Several respondents expressed frustration. “Yes, MFIs can't end world poverty; they’re a piece of the puzzle only!” wrote one US respondent, and a practitioner in Tanzania complained: “People's expectations of MFIs are normally beyond their ability to deliver and the situation will persist until such a time when people's perspectives on MFIs become more realistic”. But for others, the “myth” of microfinance as a panacea for poverty alleviation is being exposed. It is, as this report noted in 2009, “an industry surrounded by hype”, with a permanent risk of disappointment, of expectations remaining unfulfilled. “Given all the growing momentum, interest, and attention to the topic of financial inclusion”, one CGAP analyst wrote this year, “will microfinance live up to the hype? We need to temper expectations, to be clear about what microfinance is and is not, and continue to explore new ways of delivering financial services to poor people”. Many respondents said it was up to the industry to communicate its message better to ensure that expectations did not become excessive. Nigel Biggar, senior advisor at the Grameen Foundation in the US, said that “MFIs need to be able to defend their work not only from a financial perspective but, critically, from a social perspective. To do this, social performance management is the key: understanding and documenting the extent to which MFIs are reaching their target population - the poor, the very poor, the unbanked, marginalised, etc. and documenting how organisations manage their social performance to enable welfare gains for their target populations. This would not only deflect criticism, it would strengthen how microfinance delivers on its social objectives of poverty alleviation”.

11. Managing technology (15) THE PROBLEM of getting technology right is moving up the risk scale. MFIs face tough decisions on the management of their IT systems and their delivery strategies in the near future. Do they have the know-how and the resources to get them right? Some of our respondents thought these were among the most difficult issues facing MFIs today: failure could put an MFI out of business. A microfinance analyst said it was a case of “Invest in technology or cease to exist in five years”. Concerns about this Banana Skin were strongest in Africa and the CEE. Respondents identified several areas where MFIs needed to do better on technology. One was internal systems, given the need to reduce costs and tighten up management controls, for example in the area of credit. An Indian respondent said that “a significant ramp up is required”.

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C S F I / New York CSFI Another was business strategy at a time when technology is bringing dramatic new forms of mobile banking which could be crucial to an MFI’s ability to deliver the service and remain competitive against commercial rivals. A US microfinance consultant said there was a risk that the microfinance industry “won't position itself aggressively enough to take advantage of branchless banking services, and will be overtaken by mobile network operators and large banks who figure out how to get into rural areas and go down-scale”. A lack of IT skills was another concern. Many respondents feared that MFIs would be pressed to manage technology successfully, given the scarcity and cost of experts, and the high level of investment needed. A US policy adviser said that “all eyes are on mobile banking, but it has only been proven at scale in a very few institutions. The institutional capacity of the financial institution and the mobile phone provider and the quality of the partnership will be critical to more success stories”.

12. Profitability (12) ALTHOUGH concern about profitability has remained level, perception of this risk is shifting. It used to be that profits were seen as a good thing, an indication of the health and success of the microfinance industry. Increasingly, they are seen as bad, a symptom of the unwelcome commercialisation of the sector. The risk is therefore switching from finance to reputation. Beth Porter, policy advisor to UNCDF, said it is “important for the industry to be profitable - and to be seen as a good and sound investment. But the returns to investors in IPOs should return to earth. Otherwise the backlash from politicians and the public may lead regulators to put in place draconian measures, and investors to move their support from innovation that is helping poorer and more vulnerable populations to less controversial investments”. An Indian respondent saw the risk to the industry lying in its “inability to address the issue of profits and profiteering”.

Are profits a good or a bad thing?

Nonetheless, there is concern about the pressures on MFI profitability, and about the risks these pose to the sustainability of the industry. Sebastien Duquet, a director of Planis, a microfinance investor, said that profitability was shrinking on all continents. “Competition is finally playing its part. But it is weakening certain players, particularly the small ones.” Some respondents feared that, by squeezing profitability, competition would spur MFIs to take greater risks, for example with their lending. A further threat to profitability comes from political interference, in particular rate capping. Some respondents feared that MFIs might even have to reduce their profitability to protect themselves from political and media attacks. A Mexican respondent said that profits should come from “administrative efficiencies, and not higher interest rates”. But many respondents also emphasised that profits were healthy: it was a matter of how they were shared out between many stakeholders, not just investors. One US investor believed that “the commercial sector, funded in domestic markets, will lead an expansion of the industry with more stable institutions, with a wider range of services, and with less political interference.”


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C S F I / New York CSFI 13. 13. Back Backoffice office(22) (22) THE ABILITY of of MFIs to to keep effective control of of their operations as as they evolve THE ABILITY MFIs keep effective control their operations they evolve becoming a rising risk issue.Many Many respondents said that MFIs were growing is is becoming a rising risk issue. respondents said that MFIs were growing at at a a faster pace than their back office systems could handle, and this was exposing them faster pace than their back office systems could handle, and this was exposing them creditrisk riskand andother otherdangers. dangers.A Arespondent respondentfrom fromPeru Perusaid saidthat thatthethetwo twomost most to tocredit urgentrisk riskissues issuesfacing facingMFIs MFIswere were“the “theabsence absenceof ofinternal internalcontrols controlsto toensure ensure urgent quality growthportfolios, portfolios,and andthethe risksassociated associatedwith withthethelack lackof oftechnology technology quality growth risks forfor monitoring multiple credits…” monitoring multiple credits…” But concern about this risk varied greatly: it was high Africa and East But concern about this risk varied greatly: it was high in in Africa and thethe FarFar East butbut lowin inthetheCEE CEEand andthetheMiddle MiddleEast. East.It Itwas wasalso alsohigh highamong amongregulators regulatorsbutbutlow low low amongpractitioners. practitioners.Philippe PhilippeNsenga, Nsenga,inspector inspectorof ofmicrofinance microfinanceat atthetheNational National among Bankof ofRwanda, Rwanda,said saidthat thatMFIs MFIssuffered sufferedfrom fromoperational operationalrisk riskbecause becauseof of“ever “ever Bank growing operations and products versus poor management information systems”. growing operations and products versus poor management information systems”. Respondentssaw sawa anumber numberof ofreasons reasonsforforthetherise risein inthis thisrisk: risk:thethepressures pressuresof of Respondents competition,thetheneed needto toexpand expandthethebusiness businessto tomeet meetinvestor investorexpectations, expectations,poor poor competition, strategic planning, and a culture which treated back office boring. High cost strategic planning, and a culture which treated thethe back office as as boring. High cost was also a deterrent adequate investment control systems. was also a deterrent to to adequate investment in in control systems. However,thetherisks riskswere wereclear. clear.Sanjay SanjaySinha, Sinha,managing managingdirector directorof ofMicro-Credit Micro-Credit However, RatingsInternational Internationalin inIndia, India,saw sawexcessive excessivegrowth growth“leading “leadingto toa aloosening looseningof of Ratings control systems which results portfolio delinquency and/or customer abuse and control systems which results in in portfolio delinquency and/or customer abuse and a a rising level loan losses…” rising level of of loan losses…”

Weak Weakinternal internal controls controlsare are hurting hurtingMFIs MFIs

Respondents said that badly managed MFIs were losing track their borrowers and Respondents said that badly managed MFIs were losing track of of their borrowers and status their loans.This This was exposing them additional risks multiple thethe status of of their loans. was exposing them to to thethe additional risks of of multiple borrowing,delinquency delinquency andfraud. fraud.One OneEuropean Europeaninvestor investorsaid saidthat that“in“inworkouts, workouts, borrowing, and lenders often realise that portfolio data inaccurate”. Poor management information lenders often realise that portfolio data is is inaccurate”. Poor management information systems lead ill-informed decisions,and andcontribute contribute another risks:poor poor systems lead to toill-informed decisions, to toanother setsetof of risks: accountability and transparency. accountability and transparency. But some respondents saw improvements this area, under pressure from investors But some respondents saw improvements in in this area, under pressure from investors and regulators who concerned about mounting loan losses.A A respondent from and regulators who areare concerned about mounting loan losses. respondent from Tanzaniasaid saidthat thatMFIs MFIs“are “aremoving movingmore moreand andmore moreinto intoacquiring acquiringaffordable affordable Tanzania advancedtechnologies, technologies,and andbuilding buildinginternal internalcapacities capacitiesto tohandle handleback backoffice office advanced operations”, and andananEgyptian Egyptianinvestor investorsaid saidthat that“best “bestpractices practicesarearenow nowwidely widely operations”, shared and applied”. shared and applied”.

14. 14.Transparency Transparency(16) (16) TRANSPARENCY forfor MFIs they dodonotnot disclose enough information TRANSPARENCYis isa risk a risk MFIsif if they disclose enough information abouttheir theirbusiness businessand andservices servicesto topreserve preservethetheconfidence confidenceof ofinvestors investorsand and about customers.Although AlthoughMFIs MFIsarearedoing doing betterononthis thisfront frontthrough throughfuller fuller reporting, customers. better reporting, they may still falling behind rapid growth investor and media interest they may still bebe falling behind thethe rapid growth of of investor and media interest in in thethe business. This Banana Skin was a particular concern regulators who business. This Banana Skin was a particular concern to to regulators who putput it it at at thethe their list. toptop of of their list. respondent from MFI rating agency said that risk was rising “because more and AA respondent from anan MFI rating agency said that risk was rising “because more and moretransparency transparencyis isexpected expectedwith withthetheincreasing increasingattention attentionof ofthetheinternational international more media.” media.”

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C S F I / New York CSFI Although Although many many countries countries now now require require audited audited accounts, accounts, there there is still is still scepticism scepticism about thethe quality of of thethe numbers, particularly thethe reporting of bad loans. A ratings about quality numbers, particularly reporting of bad loans. A ratings analyst in the Philippines saidsaid thatthat “although there areare MFIs who stillstill report a one analyst in the Philippines “although there MFIs who report a one digit PAR, if we carefully examine their portfolio andand how they report PAR, wewe cancan digit PAR, if we carefully examine their portfolio how they report PAR, seesee thatthat delinquency is still major problem among MFIs”. delinquency is still major problem among MFIs”. greater may social where MFIs longer their ButBut thethe greater riskrisk may lie lie on on thethe social sideside where MFIs cancan no no longer taketake their charmed status granted. AnAn investor Netherlands charmed status forfor granted. investor in in TheThe Netherlands saidsaid thatthat “the“the microfinance industry increasingly have prove effect activities. microfinance industry willwill increasingly have to to prove thethe effect of of its its activities. Moretransparency transparencywillwillbe beneeded neededtowards towardsMFI MFIclients clients(about (aboutpricing pricingandand More conditions), towards investors (about potential returns) towards outside conditions), towards investors (about potential returns) andand towards thethe outside world (about image of exploiting people)”.This This calls communication skills world (about thethe image of exploiting people)”. calls forfor communication skills to be added to an MFI’s expertise. to be added to an MFI’s expertise. Khaled Al-Gazawi, chief executive officer of The First Microfinance Foundation Khaled Al-Gazawi, chief executive officer of The First Microfinance Foundation in in Egypt, “with more MFIs being created every day, with more clients Egypt, saidsaid thatthat “with more MFIs being created every day, andand with more clients being served, transparency with clients interest rates hidden costs being served, transparency with clients on on interest rates andand hidden costs willwill be be a a challenge.Investors Investorsarearein inmicrofinance microfinanceforforprofit, profit,andandthethesocial socialgoals goalsof of challenge. microfinance might come Regulatory frameworks should microfinance might notnot come on on thethe toptop of of thethe list.list. Regulatory frameworks should to balance a double bottom guarantee client knows basis aimaim to balance a double bottom lineline andand guarantee thatthat thethe client knows thethe basis on on which he/she borrow”. which he/she willwill borrow”.

15. 15.Strategy Strategy(-)(-) of MFIs to develop andand implement a successful business strategy is is of MFIs to develop implement a successful business strategy THE ABILITY THE ABILITY becoming more urgent in in these difficult times. ForFor thethe firstfirst time thisthis year wewe becoming more urgent these difficult times. time year included Strategy among ourour Banana Skins; it received a middling ranking, butbut waswas included Strategy among Banana Skins; it received a middling ranking, alsoalso seen to to be be oneone of of thethe faster-rising risks at No. 6 because of of thethe bigbig strategic seen faster-rising risks at No. 6 because strategic issues facing MFIs. issues facing MFIs. A priori, MFIs need to have thethe skills to manage strategy. Some of our respondents A priori, MFIs need to have skills to manage strategy. Some of our respondents feltfelt these were absent from thethe governance structure of of many MFIs. MFI these were absent from governance structure many MFIs.AnAn MFI director in in East Africa saidsaid thatthat successful strategy “will depend on on quality director East Africa successful strategy “will depend quality management, which is not abundantly available”. management, which is not abundantly available”. Respondents Respondentsidentified identifiedseveral severalaspects aspectsto tostrategic strategicrisk: risk:scaling, scaling,profitability, profitability, funding, stakeholder confidence etc.. thethe most difficult willwill be be thethe need to to funding, stakeholder confidence etc..ButBut most difficult need balance business andand social objectives so so as as to deliver sustainability as as well as as thethe balance business social objectives to deliver sustainability well microfinance service. (See Box) microfinance service. (See Box)

MFIs MFIs with with weak weak strategies strategies could could fail fail

TheThe consequences of of poor strategic planning could be be severe. respondents consequences poor strategic planning could severe.Some Some respondents expected thatthat MFIs without effective strategies would failfail or or be be taken over. expected MFIs without effective strategies would taken over.AnAn Egyptian respondent saidsaid thatthat “badly managed MFIs willwill feelfeel more challenged, andand Egyptian respondent “badly managed MFIs more challenged, mergers might be be more andand more common in the market.” mergers might more more common in the market.” Julie Abrams, a consultant at Microfinance Analytics in the “this next Julie Abrams, a consultant at Microfinance Analytics in the US,US, saidsaid thatthat “this next phase could well become thethe years of the microfinance minefields. MFIs willwill have to to phase could well become years of the microfinance minefields. MFIs have impeccably laser-focused strategically sound to thrive. There be be impeccably run,run, laser-focused andand strategically sound to thrive. There willwill be be no no room sloth sloppiness operations, governance, management, room forfor sloth or or sloppiness in in operations, governance, riskrisk management, andand customer focus; being proactive in all of these willwill be be key. MFIs cancan no no longer grow customer focus; being proactive in all of these key. MFIs longer grow themselves intointo sustainability andand profits, as some have in the past”. themselves sustainability profits, as some have in the past”.


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C S F I / New York CSFI Is the business model broken? The air of crisis surrounding microfinance raises the question whether the business model is in need of a makeover. Far from depicting a thriving industry motivated by worthy social goals, one set of respondents to this survey painted microfinance as driven by greed, sustained by subsidised funds or profit-hungry investors, failing its clients by deserting the most needy or driving them into debt, with only a veneer of ethics and philanthropy. In a comment typical of very many in this vein, one of them observed: “Microfinance is slowly but surely losing what made it special and successful”. Another set of respondents portrayed MFIs as stuck in the past, lacking the resources to scale up or improve the service, self-pitying, and probably doomed to be wiped out by the first set. A microfinance analyst said that “MFIs, particularly small, local institutions, have not delivered scale in most countries and are not likely to do so alone. As new providers and delivery channels move in, what will happen to these organisations?” A Mexican respondent said that “the model is becoming eroded and many institutions are not doing anything to adopt a different one.” Both sets may be an exaggeration. But there is no mistaking the unease that exists about the traditional microfinance model at this possibly crucial stage in its evolution. Many of our respondents felt that microfinance needed to re-engineer itself to take account of new realities: the demands created by commercial investment, competition from powerful new entrants, the uncertain future for small MFIs, particularly those in rural areas, and the need, despite all these things, to keep sight of philanthropic objectives. Philip Brown, managing director of microfinance risk at Citi, said that “strategy and business models have constantly to evolve to address changing client needs and market parameters. Learning from the past and recent history demonstrates that failure to adapt can lead to institutional stress and demise”.

A re-think on group lending Some respondents even wondered whether there was any future for the traditional “Grameen group lending model”. A respondent from Peru said it was time to question the notion that "the group approach is the only way to reach microentrepreneurs lower down the pyramid. There are other ways of getting credits into rural areas at reasonable costs”. Mahesh Mani, vice-president at Citibank in India, said there was an increasing need “to improve and innovate the product offering and re-look at the classical ‘Grameen model’ and make it more flexible and customised with respect to local conditions and the needs of the target market …This is because the so-called biggest strength of the ‘joint liability group’ model can also become its biggest weakness”. Many respondents felt that the industry was coming to the end of a period of rapid and easy growth, and would have to restructure to survive: consolidation among small MFIs, specialisation among larger ones, with a focus on quality rather than quantity, on meeting demand rather than just supplying what they could. Alex Pollock, director of microfinance at UNRWA, said: “The ability to continue to grow and maintain profitability is limited by competition and national markets, and MFIs must recognise that at some point their operations will reach an optimal level, at which point they will need to concentrate more clearly on maintaining their edge through customer service and improvements in their business processes that they may have neglected because of the openness of the market”.

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C S F I / New York CSFI 16.16.Liquidity Liquidity (2)(2) LIQUIDITY is noislonger the concern it was in 2009 at the of the LIQUIDITY no longer the concern it was in 2009 at height the height of financial the financial crisis. downward change in position reflects the return to more normal crisis. The The sharpsharp downward change in position reflects the return to more normal conditions in global finance. conditions in global finance. Nonetheless, the availability of liquidity clearly differs market Nonetheless, the availability of liquidity clearly differs veryvery muchmuch fromfrom one one market to another, among different of MFI. Many respondents liquidity to another, and and among different typestypes of MFI. Many respondents saw saw liquidity flooding the more dynamic emerging markets as lending banks re-opened flooding into into the more dynamic emerging markets as lending banks re-opened lineslines closed during the crisis. An Egyptian respondent “liquidity theythey had had closed during the crisis. An Egyptian respondent said said that that “liquidity for for should notanbeissue an issue as there are more sources of cash ever”. goodgood MFIsMFIs should not be as there are more sources of cash now now thanthan ever”.

A sharp A sharp drop drop in liquidity in liquidity risk risk

though welcome, it could contain the seeds of new But But though this this was was welcome, it could also also contain the seeds of new risksrisks suchsuch as a as a resumption of poorly managed growth. Wilson Castro, director of small business resumption of poorly managed growth. Wilson Castro, director of small business lending at Banco Familiar in Paraguay, levels of global liquidity lending at Banco Familiar in Paraguay, said said that that “high“high levels of global liquidity are are moving towards emerging markets, especially where are many MFIs, which moving towards emerging markets, especially where therethere are many MFIs, which increases of liquidity sharpens of overindebtedness”. increases the the levellevel of liquidity and and sharpens the the risk risk of overindebtedness”. A A respondent onethe of state the state development banks in Mexico respondent fromfrom one of development banks in Mexico said said that that MFIsMFIs therethere “suffer excess liquidity andchallenge the challenge to increase lending, but carefully”. “suffer fromfrom excess liquidity and the is to isincrease lending, but carefully”. conditions in other markets be very different. Roshaneh Zafar, managing But But conditions in other markets can can be very different. Roshaneh Zafar, managing director of Kashf the Kashf Foundation in Pakistan, a combination a strained director of the Foundation in Pakistan, said said that that a combination of a of strained environment caution among lending banks squeezing MFIs. fiscalfiscal environment and and caution among lending banks was was squeezing MFIs. She She added: “Given the increased credit constraints on liquidity, added: “Given the increased credit risk risk and and constraints on liquidity, MFIsMFIs will will continue to have difficulties in being operationally financially self-sustainable.” continue to have difficulties in being operationally and and financially self-sustainable.” Many respondents in Africa and Asia reported liquidity problems. Many respondents in Africa and Asia reported liquidity problems. markets are also discriminating in favour of more the more robust MFIs. The The markets are also discriminating in favour of the robust MFIs. L.B.L.B. Prakash, a practitioner Development Capital in India, banks Prakash, a practitioner withwith Development Capital in India, said said that that mostmost banks werewere playing it safe by lending to large MFIs. is ironical the microfinance playing it safe by lending onlyonly to large MFIs. “It is“Itironical that that the microfinance sector started off small for small loans, but does not small get small borrowings”. sector started off for loans, but does not get borrowings”. MFIsMFIs withwith access to local deposits are also better placed, though is concern in some access to local deposits are also better placed, though therethere is concern in some areasareas the economic overindebtedness deplete savings. Fodie, that that the economic crisiscrisis and and overindebtedness will will deplete savings. KebeKebe Fodie, director of Union Mecap in Burkina of savings is stagnating director of Union Mecap in Burkina Faso,Faso, said said that that “the “the levellevel of savings is stagnating or decreasing”. or decreasing”. if conditions are improving, learnt lessons the fickleness But But eveneven if conditions are improving, MFIsMFIs havehave learnt lessons aboutabout the fickleness of liquidity. An Indian respondent “in case the case a repayment of liquidity. An Indian respondent said said that that “in the of a ofrepayment crisiscrisis or or regulatory changes, liquidity is high.” regulatory changes, liquidity risk risk is high.”

17.17.Macro-economic Macro-economic trends trends (3)(3) CONCERN aboutabout the impact of the economy on microfinance has has fallen CONCERN the impact of global the global economy on microfinance fallen sharply the resumption of growth in major the major nations. However views sharply withwith the resumption of growth in the nations. However views differdiffer widely lessons learnt the crisis. widely overover whatwhat lessons havehave beenbeen learnt fromfrom the crisis. Many respondents stresses of the shown Many respondents felt felt that that the the stresses of the last last 2-3 2-3 yearsyears had had shown that that microfinance cannot escape international shocks. impact in many forms: microfinance cannot escape international shocks. The The impact camecame in many forms: in weaker economic growth, in disruptions to world commodity markets, in lower in weaker economic growth, in disruptions to world commodity markets, in lower remittances, in funding difficulties andrising in rising indebtedness. Hanns Martin Hagen, remittances, in funding difficulties and in indebtedness. Hanns Martin Hagen, financial sector economist at Germany’s development chiefchief financial sector economist at Germany’s KfWKfW development bankbank said:said: “The“The


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C S F I / New York CSFI financial financial crisiscrisis is notis over not over yet. For yet. the Fornext the next one or onetwo or two years, years, a large a large number number of MFIs of MFIs will will havehave to work withwith theirtheir clients to preserve the quality of their portfolios”. to work clients to preserve the quality of their portfolios”. Many respondents gavegave accounts of local impacts, particularly in CEE where Many respondents accounts of local impacts, particularly in CEE where concern on this frontfront was was strongest. in Tajikistan said said that that concern on this strongest.A microlender A microlender in Tajikistan “microfinance is not fromfrom the problems of the world economy, and and “microfinance is immune not immune the problems of overall the overall world economy, Tajikistan in particular is very vulnerable to shocks in Russian the Russian economy Tajikistan in particular is very vulnerable to shocks in the economy as soas so of local is dependent on remittances the remittances of Tajik workers in Russia.” muchmuch of local GDPGDP is dependent on the of Tajik workers in Russia.” A A manager in Syria commented continued recession, we fear the rate manager in Syria commented that that “with“with continued recession, we fear that that the rate of of success of small medium enterprises be negatively affected”. success of small and and medium size size enterprises will will be negatively affected”. Con Con Keating, a specialist on UK the UK credit union movement, “in recessionary, Keating, a specialist on the credit union movement, said said that that “in recessionary, unemployment times, our membership is that credit standing highhigh unemployment times, our membership is that mostmost hurt.hurt. The The credit standing of of our membership is lower, lower.” our membership is lower, muchmuch lower.” concern is that economic microfinance’s a time One One concern is that economic stressstress will will undoundo microfinance’s goodgood workwork at a at time its reputation is under question. A UK-based consultant levelling whenwhen its reputation is under question. A UK-based consultant said said that that “any“any levelling or reduction in microfinance lending within a locality impact market liquidity or reduction in microfinance lending within a locality will will impact market liquidity a further adverse impact purchasing capacity the levels and and be abefurther adverse impact uponupon locallocal purchasing capacity and and the levels of of – and aggravate the credit quality situation”. A respondent US respondent locallocal tradetrade – and thus thus aggravate the credit quality situation”. A US feared “resource limitations a challenging macro environment feared that that “resource limitations and and a challenging macro environment will will lead lead cut down on their expansion plans, in-country and globally.” MFIsMFIs to cuttodown on their expansion plans, in-country and globally.”

MFIs MFIs areare notnot all all immune immune to the to the global global economy economy

a number of respondents a more upbeat lawyer Howard But But a number of respondents tooktook a more upbeat view.view. US US lawyer Howard J. J. Finkelstein microfinance shown it was strong enough to survive Finkelstein said said that that microfinance had had shown that that it was strong enough to survive global shocks.“Did“Did its victims in the microfinance world? global shocks. the the crisiscrisis havehave its victims in the microfinance world? Absolutely. Buta as a whole it claimed fewer victims in microfinance the microfinance sector Absolutely. But as whole it claimed fewer victims in the sector thanthan didthe in commercial the commercial banking sector.” Many respondents commented it didit in banking sector.” Many otherother respondents commented on on the “resilience” of microfinance institutions. A respondent America the “resilience” of microfinance institutions. A respondent fromfrom LatinLatin America said said “in countries Venezuela, inflation above 20 cent, per cent, this not has not that that “in countries like like Venezuela, withwith inflation ratesrates above 20 per this has an impediment to a flourishing microfinance industry”. beenbeen an impediment to a flourishing microfinance industry”.

18.18.Fraud Fraud (20) (20) THETHE OVERALL levellevel of concern aboutabout fraudfraud is little changed fromfrom last time, but but OVERALL of concern is little changed last time, withwith sharply contrasting attitudes. The The regions of the where this this risk risk was was sharply contrasting attitudes. regions of world the world where ranked highest werewere Central and Eastern Europe, and Africa. ranked highest Central and Eastern Europe, and Africa. Some of our felt the was was getting worse because of the stressful Some of respondents our respondents feltrisk the risk getting worse because ofmore the more stressful environment and and declining standards in the industry, aidedaided by the growing environment declining standards in the industry, by the growing sophistication of fraudsters, particularly in the of technology. sophistication of fraudsters, particularly inarea the area of technology. Mounkaila Garba, director of RechercheMounkaila Garba, director of Recherche-

in Niger, said said that that “whatever the level Action in Niger, “whatever the level How How to deal to deal withwith fraud fraud Action

of control, it is itdifficult to avoid this problem. of control, is difficult to avoid this problem.

“Train “Train well,well, pay well, pay well, and punish”. and punish”. People People commit offences understand whowho commit thesethese offences understand

control systems to round get round them”. control systems and and howhow to get them”. African respondent An An EastEast African respondent said said that that “this“this a major of risk and if unchecked couldcould be a be major area area of risk and if unchecked be detrimental to industry the industry in future”. the future”. Several reported a growth couldcould be detrimental to the in the Several MFIsMFIs reported a growth in fictitious accounts as loan officers strove to meet lending targets. Fictitious in fictitious loanloan accounts as loan officers strove to meet lending targets. Fictitious business “failures” by customers toout get of outtheir of their loans. business “failures” werewere also also beingbeing usedused by customers to get loans. MFI manager MFI manager RD Congo RD Congo

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C S F I / New York CSFI AndAnd fraudfraud is not is the not only the only problem. problem. Respondents Respondents mentioned mentioned money money laundering, laundering, terrorterror finance and identity fraudfraud as further rising crime areas. finance and identity as further rising crime areas. But But otherother respondents felt that MFIsMFIs werewere doing better against fraud, by tightening respondents felt that doing better against fraud, by tightening up internal controls, centralising staffstaff records, and and installing stronger systems. An An up internal controls, centralising records, installing stronger systems. Egyptian respondent said said that that this this was was “always a risk, but it be managed Egyptian respondent “always a risk, butshould it should be managed better changing technology and know-how”. A respondent Pakistan better withwith changing technology and know-how”. A respondent fromfrom Pakistan notednoted a staff reference bureau had been setfor upthe forindustry the industry there. that that a staff reference bureau had been set up there.

19.19.Product Product development development (24) (24) ABILITY of MFIs to raise by developing and better products THETHE ABILITY of MFIs to raise theirtheir gamegame by developing new new and better products is becoming moremore of anofissue. The The majority of our respondents felt that, without is becoming an issue. majority of our respondents felt that, without product innovation, somesome MFIsMFIs risked failing in their mission and and beingbeing overtaken product innovation, risked failing in their mission overtaken by more aggressive competitors. by more aggressive competitors.

The The need need to to expand expand beyond beyond credit credit

Stephanie Dolan, principal specialist at ACCION International, Stephanie Dolan, principal specialist at ACCION International, said said that that therethere has has “increasing discussion microfinance in many regions beenbeen “increasing discussion aboutabout howhow microfinance in many regions and and institutions is still really mono-product, focused primarily on provision the provision of credit institutions is still really mono-product, focused primarily on the of credit services. In order for microfinance to truly a difference maximize services. In order for microfinance to truly makemake a difference and and maximize its its potential, it will to offer a full of quality, affordable, relevant, potential, it will needneed to offer a full rangerange of quality, affordable, relevant, and and accessible financial services to clients”. Some respondents forthright: accessible financial services to clients”. Some respondents werewere moremore forthright: which offered a comprehensive product one one said said that that MFIsMFIs which offered a comprehensive product suitesuite “are “are aboutabout as as common as unicorns”. common as unicorns”. Beyond credit. Many respondents concerned focused too much Beyond credit. Many respondents werewere concerned that that MFIsMFIs focused too much on on credit products and services. limited business prospects and created credit products and services. ThisThis limited theirtheir business prospects and created over-overreliance on increasingly an increasingly of market. the market. Diversification reliance on an riskyrisky area area of the Diversification was was goodgood to to spread A respondent of large the large US funding organisations spread risk.risk. A respondent fromfrom one one of the US funding organisations said said that that industry - meaning and those support - needs be much “the “the industry - meaning MFIsMFIs and those whowho support themthem - needs to betomuch moremore innovative forward-thinking a range of financial services innovative and and forward-thinking aboutabout a range of financial services that that helphelp the the manage financial needs. in some slower growth poorpoor manage theirtheir financial needs. ThisThis maymay in some casescases meanmean slower growth of of microcredit, growth of microfinance. Funders investors microcredit, but but fasterfaster growth of microfinance. Funders and and investors needneed to to understand an MFI a diversified product offering in long the long going understand that that an MFI withwith a diversified product offering is, inis,the run, run, going be more sustainable a credit-only mono-product institution delivering double to betomore sustainable thanthan a credit-only mono-product institution delivering double or triple growth in gross portfolio year”. or triple digitdigit growth in gross loanloan portfolio everyevery year”. Respondents not short of suggestions for new products: payments, remittances, Respondents werewere not short of suggestions for new products: payments, remittances, savings/deposits, for housing education, insurance products Carlos savings/deposits, loansloans for housing and and education, insurance products etc.. etc.. Carlos Danel, vice-president at Compartamos in Mexico, “there is still to know Danel, vice-president at Compartamos in Mexico, said said “there is still a lotatolotknow which products and why, so that the industry can shift and and learnlearn aboutabout which products workwork best best and why, so that the industry can shift its its supply to demand.” focusfocus fromfrom supply to demand.” Access. of potential product innovation is service delivery Access. The The otherother area area of potential product innovation is service delivery withwith the the arrival of mobile banking which enable to compete commercial arrival of mobile banking which will will enable MFIsMFIs to compete withwith commercial banks, extend areas, thereby strengthening financial banks, and and extend theirtheir reachreach into into ruralrural areas, thereby strengthening financial inclusion. However, this presents difficulties its own. Rippey, senior fellow inclusion. However, this presents difficulties of itsofown. PaulPaul Rippey, senior fellow at Center the Center for Financial Inclusion, “banks serving the poor at the for Financial Inclusion, said said that that “banks serving the poor havehave a a promising future…but savings groups ‘phone banking disruptive promising future…but savings groups and and cell cell ‘phone banking are are disruptive technologies either clients or increase clients, depending on how technologies that that will will either take take awayaway clients or increase clients, depending on how banks to them”. banks reactreact to them”.


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C S F I / New York CSFI Constraints. Constraints. Product Product development development is expensive, is expensive, and some and some respondents respondents fearedfeared that that MFIs MFIs wouldwould not have to pursue it. In certain countries, the regulatory not the haveresources the resources to pursue it. In certain countries, the regulatory environment did not innovation, for example in deposit-taking and and environment did encourage not encourage innovation, for example in deposit-taking telephone banking. Diversification is also, a risk.a risk. Some Some respondents felt that telephone banking. Diversification is itself, also, itself, respondents felt that MFIs MFIs wouldwould do better to “stick to their An Indian respondent said that do better to “stick to knitting”. their knitting”. An Indian respondent said that “unnecessary diversification is more “unnecessary diversification is dangerous”. more dangerous”.

Know Know youryour customer customer One ofOne theofconcerns the concerns about about the growth the growth of microfinance of microfinance is thatisMFIs that are MFIslosing are losing the the personal personal touch:touch: they see they their seeclients their clients as marketing as marketing targetstargets rather rather than asthan people as people to be to be helped,helped, and this and risks thisdestroying risks destroying the essential the essential character character of the of business the business – and generating – and generating bad loans badfor loans MFIs. for MFIs. A respondent A respondent from one fromofone theoflarge the European large European microfinance microfinance investors investors said: “We said:are “We are concerned concerned about about the ethical the ethical issues issues of over-indebting of over-indebting needy needy clients.clients. It has Ita has negative a negative reputational reputational impactimpact on theon market the market and participants. and participants. As double As double bottom bottom line investors line investors we we have ahave fiduciary a fiduciary responsibility responsibility to provide to provide both an both ethical an ethical and financial and financial return.” return.” Inherent Inherent in this in risk this is arisk failure is a failure to understand to understand the customer, the customer, as to the as to products the products they need they need and their and borrowing their borrowing capacity. capacity. An East AnAfrican East African respondent respondent said there said was therea was potential a potential “failure“failure to respond to respond to needs to needs of theofmarket the market through through properproper product product development development strategies, strategies, through through laxity, laxity, poor customer poor customer care and carepoor andsupervision.” poor supervision.” The spread The spread of of plasticplastic cards, cards, electronic electronic funds funds transfer transfer and paperless and paperless recordsrecords is speeding is speeding up theup the depersonalisation depersonalisation of banking of banking and making and making it harder it harder for MFIs fortoMFIs assess to assess their customers. their customers. Emmanuelle Emmanuelle Javoy,Javoy, managing managing director director of Planet of Planet Rating,Rating, emphasised emphasised the difficulties the difficulties that that poor customer poor customer contact contact created created in times in times of stress. of stress. “What“What the last the years last have yearsshown have shown is is that inthat troubled in troubled times strict timesrepayment strict repayment follow-up follow-up is not sufficient is not sufficient to keep tocredit keep credit risk low. risk low. A moreAdifferentiated more differentiated approach, approach, including including rescheduling rescheduling or refinancing, or refinancing, litigation litigation in some in some cases cases and changes and changes in loanin officers’ loan officers’ incentives incentives schemes, schemes, is thenis necessary. then necessary. This isThis is certainly certainly more complex more complex and costly, and costly, but is key but to is key maintaining to maintaining the trust thethat trustisthat at the is at core the core of the of relationship the relationship between between an MFIan and MFI itsand borrowers." its borrowers."

20.20. Ownership Ownership (17)(17) The form of ownership of MFIs is a potential risk because it canitcreate internal The form of ownership of MFIs is a potential risk because can create internal conflicts, for example between commercially-focused investors and other more more conflicts, for example between commercially-focused investors and other socially-minded stakeholders. Such conflict could could be destabilising, even fatal. socially-minded stakeholders. Such conflict be destabilising, even fatal.

Ownership Ownership structures structures cancan create create conflicts conflicts of interest of interest

Most Most of ourofrespondents saw the issue issue in these terms,terms, thoughthough they held our respondents sawownership the ownership in these they held different viewsviews about about its severity. Prof. Prof. Hans Hans DieterDieter SeibelSeibel of theofUniversity of of different its severity. the University Cologne said that whichwhich relied relied heavily on external debt funding and had Cologne saidMFIs that MFIs heavily on external debt funding andfew had few customer deposits “aof lack of ownership local ownership and governance, customer deposits wouldwould suffersuffer “a lack local and governance, riskingrisking external influence, including profiteering through IPOs)”. undueundue external influence, including profiteering (e.g., (e.g., through IPOs)”. S-P S-P O'Mahony, CEO of Opportunity Microcredit in Romania, saidmany that many O'Mahony, CEO of Opportunity Microcredit in Romania, said that MFIs MFIs now now had commercial as as well as social purpose funders, and would to balance had commercial as well social purpose funders, and would “need“need to balance sources to ensure the strongest foundation for moving forward”. sources wiselywisely to ensure the strongest foundation for moving forward”. Another issue issue was the of single individuals, often often the creators of theof the Another wasdominance the dominance of single individuals, the creators business, who reluctant were reluctant to control. cede control. Srinivas Bonam, head microfinance at business, who were to cede Srinivas Bonam, head microfinance at IndusInd Bank Bank in India, said itsaid would desirable “to have diversified institutional IndusInd in India, it would desirable “to ahave a diversified institutional holding an MFI. Individuals, including promoters, a minimal holding in aninMFI. Individuals, including promoters, shouldshould have have a minimal

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C S F I / New York CSFI holding”. holding”. Another Another respondent respondent said said that that dominant dominant shareholders shareholders couldcould standstand in the in the way way of consolidation among MFIs, preventing themthem fromfrom becoming stronger. of consolidation among MFIs, preventing becoming stronger. Some respondents felt felt thesethese conflicts couldcould onlyonly be resolved by the eventual Some respondents conflicts be resolved by the eventual withdrawal of certain typestypes of investors. A US respondent said said that that “tensions withdrawal of certain of investors. A US respondent “tensions between international financial institutions (IFIs) and private investors will will continue between international financial institutions (IFIs) and private investors continue thepresence IFI presence is substantially reduced”. Matthew Gamser ofInternational the International untiluntil the IFI is substantially reduced”. Matthew Gamser of the Finance Corporation in Hong western donors social Finance Corporation in Hong KongKong said said that that “with“with western donors and and social investors increasingly strapped for funds, see how ownerships dominated investors increasingly strapped for funds, we'llwe'll see how weakweak ownerships dominated by such interests really by such interests really are”.are”. But others it moving the opposite As possibilities the possibilities opened up, they But others saw saw it moving the opposite way.way. As the opened up, they saw saw commercial investors providing access to capital, paving the way commercial investors providing MFIsMFIs withwith access to capital, paving the way to a to a stronger future. respondent is more likely NGOs stronger future. One One respondent said said that that “it is“itmore likely that that NGOs will will find find it it difficult to cope inchanging the changing environment”. difficult to cope in the environment”.

21.21.Interest Interest rates rates (11) (11) LITTLE RISK is seen on interest the interest so as farvolatility as volatility is concerned: LITTLE RISK is seen on the rate rate frontfront so far is concerned: global ratesrates havehave beenbeen low low for some timetime and and are likely to remain so inso the global for some are likely to remain in the foreseeable future. foreseeable future.

Little Little change change seen seen onon thethe interest interest rate rate front front

is good for MFI funding: should remain However is bad ThisThis is good newsnews for MFI funding: costscosts should remain low.low. However it is itbad for MFI lenders off high charges. It creates pressure on them newsnews for MFI lenders whowho live live off high loanloan charges. It creates pressure on them to to lower accept lower margins. Many of respondents our respondents therefore thought lower ratesrates and and accept lower margins. Many of our therefore thought an extended environment prove difficult for MFIs: it poses that that an extended low low rate rate environment couldcould prove difficult for MFIs: it poses a riska risk to profitability and reputation. bothboth to profitability and reputation. major on this liespolitically in politically motivated moves to interest cap interest The The major risk risk on this frontfront lies in motivated moves to cap ratesrates squeeze margins, which complicates liability on on loansloans and and squeeze MFIMFI margins, which complicates assetasset and and liability management, presents problem of re-pricing management, and and presents MFIsMFIs withwith the the problem of re-pricing theirtheir loansloans to to conform the regulations. A investor US investor political fallout conform withwith the regulations. A US said said that that “the “the political fallout overover interest tarnish institutions possible systemic interest ratesrates couldcould tarnish goodgood and and poorpoor institutions alike,alike, withwith possible systemic implications in some markets”. implications in some markets”. Further the prospect of rising interest as inflationary the inflationary effects Further out, out, therethere is theis prospect of rising interest ratesrates as the effects of of monetary easing through, which inflame the whole interest issue. monetary easing flowflow through, which couldcould inflame the whole interest cost cost issue. A A Mexican respondent injured parties be users the users demand Mexican respondent said said that that “the “the injured parties will will be the sincesince demand for for credit in segment this segment is highly inelastic to fluctuations in interest rates”. credit in this is highly inelastic to fluctuations in interest rates”.

22.22.Too Too much much funding funding (25) (25) PROBLEM of excessive funding microfinance eased, THETHE PROBLEM of excessive funding for for microfinance has has eased, but but not not disappeared (and(and it is itseen as a as greater risk risk thanthan a shortage of funding. See No. 23). 23). disappeared is seen a greater a shortage of funding. See No. Although is dangerous to generalise, respondents seeflow the flow of funding returning Although it is it dangerous to generalise, respondents see the of funding returning to market the market the crisis, in quantities which the industry it hard to the afterafter the crisis, oftenoften in quantities which the industry maymay find find it hard to absorb without creating strains, especially at a time growth is slowing. to absorb without creating strains, especially at a time whenwhen growth is slowing. Silva, general manager of Omtrix in Costa money AlexAlex Silva, general manager of Omtrix in Costa Rica,Rica, said said that that “too “too muchmuch money is is available to MFIs which, especially is combined beingbeing mademade available to MFIs which, especially whenwhen it is itcombined withwith highhigh return expectations, might managers to grow rapidly at times return expectations, might forceforce MFIMFI managers to grow too too rapidly at times


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C S F I / New York CSFI overlooking overlooking goodgood practices”. practices”. An Egyptian An Egyptian respondent respondent said said that that this this was was “a very “a very serious risk.risk. Some MFIsMFIs are close to drowning withwith all the thrown at them”. serious Some are close to drowning allcash the cash thrown at them”. A UK-based development expert said said that that in some countries “the “the threat of aof a A UK-based development expert in some countries threat microcredit bubble popping is very real real and it will lead lead to massive destabilisation of of microcredit bubble popping is very and it will to massive destabilisation locallocal economies artificially pumped up on and and thenthen cast cast adriftadrift as the economies artificially pumped up microcredit on microcredit as the microfinance institutions either or refuse to roll-over microcredits. microfinance institutions either fail fail or refuse to roll-over microcredits. The The international donors but cannot admit a mistake implicates international donors knowknow this this but cannot admit to a tomistake that that implicates 'the 'the market' 'profit-driven institutions' which sacrosanct in many market' and and 'profit-driven institutions' which are are still still sacrosanct in many development agencies, no matter the consequences”. development agencies, no matter whatwhat the consequences”. is that which accept money business The The fear fear is that MFIsMFIs which accept easyeasy money will will take take risksrisks withwith theirtheir business the industry’s reputation. Vandeweerd, strategic director at ADA and and the industry’s reputation. Luc Luc Vandeweerd, strategic director at ADA Asbl,Asbl, a a Luxembourg-based microfinance development group, “most of largest the largest Luxembourg-based microfinance development group, said said that that “most of the investors are targeting the same markets, the same of MFIs offering investors are targeting the same markets, workwork withwith the same kindkind of MFIs offering the same of short renewable) funding, putting pressure the same kindkind of short termterm (1-2 (1-2 yearsyears renewable) funding, and and putting pressure on on clients’ MFIs. is that MIVs contribute a growth without theirtheir clients’ MFIs. The The mainmain risk risk is that thesethese MIVs contribute to a to growth without control to related consequences of social values, over-indebtedness, any any control and and to related consequences (loss(loss of social values, over-indebtedness, etc.)”. etc.)”.

The The problem problem is not is not tootoo little little funding, funding, butbut tootoo much much

Another is that the high valuations placed on MFI flotations further tarnish Another risk risk is that the high valuations placed on MFI flotations maymay further tarnish microfinance’s image provoke a public backlash. Tanmay Chetan, co-founder microfinance’s image and and provoke a public backlash. Tanmay Chetan, co-founder managing partner of Agora Microfinance Partners in UK, the UK, and and managing partner of Agora Microfinance Partners in the said said that that over-overvaluations “pushing the MFIs to and try and maximise returns valuations werewere “pushing the MFIs to try maximise theirtheir returns fromfrom theirtheir clients. is creating a bubble-like situation in some of world, the world, which clients. ThisThis is creating a bubble-like situation in some partsparts of the which can can to a bust in some geographies Southern India”. lead lead to a bust in some geographies like like Southern India”. should be too funding around is frustrating for MFIs ThatThat therethere should be too muchmuch funding around is frustrating for MFIs who who are are suffering the reverse problem, usually the smaller serving difficult markets. suffering the reverse problem, usually the smaller onesones serving difficult markets. Many respondents it was a matter of much too much funding but funding Many respondents said said that that it was not anot matter of too funding but funding that that spread or indiscriminately dispersed. Lukas Wellen, of Musoni was was badlybadly spread or indiscriminately dispersed. Lukas Wellen, CEOCEO of Musoni in in Kenya, bad funding “keeps projects afloat”. Another respondent Kenya, said said bad funding “keeps weakweak projects afloat”. Another respondent said said that that funding be diverted to small projects, in same the same “too“too muchmuch funding maymay be diverted to small scalescale projects, and and we'llwe'll be inbethe position in five years’ time”. position in five years’ time”.

23.23.Too Too little little funding funding (6)(6) ONEONE SIGN of a of return to normality is theislow levellevel of concern aboutabout funding for the SIGN a return to normality the low of concern funding for the microfinance industry. As inAspre-crisis days,days, the larger problem is anisoverabundance microfinance industry. in pre-crisis the larger problem an overabundance of finance and the capacity. of finance andrisk the of riskexcess of excess capacity. But But that that is a is generalisation. Concerns remain aboutabout the availability of funding in in a generalisation. Concerns remain the availability of funding manymany markets and and for particular typestypes of MFI, for example the smaller and and less less markets for particular of MFI, for example the smaller profitable onesones (which maymay also also be the serving the neediest communities). profitable (which be ones the ones serving the neediest communities). Respondents reported funding difficulties in allin regions, but overall concern was was Respondents reported funding difficulties all regions, but overall concern strongest in Africa and Asia. Regulators particularly concerned funding, strongest in Africa and Asia. Regulators werewere particularly concerned aboutabout funding, placing this No. on5their risk risk list. list. placing this 5No. on their A growing is that the doubts are now spreading the effectiveness A growing issueissue is that the doubts that that are now spreading aboutabout the effectiveness of of microfinance will will frighten off investors and lenders. A microfinance consultant said said microfinance frighten off investors and lenders. A microfinance consultant that that “the “the double whammy of scarcity of investment capital (especially if if double whammy of scarcity of investment capital (especially international investors become disillusioned) and and the need to increase regulatory international investors become disillusioned) the need to increase regulatory capital (which has already happened in some markets but may be more of a of feature capital (which has already happened in some markets but may be more a feature

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C S F I / New York CSFI in future in future if consumer if consumer protection protection worries worries spook spook regulators) regulators) maymay be too be much too much for some for some MFIsMFIs to bear”. to bear”. Growing political interference in the is another threat, identified particularly Growing political interference inindustry the industry is another threat, identified particularly by respondents in the sub-continent and and LatinLatin America. Danilda Almanzar, by respondents in Indian the Indian sub-continent America. Danilda Almanzar, director of deposits at Banco Ademi in the Republic, said said that that “the “the director of deposits at Banco Ademi in Dominican the Dominican Republic, economic policies adopted by populist governments in some American economic policies adopted by populist governments in some LatinLatin American countries affect the issue of foreign investments in each country”. countries couldcould affect the issue [and[and cost]cost] of foreign investments in each country”. As before, respondents commented on the unsuitability of much of the As before, manymany respondents commented on the unsuitability of much of the available funding, on need the need for MFIs to new tap new sources diversify available funding, on the for MFIs to tap sources and and diversify theirtheir funding particularly sources, though this not always funding base,base, particularly into into locallocal sources, though this is notis always easy.easy. SyedSyed M. M. Quader, managing director of Southtech in Bangladesh, the “home” Quader, managing director and and CEOCEO of Southtech in Bangladesh, the “home” of of microfinance, “MFIs are unable to borrow the public commercial microfinance, said said that that “MFIs are unable to borrow fromfrom the public like like commercial banks, as they attempt to expand are increasingly relying on relatively banks, and and as they attempt to expand theythey are increasingly relying on relatively expensive funding commercial banks. margins are getting narrower expensive funding fromfrom commercial banks. TheirTheir margins are getting narrower by by the although day although are perceived be charging interest rates.” the day theythey are perceived to betocharging highhigh interest rates.” Although which deposits are better placed for local funding, is also Although MFIsMFIs which take take deposits are better placed for local funding, therethere is also concern in some places economic difficulties damage people’s confidence concern in some places that that economic difficulties will will damage people’s confidence in banks reduce savings. Bernard-Désiré Ntavumba of FSTE in Burundi in banks and and reduce theirtheir savings. Bernard-Désiré Ntavumba of FSTE in Burundi it was “difficult for poor people to make voluntary savings, andconsequence the consequence said said it was “difficult for poor people to make voluntary savings, and the is a decrease in available cash”. is a decrease in available cash”. Overall, though, the very position scored by funding suggests Overall, though, the very low low position scored by funding risk risk suggests that that fearsfears that that investors be scared offcontroversy by controversy be exaggerated. investors will will be scared off by maymay be exaggerated.

24.24. Foreign Foreign exchange exchange (8)(8) Few Few worries worries about about foreign foreign exchange exchange risk risk

DESPITE DESPITE all the all talk the talk of global of global currency currency warswars and and euroeuro crises, crises, foreign foreign exchange exchange is is not seen big Banana for MFIs because of them exposure not seen as a as biga Banana SkinSkin for MFIs because mostmost of them havehave littlelittle exposure to to currencies currencies otherother thanthan theirtheir own.own. Respondents tapping deposits and receiving Respondents said said that that MFIsMFIs werewere tapping moremore locallocal deposits and receiving moremore of of foreign funding in local currency. Foreign exchange expertise theirtheir foreign funding in local currency. Foreign exchange expertise was was also also growing, hedging possibilities improved. A respondent Africa growing, and and hedging possibilities had had improved. A respondent fromfrom EastEast Africa “most prefer to borrow sources, borrow said said that that “most MFIsMFIs prefer to borrow fromfrom locallocal sources, and and thosethose that that borrow overseas engage in hedging arrangements banks”. fromfrom overseas engage in hedging arrangements withwith locallocal banks”. However, the importance of external funding to some means this could However, the importance of external funding to some MFIsMFIs means this could still still be be an area of risk particularly as respondents in particular markets noted, an area of risk particularly if, asif, respondents in particular markets noted, locallocal funding sources are inadequate and hedging possibilities remain limited. funding sources are inadequate and hedging possibilities remain limited. Fermin Vivanco, investment officer the Inter-American Development in the Fermin Vivanco, investment officer at theat Inter-American Development BankBank in the “relying on hard currency US, US, said said that that MFIsMFIs werewere “relying too too muchmuch on hard currency loansloans fromfrom microfinance investment vehicles, instead of capturing deposits. of the microfinance investment vehicles, instead of capturing deposits. The The valuevalue of the dollar has been going last years, so debt in dollars has been cheap. dollar has been going downdown thesethese last years, so debt in dollars has been cheap. But But exposure become a problem in long the long the economic environment this this exposure maymay become a problem in the termterm if theif economic environment changes”. changes”. Some respondents flagged an indirect foreign currency the impact of foreign Some respondents flagged an indirect foreign currency risk:risk: the impact of foreign exchange volatility on the of remittances, through on the exchange volatility on the valuevalue of remittances, and and through that that on the locallocal economy and borrowers’ creditworthiness. economy and borrowers’ creditworthiness.


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C S F I / New York CSFI Preparedness Preparedness We asked respondents to score the preparedness of MFIs to handle the risks theythey had had We asked respondents to score the preparedness of MFIs to handle the risks identified on aon scale where 1=poor and 5=good. The The totaltotal scorescore was was 2.70,2.70, which is is identified a scale where 1=poor and 5=good. which slightly better thanthan middling. However therethere werewere variations according to the slightly better middling. However variations according to the category of respondent. category of respondent. Geographically, respondents America the most optimistic and those Geographically, respondents fromfrom LatinLatin America werewere the most optimistic and those the least. Among respondent types, practitioners the most confident fromfrom AsiaAsia the least. Among respondent types, practitioners werewere the most confident the level of preparedness and regulators the least. aboutabout the level of preparedness and regulators the least. Total Total Practitioners Practitioners Investors Investors Analysts Analysts Regulators Regulators

2.702.70 2.792.79 2.682.68 2.51 2.51 2.222.22

America 3.12 3.12 LatinLatin America MENA MENA 2.962.96 CEE CEE 2.782.78 Western Europe 2.72 2.72 Western Europe North America 2.682.68 North America Far East Far East 2.67 2.67 Africa Africa 2.57 2.57 AsiaAsia 2.482.48

Preparedness Preparedness could could be be better better

Respondents’ comments aboutabout preparedness reflected concerns aboutabout MFIs’ ability Respondents’ comments preparedness reflected concerns MFIs’ ability to manage risk risk successfully in the volatile environment that that currently prevails, to manage successfully in the volatile environment currently prevails, particularly in the of credit and reputation. particularly inareas the areas of credit and reputation. KarlaKarla Brom, an MFI consultant in the said:said: “Most MFIsMFIs do not the risk Brom, an MFI consultant in US, the US, “Most do have not have the risk infrastructure in place to handle theirtheir current clients and and products…There is not infrastructure in place to handle current clients products…There is anot a largelarge poolpool of trained risk risk managers to draw from,from, and and veryvery littlelittle comprehension of of of trained managers to draw comprehension howhow to measure and manage the trade off between risk risk and reward…Operational risk risk to measure and manage the trade off between and reward…Operational grows as MFIs grow, and and as their product and and clientclient mix mix grows as well. ThisThis leadsleads grows as MFIs grow, as their product grows as well. to reputational risk risk sincesince moremore eyeseyes are focused on the and MFIs can'tcan't explain to reputational are focused onsector, the sector, and MFIs explain theirtheir pricing or business models in a clear way way to regulators or others.” pricing or business models in a clear to regulators or others.” Further respondents felt that the microfinance industry the threshold Further out, out, respondents felt that the microfinance industry stoodstood at theat threshold of of big long termterm decisions which needed to beto firmly addressed to ensure survival. big long decisions which needed be firmly addressed to ensure survival. Sarah Nolan, regional director for East Europe, Africa at Opportunity Sarah Nolan, regional risk risk director for East Europe, AsiaAsia and and Africa at Opportunity International, “Shareholders, lenders leaders be prepared International, said:said: “Shareholders, lenders and and leaders needneed to beto prepared for afor a ‘generational’ transition of industry the industry a phase characterised by rapid growth, ‘generational’ transition of the fromfrom a phase characterised by rapid growth, commercial investment subsidized support, towards a more self-reliant industry commercial investment and and subsidized support, towards a more self-reliant industry featuring a systematic approach to management, governance, organisational featuring a systematic approach to management, governance, and and organisational development”. development”.

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C S F I / New York CSFI APPENDIX: The questionnaire and guide Insert pdf

CSFI

CENTRE FOR THE STUDY OF FINANCIAL INNOVATION 5, Derby Street, London W1J 7AB, UK Tel: +44 (0)20 7493 0173 Fax: +44 (0)20 7493 0190

Microfinance Banana Skins 2011 This survey seeks to identify the risks facing microfinance institutions (MFIs) over the medium term (2-3 years), as seen by practitioners, investors and close observers of the industry. Its focus is the commercial microfinance sector, by which we mean institutions which are run for profit and have assets of more than US$5 million.

Who you are Name: Position: Institution: Country:

Replies are in confidence, but if you are willing to be quoted in our report, please tick

Your perspective on the microfinance industry

Practitioner If yes, does your institution take customer deposits? Investor Regulator Analyst Other (please state)

Question 1. Please describe in your own words the main risks you see facing the microfinance industry over the next 2-3 years, and your reasons.


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C S F I / New York CSFI Question 2. Here are some areas of risk for MFIs which have been attracting attention. How do you rate their severity, and what is their trend: rising, steady or falling? Use the right hand column to add comments. Insert more risks at the bottom if you wish. Severity 1=low 5=high

Trend

Rising Steady Falling

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1

Back office operations How vulnerable are MFIs to risks in administration, accounting, systems and controls?

2

Competition Will competitive pressures push MFIs to take greater risks in areas such as pricing, product innovation and credit quality?

3

Corporate governance Are there weaknesses such as low calibre or lack of independence?

4

Credit risk Will MFIs be damaged by borrowers failing to repay their loans because of overborrowing, poor credit management, poor client understanding or difficult economic conditions?

5

Foreign exchange Could MFIs be harmed by currency fluctuations?

6

Fraud Will MFIs be damaged by dishonest staff and customers?

7

Inappropriate regulation Could MFI growth and profitability be constrained by bad rules?

8

Interest rates Will MFIs be hurt by fluctuations in interest rates?

9

Liquidity Will MFIs suffer a shortage of ready cash?

Comment


C S F I / New York CSFI 10 Macro-economic trends Are MFIs vulnerable to pressures in the wider economy such as inflation, recession and volatile markets? 11 Management quality Is MFI management up to the challenge of growing the business and managing the risks? 12 Managing technology Will MFIs be able to master this difficult area? 13 Mission drift How strong is the risk that MFIs will be deflected from their stated missions? 14 Ownership Are the ownership structures of MFIs appropriate and stable? 15 Political interference Will political interference harm MFI business, eg in the areas of interest rates, lending policy and subsidised competition? 16 Product development Could MFIs fail to develop the right products and manage them successfully? 17 Profitability Could inadequate profitability affect MFI growth and commercial viability? 18 Reputation How severe are the threats to the industry’s reputation? 19 Staffing Will MFIs have difficulty recruiting and retaining good staff? 20 Strategy Will MFIs be able to map strategies to survive and grow in today’s challenging environment?


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C S F I / New York CSFI 21 Too little funding Will there be sufficient funding to sustain healthy growth in the industry? 22 Too much funding Alternatively, does an overabundance of funding encourage MFIs to take unnecessary risks? 23 Transparency Do MFIs report enough good information to sustain confidence in the sector? 24 Unrealisable expectations Do people expect too much of MFIs, and what happens if they fail to deliver? 25

Question 3. How well prepared do you think MFIs are to handle the risks you have identified? On a scale of 1-5, 1=poorly prepared, 5=well prepared

Thank you for your time.

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CSFI PUBLICATIONS 99. “Microfinance Banana Skins 2011: the CSFI survey of microfinance risk” February 2011. ISBN 978-0-9563888-6-5.

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98. “Including Africa - Beyond microfinance” By Mark Napier. February 2011. ISBN 978-0-9563888-5-8.

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97. “Getting Brussels right: “best practice” for City firms in handling EU institutions” By Malcolm Levitt. December 2010. ISBN 978-0-9563888-4-1.

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96. “Private equity, public loss?” By Peter Morris. July 2010. ISBN 978-0-9563888-3-4.

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95. “Systemic policy and financial stability: a framework for delivery.” By Sir Andrew Large. June 2010. ISBN 978-0-9563888-2-7.

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94. “STRUGGLING UP THE LEARNING CURVE: solvency II and the insurance industry.” By Shirley Beglinger. June 2010. ISBN 978-0-9563888-1-0.

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93. “Investing in Social Enterprise: the role of tax incentives.” By Vince Heaney. May 2010. ISBN 978-0-9561904-8-2.

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92. “banana skins 2010: after the quake.” Sponsored by PricewaterhouseCoopers. By David Lascelles. February 2010. ISBN 978-0-9561904-9-9.

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91. “FIXING REGULATION” By Clive Briault. October 2009. ISBN 978-0-9563888-0-3.

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90. “CREDIT CRUNCH DIARIES: the financial crisis by those who made it happen.” By Nick Carn and David Lascelles. October 2009. ISBN 978-0-9561904-5-1.

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89. “Twin Peaks Revisited: a second chance for regulatory reform.” By Michael W. Taylor. September 2009. ISBN 978-0-9561904-7-5.

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88. “NARROW BANKING: the reform of banking regulation.” By John Kay. September 2009. ISBN 978-0-9561904-6-8.

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87. “THE ROAD TO LONG FINANCE: a systems view of the credit scrunch.” By Michael Mainelli and Bob Giffords. July 2009. ISBN 978-0-9561904-4-4.

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86. “FAIR BANKING: the road to redemption for UK banks.” By Antony Elliott. July 2009. ISBN 978-0-9561904-2-0.

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85. “MICROFINANCE BANANA SKINS 2009: confronting crises and change.” By David Lascelles. June 2009. ISBN 978-0-9561904-3-7. 84. “GRUMPY OLD BANKERS: wisdom from crises past.” March 2009. ISBN 978-0-9561904-0-6.

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83. “HOW TO STOP THE RECESSION: a leading UK economist’s thoughts on resolving the current crises.” By Tim Congdon. February 2009. ISBN 978-0-9561904-1-3.

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82. “INSURANCE BANANA SKINS 2009: the CSFI survey of the risks facing insurers.” By David Lascelles. February 2009. ISBN 978-0-9551811-9-1.

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81. “BANKING BANANA SKINS 2008: an industry in turmoil.” The CSFI’s regular survey of banking risk at a time of industry turmoil. May 2008. ISBN 978-0-9551811-8-4.

£25/$50/€40

80. “MICROFINANCE BANANA SKINS 2008: risk in a booming industry.” By David Lascelles. March 2008. ISBN 978-0-9551811-7-7.

£25/$50/€40

79. “INFORMAL MONEY TRANSFERS: economic links between UK diaspora groups and recipients ‘back home’.” By David Seddon. November 2007. ISBN 978-0-9551811-5-3.

£25/$50/€40

78. “A TOUGH NUT: Basel 2, insurance and the law of unexpected consequences.” By Shirley Beglinger. September 2007. ISBN 978-0-9551811-5-3.

£25/$50/€40

77. “WEB 2.0: how the next generation of the Internet is changing financial services.” By Patrick Towell, Amanda Scott and Caroline Oates. September 2007. ISBN 978-0-9551811-4-6.

£25/$50/€40

76. “PRINCIPLES IN PRACTICE: an antidote to regulatory prescription.” The report of the CSFI Working Group on Effective Regulation. June 2007. ISBN 978-0-9551811-2-2.

£25/$50/€40

75. “INSURANCE BANANA SKINS 2007: a survey of the risks facing the insurance industry.” Sponsored by PricewaterhouseCoopers. By David Lascelles. May 2007. ISBN 978-0-9551811-3-9.

£25/$45/€40

74. “BIG BANG: two decades on.” City experts who lived through Big Bang discuss the lasting impact of the de-regulation of London’s securities markets Sponsored by Clifford Chance. February 2007. ISBN 978-0-9551811-1-5.

£25/$45/€40

73. “BANKING BANANA SKINS 2006” The latest survey of risks facing the banking industry Sponsored by PricewaterhouseCoopers. By David Lascelles. April 2006. ISBN 0-9551811-0-0.

£25/$45/€40

72. “THE PERVERSITY OF INSURANCE ACCOUNTING: in defence of finite re-insurance.” An industry insider defends finite re-insurance as a rational response to irrational demands. By Shirley Beglinger. September 2005. ISBN 0-9545208-9-0.

£25/$45/€40

71. “SURVIVING THE DOG FOOD YEARS: solutions to the pensions crisis.” New thinking in the pensions area (together with a nifty twist by Graham Cox). By John Godfrey (with an appendix by Graham Cox). April 2005. ISBN 0-9545208-8.

£25/$45/€40

70. “NOT WAVING BUT DROWNING: over-indebtedness by misjudgement.” A former senior banker takes an iconoclastic look at the bottom end of the consumer credit market. By Antony Elliott. March 2005. ISBN 0-9545208-7-4.

£25/$45/€40

69. “BANANA SKINS 2005” Our latest survey of where bankers, regulators and journalists see the next problems coming from. Sponsored by PricewaterhouseCoopers. By David Lascelles. February 2005. ISBN 0-9545208-6-6.

£25/$45/€40

68. “BETTING ON THE FUTURE: online gambling goes mainstream financial.” By Michael Mainelli and Sam Dibb. December 2004. ISBN 0-9545208-5-8

£25/$45/€40

67. “REGULATION OF THE NON-LIFE INSURANCE MARKET: why is it so damn difficult?” By Shirley Beglinger. November 2004. ISBN 0-9545208-4-X

£25/$45/€40

66. “COMPANIES CANNOT DO IT ALONE: an investigation into UK management attitudes to Company Voluntary Arrangements.” By Tim Mocroft (with Graham Telling and Roslyn Corney). July 2004. ISBN 0-9545208-3-1

£25/$45/€40

65. “THE CURSE OF THE CORPORATE STATE: saving capitalism from itself.” By Bob Monks. January 2004. ISBN 0-9545208-2-3

£25/$40/€45

64. “BANKING BANANA SKINS 2003: what bankers were worrying about in the middle of 2003.” Sponsored by PricewaterhouseCoopers By David Lascelles. September 2003. ISBN 0-9545208-1-5

£25/$45/€40

63. “THE GLOBAL FX INDUSTRY: coping with consolidation.” Sponsored by Reuters. By Christopher Swann. May 2003. ISBN 0-9545208-0-7

£25/$45/€40

62. “PENSIONS IN CRISIS? RESTORING CONFIDENCE: a note on a conference held on February 26, 2003.” By Andrew Hilton. May 2003. ISBN 0-954145-7-3

£25/$45/€40

61. “BASEL LITE: recommendations for the European implementation of the new Basel accord.” By Alistair Milne. April 2003. ISBN 0-954145-8-1

£25/$45/€40

60. “THINKING NOT TICKING: bringing competition to the public interest audit.” By Jonathan Hayward. April 2003. ISBN 0-9543145-6-5

£25/$40/€40

59. “A NEW GENERAL APPROACH TO CAPITAL ADEQUACY: a simple and comprehensive alternative to Basel 2.” By Charles Taylor. November 2002. ISBN 0-9543145-5-7

£25/$40/€45

58. “WHO SPEAKS FOR THE CITY? trade associations galore.” By David Lascelles and Mark Boleat. November 2002. ISBN 0-9583145-4-9

£25/$40/€45

57. “CAPITALISM WITHOUT OWNERS WILL FAIL: a policymaker’s guide to reform.” By Robert Monks and Allen Sykes. November 2002. ISBN 0-9543145-3-0

£25/$40/€45

56. “THE FUTURE OF FINANCIAL ADVICE IN A POST-POLARISATION MARKETPLACE.” By Stuart Fowler. November 2002. ISBN 0-9543145-2-2

£25/$40/€45

55. “CLEARING AND SETTLEMENT: monopoly or market?” By Tim Jones. October 2002. ISBN 0-9543145-1-4

£25/$40/€45

54. “WAITING FOR ARIADNE: a suggestion for reforming financial services regulation.” Kevin James. July 2002. ISBN 0-9543145-0-6

£25/$40/€45

53. “HARVESTING TECHNOLOGY: financing technology based SMEs in the UK.” Craig Pickering. April 2002. ISBN 0-9543144-5-3

£25/$40/€45

52. “SINGLE STOCK FUTURES: the Ultimate Derivative.” By David Lascelles. February 2002. ISBN 0-9543144-5-2

£25/$40/€45

51. “BANKING BANANA SKINS 2002: a CSFI Survey of Risks Facing Banks.” What bankers are worrying about at the beginning of 2002. Sponsored by PricewaterhouseCoopers. By David Lascelles. February, 2002. ISBN 0-9543144-5-1

£25/$40/€45

50. “BUMPS ON THE ROAD TO BASEL: an anthology of views on Basel 2.” Edited by Andrew Hilton. January 2002. ISBN 0-9543144-5-0

£25/$40/€45

49. “THE SHORT-TERM PRICE EFFECTS OF POPULAR SHARE RECCOMENDATIONS.” By Bill McCabe. September 2001. ISBN 0-9543144-4-9

£25/$40

48. “WAKING UP TO THE FSA: how the City views its new regulator.” By David Lascelles. May 2001. ISBN 0-9543144-4-8

£25/$40

47. “BRIDGING THE EQUITY GAP: a new proposal for virtual local equity markets.” By Tim Mocroft. January 2001. ISBN 0-9543144-4-7

£25/$40

46. “iX: better or just bigger?” By Andrew Hilton and David Lascelles. August 2000. ISBN 0-9543144-4-6

£25/$40

45. “BANKING BANANA SKINS 2000: the CSFI’s latest survey of what UK bankers feel are the biggest challenges facing them.” By David Lascelles. June 2000. ISBN 0-9543144-4-5

£25/$40

44. “INTERNET BANKING: a fragile flower.” By Andrew Hilton. April 2000. ISBN 0-9543144-4-4

£25/$40

43. “REINVENTING THE COMMONWEALTH DEVELOPMENT CORPORATION UNDER PUBLIC-PRIVATE PARTNERSHIP.” By Sir Michael McWilliam. March 2000. ISBN 0-9543144-4-3

£25/$40

42. “IN OR OUT: maximising the benefits/minimising the costs of (temporary or permanent) non-membership of EMU.” Various. November 1999. ISBN 0-9543144-4-2

£25/$40

41. "EUROPE’S NEW BANKS: the non-banks phenomenon.” By David Lascelles. November 1999. ISBN 0-9543144-4-1

£25/$40

40. “A MARKET COMPARABLE APPROACH TO THE PRICING OF CREDIT DEFAULT SWAPS.” By Tim Townend. October 1999. ISBN 0-9543144-4-0

£25/$40

39. “QUANT AND MAMMON: meeting the City’s requirements for post-graduate research and skills in financial engineering.” By David Lascelles. April 1999. ISBN 0-9543144-3-9

£25/$40

38. “PSYCHOLOGY AND THE CITY: applications to trading, dealing and investment analysis.” By Denis Hilton. April 1999. ISBN 0-9543144-3-8

£25/$40

37. “LE PRIX DE L’EUROPE: competition between London, Paris and Frankfurt.” By David Lascelles. February 1999. ISBN 0-9543144-3-7

£25/$40

36. “THE INTERNET IN TEN YEARS’ TIME: a CSFI survey.” Various. November 1998. ISBN 0-9543144-3-6

£25/$40

35. “CYBERCRIME: tracing the evidence.” By Rosamund McDougall. September 1998. ISBN 0-9543144-3-5

£6/$10

34. “THE ROLE OF MACRO-ECONOMIC POLICY IN STOCK RETURN PREDICTABILITY.” By Nandita Manrakhan. August 1998. ISBN 0-9543144-3-4

£25/$40

33. “MUTUALITY FOR THE 21ST CENTURY.” By Rosalind Gilmore. July 1998. ISBN 0-9543144-3-3

£25/$40

32. “BANKING BANANA SKINS” The fifth annual survey of possible shock to the system. By David Lascelles. July 1998. ISBN 0-9543144-3-2

£25/$40

31. “EMERALD CITY BANK: banking in 2010.” Various. March 1998. ISBN 0-9543144-3-1

£25/$40

30. “CREDIT WHERE CREDIT IS DUE: bringing microfinance into mainstream.” By Peter Montagnon. February 1998. ISBN 0-9543144-3-0

£25/$40

29. “THE FALL OF MULHOUSE BRAND.” By David Shirreff. December 1997. ISBN 0-9543144-2-9

£30/$50

28. “CALL IN THE RED BRACES BRIGADE: the case for electricity derivatives.” Ronan Parker and Anthony White. November 1997. ISBN 0-9543144-2-8

£25/$40

27. “FOREIGN CURRENCY EXOTIC OPTIONS.” A trading simulator for innovative dealers in foreign currency (with disc). By Stavros Pavlou. October 1997. ISBN 0-9543144-2-7

£25/$40

26. “BANKING BANANA SKINS:1997.” The latest survey showing how bankers might slip up over the next two to three years. By David Lascelles. April 1997. ISBN 0-9543144-2-6

£25/$40

25. “THE CRASH OF 2003: an EMU fairy tale.” By David Lascelles. December 1996. ISBN 0-9543144-2-5

£25/$40

24. “CENTRAL BANK INTERVENTION: a new approach.” New techniques for managing exchange rates. By Neil Record. November 1996. ISBN 0-9543144-2-4

£25/$40

23. “PEAK PRACTICE: how to reform the UK’s regulatory system.” By Michael Taylor. October 1996. ISBN 0-9543144-2-3

£25/$40

22. “WELFARE:A RADICAL RETHINK: the Personal Welfare Plan.” Andrew Dobson. May 1996. ISBN 0-9543144-2-2

£25/$40

21. “BANKING BANANA SKINS III” By David Lascelles. March 1996. ISBN 0-9543144-2-1

£25/$40

20. “TWIN PEAKS: a regulatory structure for the new century.” Michael Taylor. December 1995. ISBN 0-9543144-2-0

£25/$40

19. “OPTIONS AND CURRENCY INTERVENTION.” A radical proposal on the use of currency option strategies for central banks. Charles Taylor. October 1995. ISBN 0-9543144-1-9

£20/$35

18. “THE UK BUILDING SOCIETIES: do they have a future?” A collection of essays by Angela Knight; Alistair Darling, Peter White, Peter Birch, Bert Ely and Karel Lannoo September 1995. ISBN 0-9543144-1-8

£20/$35

For more CSFI publications, please visit our website: www.csfi.org.uk

Sponsorship The CSFI receives general support from many public and private institutions, and that support takes different forms. The Centre currently receives financial support from; inter alia: Ruffer Citigroup Ernst & Young Fitch Ratings

GISE AG ICMA JP Morgan PricewaterhouseCoopers

Aberdeen Asset Management ABI ACCA Accenture Arbuthnot Aviva Bank of England Barclays Chartered Insurance Insititute City of London Deloitte Eversheds Fidelity International Finance & Leasing Association FRC FSA Gatehouse Bank HSBC Jersey Finance

KPMG LCH.Clearnet Lloyds Banking Group Lloyd's of London Logica Man Group plc Morgan Stanley Nomura Institute PA Consulting Prudential plc Royal Bank of Scotland Royal London Group Santander The Law Debenture Corporation Thomson Reuters UBS Wealth Management UK Payments (APACS) Z/Yen Zurich

Absolute Strategy ACT AFME Alpheus Solutions Bank of Italy BCM Strategy Brigade Electronics BVCA Chown Dewhurst CISI Greentarget HM Treasury Hume Brophy Intrinsic Value Investors Investment Management Association

LandesBank Berlin Lansons Communications LEBA and WMBA Lending Standards Board Lombard Street Research MacDougall Auctions Miller Insurance Services NM Rothschild Record Currency Management RegulEyes Risk Reward Taiwan FSC The Share Centre THFC WDX Organisation

The CSFI also received support in kind from, inter alia: - - - - - -

Clifford Chance Edwin Coe Financial Times ifs School of Finance Linklaters LLP Hogan Lovells

- - - - - -

Macquarie Group NERC NESTA Promontory Standard Chartered Taylor Wessing

The Centre has received special purpose funding from: - CGAP and Citi (for Microfinance Banana Skins) and; - PwC (for Banking Banana Skins and Insurance Banana Skins). In addition, it has set up the following fellowship programmes: - the VISA/CSFI fellowship in Identity in Financial Services; and - the DfID/Citi/CSFI fellowship in Development.

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CSFI

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