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July 10, 2009

Microfinance Practitioners See Themselves as Vulnerable to Macro-Economic Forces
    by Robert Kropp

Second Microfinance Banana Skins report finds that in wake of economic crisis, financial issues such as credit risk and liquidity replace management quality and corporate governance as primary concerns. -- From its origins rooted in small-scale operations designed to provide small amounts of credit to the world's neediest people, microfinance has grown to a point at which the 1,200 microfinance institutions (MFIs) reporting to the Microfinance Information Exchange (MIX) have 64 million borrowers and total assets of $32 billion.

In a report entitled Microfinance Banana Skins 2008: Risk in a booming industry, issued before the worst of the financial crisis struck, the authors at the Centre for the Study of Financial Innovation (CSFI) found that a shortage of funding was not perceived as a risk by respondents in the microfinance industry. Indeed, the biggest risks cited by respondents were management quality and corporate governance.

Now that the global economy has been brought to its knees, have the perceptions of those in the microfinance industry changed in response? To assess the status of MFIs in 2009, CSFI recently issued its Microfinance Banana Skins 2009: Confronting crisis and change. Not surprisingly for an industry that has grown so far beyond its modest beginnings, the report finds that the concerns of MFIs now mirror much more closely those of banks and other traditional lenders.

Only a year ago, many believed the microfinance industry "to be more or less insulated from the vicissitudes of mainstream finance," according to the report's preface. Today, however, "the main message to take from this year's survey is that the climate for microfinance has changed, just as surely as the broader financial and economic climate has changed."

For its 2009 Microfinance Banana Skins report, CSFI received responses from 430 participants in 82 countries. The special focus of the report was on the 350 MFIs with more than $5 million in assets, which are profitable and capable of commercial growth.

The top three risks identified in the 2008 report lost ground in 2009. Management quality fell from first to fourth, corporate governance fell from second to seventh, and inappropriate regulation fell from third to thirteenth. Competition, interest rates, and staffing were also seen as lesser concerns in 2009 than in the previous year.

Given the state of the economy today, it comes as no surprise that the biggest concerns among MFIs in 2009 pertain to specifically financial issues. Credit risk rose from tenth to first among biggest risks, indicating that microfinance is no longer considered to be a low-risk industry. Liquidity rose from 20th to second, reflecting the vulnerability of MFIs to tightened credit. And macro-economic trends rose all the way from 23rd to third, as the perception that microfinance was insulated from the mainstream economy could no longer be held with conviction.

"A further recession-led concern," according to the report, "is for the reputation of the industry if MFIs are unable to sustain their flow of lending or are forced to become tougher about loan re-payment. Any hardening of the MFIs' position would add to concerns about mission drift and the perception that MFIs are abandoning their social objectives."

The report surveyed those who invest in MFIs as well, and found that "Investors are concerned about the aspects of the crisis that could reduce the value of their commitments: the ability of MFIs to manage their liquidity and funding, the effect of currency fluctuations on cross-border exposures, and the impact of credit risk on their soundness and profitability." Investors also remain concerned about the issues of corporate governance and management quality, according to the report.

Asked how well prepared they were to take on the risks they identified, only 5% of respondents described themselves as well-prepared, compared to 27% in 2008. Such an indicator of heightened anxiety is one crucial reason why the authors wrote of their report, "If a single word was needed to sum up its tone, it is 'ominous'."

One of the sponsors of the report is CitiGroup, whose Citi Microfinance business unit was created in 2005 as an initiative to expand financial access in many countries. spoke with Bob Annibale, the Global Director of Citi Microfinance, about his view of the report's findings.

"The report is meant to be a stress test," Annibale said. "If you look at the market with your risk manager's hat on, what makes you worry?"

"But I think what also comes across is resilience," Annibale continued. "I don't believe there's a crisis in microfinance, although there is a greater correlation between markets."

Annibale pointed that in countries like Bosnia & Herzegovina, whose economic fortunes are closely allied with the rest of Europe, some deterioration of market has appeared as enforced transformation to regulated status has caused serious problems for MFIs there.

But Annibale went on to say, "In some of the biggest markets, such as Indonesia, Bangladesh, and India, we're not seeing the deterioration that we might expect."

The report states, "It is impossible to read this year's text without coming to the conclusion that microfinance is at a crossroads, and that it might do the industry a power of good if it were able to call a time-out to reassess its role."

Along such lines, Annibale observed, "We've seen a slowing of the pace of growth almost everywhere, which we see as a good thing. There's certainly a caution about liquidity."

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