Microfinance Managers’ Views on a New Microfinance Risk Landscape Shift
July 9, 2009
The advent of the current global financial crisis has seen a predictable reordering of perceived risks in the microfinance industry, according to a new survey of microfinance providers, investors, and regulators.
The Banana Skins report, published by the Center for the Study of Financial Innovation, and sponsored by CGAP and Citi Foundation with support from the Council of Microfinance Equity Funds, lays out risks including a surge in nonperforming loans, shortages of liquidity and funding, and concerns about macroeconomic trends.
The survey updates the results of a previous poll published in early 2008 and underscores how perceptions have changed since that time. The report compiles and analyzes 430 responses from across 82 countries and shows that most microfinance managers acknowledge that the crisis will slow what had been a rapid growth of their industry, restrain their access to funding, and force them to take a more conservative credit policy in their home markets.
“This year’s Banana Skins survey highlights cracks and fissures in microfinance that have surfaced with the global economic crisis,” says Elizabeth Littlefield, CGAP chief executive officer. “But, the sector is basically healthy, with strong fundamentals and a solid, reliable, and growing client base. Tackling immediate concerns about credit risk and liquidity is important, but remaining focused on longer term issues of strong management, governance, and asset and liability management capacity remains crucial for the future.”
According to a CGAP survey from earlier this year, even though market conditions have significantly deteriorated, there have been very few microfinance institution (MFI) failures since the onset of the crisis. Portfolio at risk for the largest MFIs has risen but is still below 5%, significantly lower than commercial bank retail loans in emerging markets.
Nonetheless, there has been a dramatic shift in perceptions of risk by survey respondents as a result of the financial crisis. MFIs, their investors, and regulators are now focusing on credit risk, liquidity, and global economic trends. Contrast this list with the top three concerns from 2008—management quality, corporate governance, and inappropriate regulation—and it’s clear that the crisis has caused a profound shift in thinking.
Concerns about risk associated with refinancing and too little funding ranked fifth and sixth in the latest survey; these were ranked 28 and 29, respectively, in 2008. Concerns about profitability shot to 12 from 22 in the rankings. And concerns about foreign currency risk climbed to eight from 12, reflecting the difficulty some MFIs are facing in managing currency volatility arising from their past reliance on financing in hard currency.
“These findings turn the earlier survey on its head.” says David Lascelles, survey editor. “Last year’s result reflected the traditional view that microfinance operates in a world of its own, with abundant funding and loyal customers. But the crisis has shown that it is also exposed to the shocks of the ‘real economy’.”
Many MFIs have taken significant steps to mitigate the effects of the crisis, including tightening credit policy, slowing growth, and diversifying funding sources. Public investors have also stepped in and are providing emergency liquidity to cash-strapped MFIs.
As the global crisis continues to unfold in emerging markets, MFIs and their clients continue to be challenged by rising food and energy prices and declining remittance flows. Strong support from multilaterals and public investors will continue to be important where liquidity shortages and nonperforming loans have emerged as a result of the crisis.
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