CGAP: Jeanette Thomas
+1 202 473 8869
jthomas1@cgap.org

Citi:
Adam Castellani
+ 44 207 986 5608

CSFI:
David Lascelles
+44 (0)7710 088658 or +44 (0)20 7493 0173

The current flood of investment into the microfinance industry could overwhelm those microfinance institutions (MFIs) that are not equipped to meet the pressures of rapid growth and rising competition. The high expectations that people have of microfinance both as a social movement and a financial investment could be disappointed as a result, says a new survey of the risks facing the industry.

Microfinance Banana Skins 2008, published at a time when the sector is undergoing dramatic changes, reveals strong doubts among microfinance practitioners, investors and observers about the ability of many MFIs to adapt to new demands while still retaining their social objectives. Current levels of management experience and financial skills are seen as a challenge for the industry, though these deficiencies are not universal, and are being addressed in many parts of the world.

The Banana Skins report reflects the views of more than 300 respondents from 74 countries, and is the most comprehensive survey undertaken of the risk outlook for microfinance. The survey focuses on MFIs with more than $5m in assets which are profitable and capable of commercial growth. These number about 350 and account for the bulk of microfinance assets globally.

The survey was sponsored by Citi Foundation and the Consultative Group to Assist the Poor (CGAP), with support from the Council of Microfinance Equity Funds (CMEF) and the Microfinance Information eXchange (MIX).

"The views of the field come together in this report to highlight the most urgent need facing the industry" said Xavier Reille of CGAP. "And that is the need to strengthen institutions at the local level - management, boards as well as government regulators."

"Risks can only be understood with hindsight," said Philip Brown, Risk Director of Citi-Microfinance. "By pooling the different views of hundreds of sector participants, this report offers a broad overview of sector risk issues. We hope that it will inject a dose of realism by heightening awareness of current risks, raise debate and provide a view out of the windscreen of the perceived risks on the road ahead."

Of the 29 risks - or "Banana Skins" - identified by the survey, many of the top ones are linked to factors directly under MFIs' own control, such as the quality of management and corporate governance, rising costs, staffing, managing technology, and credit risk.

The main risks in the operating environment are bad regulation and political interference, though market risks such as interest rates and foreign exchange are growing as MFIs become more integrated with mainstream markets.

The fastest rising risk is identified as the growth of competition, driven by the appeal of microfinance to outside investors and commercial banks. Competitive pressures are seen to be undermining standards, cutting into profitability and aggravating staffing problems, though they are also spurring innovation and forcing down prices. Unless MFIs can manage these pressures, some could fail and damage the reputation of microfinance more widely.

The survey was carried out by the Centre for the Study of Financial Innovation, an independent not-for-profit think tank based in London which explores the future of financial services. The CSFI has been running regular "Banana Skins" surveys of the banking and insurance industries for more than ten years, and has taken a close interest in the prospects for microfinance.

David Lascelles, the survey editor, said: "The Banana Skins report paints a vivid picture of the risks faced by microfinance in its rapid evolution from NGO to commercial status. The scale and the speed of change are enormous and will need to be carefully managed."

The 40-page report provides a commentary on each of the 29 risks, and breaks down responses by type and region, providing a detailed view of the concerns by geography and different classes of respondent.

Microfinance Banana Skins 2008 is available from:
CSFI, 5, Derby Street, London W1J 7AB, UK. Tel: +44 (0)20 7493 0173,
or via email: info@csfi.org.uk.

Note to editors: Microfinance is the practice of providing small scale financial services to the world's poor, mainly savings, loans and insurance. The modern business originated in Asia 20 years ago, and has grown rapidly to the point where there are now an estimated 10,000 MFIs in the world spread across all continents. The 1,200 microfinance institutions who report to the Microfinance Information eXchange (MIX) have 53m borrowers and 64m savers, and numbers are growing by 25 per cent a year, more in some countries. Total assets of these MFIs amount to $33bn. According to research by the Consultative Group to Assist the Poor, the stock of foreign capital invested in the sector more than tripled to $4bn between 2004 and 2006, much of it held by specialised microfinance investment vehicles, with a large proportion coming from the private sector.

Sponsors:

CGAP (Consultative Group to Assist the Poor) provides the financial industry, governments and investors with objective information, expert opinion, and innovative solutions to effectively expand access to finance for poor people around the world. More information: www.cgap.org

Citi, the leading global financial services company, has some 200 million customer accounts and does business in more than 100 countries, providing consumers, corporations, governments and institutions with a broad range of financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage, and wealth management. Citi's major brand names include Citibank, CitiFinancial, Primerica, Smith Barney, Banamex, and Nikko. Additional information may be found at www.citigroup.com or www.citi.com.