As part of its ‘BeyondBrics’ publication on business markets in emerging countries, the Financial Times (FT), a business news organization based in London, England, has predicted increased default risks in microfinance institutions (MFIs). James Fontanella-Khan, an online editor for FT, states, “Microfinance is expanding fast in emerging countries. The number of financial institutions piling in to grab a slice of the market is expanding at an even faster rate.”

FT refers to a report from CGAP (Consultative Group to Assist the Poor), ‘Growth and Vulnerabilities in Microfinance,’ which studies the effects of expansion in microfinance. The primary concern cited for microfinance institutions is borrowers that default on loans. As more MFIs penetrate the market, competition for borrowers arises. In response, MFIs sometimes lower their credit standards to attract more borrowers. Such an environment reduces stability and increases default risks.

Fontanella-Khan states, “Although the potential for growth is massive, as millions of people around the world continue to have little or no access to credit, it is clear that microcredit organizations need to fortify their financial foundations if they want to survive.”

By Matthew Fox, Research Associate

About CGAP (Consultative Group to Assist the Poor):

Housed at the World Bank Group, CGAP (Consultative Group to Assist the Poor) is an independent policy and research center dedicated to providing financial access for the world’s poor. CGAP is supported by over thirty development agencies and private foundations. Its mission is to provide market intelligence, to promote standards and to offer advisory services to governments, microfinance providers, donors and investors.

Additional Resources:

[1] Financial Times: Microfinance Faces Mega Default Risks:http://blogs.ft.com/beyond-brics/2010/06/18/microfinance-faces-mega-default-risks/

[2] CGAP: Growth and Vulnerabilities Report:http://www.cgap.org/p/site/c/template.rc/1.9.42393/

[4] MicroCapital Brief: Microloan Default Risk Rises in India as SKS Microfinance Plans Initial Public Offering:http://www.microcapital.org/microcapital-brief-microloan-default-risk-rises-in-india-as-sks-microfinance-plans-initial-public-offering-ipo/

[3] MicroCapital Universe: CGAP (Consultative Group to Assist the Poor):http://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=CGAP+%28Consultative+Group+to+Assist+the+Poor%29

Browse the MicroCapital Universe and add your entry to the wiki at:http://www.microcapital.org/microfinanceuniverse/