MICROCAPITAL PAPER WRAP-UP: Will Microfinance Stay as a Separate Asset Class? by Marco Coppoolse

By Marco Coppoolse, published by MicroCapital.Org, August 2009, 9 pages, available at:
https://www.microcapital.org/downloads/whitepapers/Will_Microfinance_Rema…

Microfinance has seen an expansion of its products formula from 2005 to 2007. The author’s view is that the microfinance sector will not stay as a separate asset class for long, as more MFIs are developing into full service microfinance banks for the emerging markets sector. MFIs are becoming members of the emerging market banking asset class. These full service microfinance banks offer even larger individual SME loans, savings, remittances, insurance and sometimes even credit cards. While they still service “the poor,” they have entered into new market segments, introduced new products and partnered with mainstream investors.

The report predicts that as microfinance continues integrating into the banking sector, its anti-cyclical nature will disappear. The author’s conclusion is derived from the following components: Growth in microfinance is accelerating; while (comparable) returns are decreasing. The average comparable return of equity (CRoE ) decreased to 49 percent in 2007 from 60 percent in 2005. RoE remained roughly at 25 percent due to only a slight increase in leverage.

Returns are still high in absolute terms while asset quality is still remaining solid. Expense ratios are decreasing, but remain high in certain countries.

Leading microfinance institutions are growing their portfolios with larger average loan sizes; the sector is becoming less “micro”. All microfinance institutions in the sample have seen average loan size increase. The growth in loan size is in part the result of a conscious policy to expand individual lending in the SME segment. Also, group lending and join liability groups (once a key to low default rates in microfinance) are no longer the norm. Microfinance institutions such as SHARE, LAPO, Card NGO, and ASA have not expanded as the others in the sample. This is due to group lending still being a main form of microcredit. The average portfolio growth for 2007 is at 38 percent vs. 32 percent in 2005.

Increased attention for savings in microfinance has resulted in greater savings than in credit extended; institutions active in credits and savings have done better than institutions that only offer credit. Institutions active in savings expanded more in savings than in credit extended. For example, the number of savers in the sample expanded roughly from 5 million to 9 million during 2005-2007, with the number of borrowers at 9.2 million in 2007 vs 6.4 million in 2005. Furthermore, MFIs such as Mibanco, Equity Bank, BancoSol, ACLEDA and XacBank have over 50 percent of their loan portfolio funded by savings. According to the author, the “full-service” MFI seems to be the better model (lower costs ratios and better improvement in ratios from 2005-2007).

Leverage has increased only slightly and asset quality remains solid. Institutions operating under full banking regimes (MiBanco, BancoSol, ACLEDA, and XacBank) appear to have increased their leverage from 2005 to 2007. From 2005-2007 leverage has slightly increased with the global economy currently experiencing a process of deleveraging. The average interest rates in microfinance are also decreasing. Asset quality remains solid as PAR > 30 has improved from 3.2 percent to 2.7 percent (excluding LAPO and Card; two new additions to the sample).

In conclusion, institutions in open markets that are well regulated; allowing for multiple products, tend to develop from microlenders offering credit into microbankers offering a menu of products.

By Zoran Stanisljevic

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