MICROFINANCE PAPER WRAP-UP: Microfinance and the Role of Policies and Procedures in Saturated Markets and During Periods of Fast Growth, by Adrian Gonzalez and Emmanuelle Javoy, published by, Microfinance Information Exchange, Planet Rating

Published by the Microfinance Information Exchange & Planet Rating, MicroBanking Bulletin, September 2011, 10 pages, available at: http://www.themix.org/sites/default/files/MBB-%20microfinance%20and%20the%20role%20of%20policies%20and%20procedures%20in%20saturated%20markets_1.pdf

Internal procedures and policies as well as external factors are important determinants of the portfolio quality of microfinance institutions (MFIs). This paper aims to assess the effects of internal factors such as governance, management information systems (MIS), risk management procedures and lending methods in different scenarios. In particular the authors consider how internal factors interact with external factors such as market saturation and MFI growth rates. Questions such as the following are addressed: “Is governance more important in periods of accelerated growth than in periods of contraction?” and “Are MIS more critical in highly saturated markets?” The authors employ data from approximately 200 ratings of 130 MFIs by Planet Rating of France. The ratings employ a methodology known as GIRAFE, an acronym for the following six assessment domains: governance, information, risk management, activities, funding and liquidity, and efficiency and profitability.

The authors use the following indicators of credit risk: portfolio at risk over 30 days (PAR30), write-off ratio (WOR) and total credit risk, which is defined as the sum of PAR30 and WOR. The analysis focuses on the levels of credit risk and their relationship with GIRAFE scores, in contrast to previous work that considered changes in levels of credit risk over time.

The study indicates that the quality of the management of the financial services provided by the MFI is the key determinant of portfolio quality under all growth scenarios and saturation levels. Governance and risk management were the second and third most important determinants, depending on the proxy used for credit risk and the scenario under consideration. Information systems and design are the next most important factors.

The authors suggest that good policies and procedures, like insurance policies, are more important in periods of trouble than in periods of stability. Weak MFIs may appear strong when no problems are on the horizon, but external shocks will quickly reveal their weaknesses. The authors see the challenge in the industry now as the need to take time to reevaluate targets in high risk markets and to refocus attention on new and under-served markets.

The authors argue that this study validates the utility of Planet Rating’s GIRAFE scores to forecast credit risk 12 months ahead, offering early-warning of credit risk and over-indebtedness. The analysis also suggests that MFIs operating in regions where penetration rates are high should employ additional management strategies to efficiently mitigate the risks related to market saturation. In this respect, Planet Rating in particular suggests attention to the following issues:

-Market Evaluation: Careful evaluation of market potential including reviewing the strategies and growth targets of competitors in business plans;

-Prevention of cross and over-indebtedness: Review of indebtedness of clients prior to loan disbursement; adaptation of loan officer incentive schemes in areas with high levels of penetration; detailed analysis of portfolio quality by region, product, economic sector and month of disbursement; annual evaluation of the level of cross-indebtedness either via credit bureaus or analysis by an independent third party; and

– Sector Organization: Collaboration and cooperation among MFIs in order to create tools that can help identify areas of saturation.

By Ashim Kar, Research Associate

Sources and Additional Resources:

Gonzalez, Adrian and Emmanuelle Javoy (2011). “Microfinance and the Role of Policies and Procedures in Saturated Markets and During Periods of Fast Growth”, MicroBanking Bulletin, September 2011, http://www.themix.org/sites/default/files/MBB-%20microfinance%20and%20the%20role%20of%20policies%20and%20procedures%20in%20saturated%20markets_1.pdf

MicroCapital.org story, February 2, 2011, “MICROCAPITAL PAPER WRAP-UP: Over-Indebtedness and Microfinance: Constructing an Early Warning Index; by Vivien Kappel, Annette Krauss and Laura Lontzek; published by Center for Microfinance, University of Zurich, responsAbility Social Investments AG, Triodos Bank and Council of Microfinance Equity Funds”, https://www.microcapital.org/microcapital-paper-wrap-up-over-indebtedness-and-microfinance-constructing-an-early-warning-index-by-vivien-kappel-annette-krauss-and-laura-lontzek-published-by-center-for-microfinance-universit/

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