PAPER WRAP-UP: Performance and Transparency: A Survey of Microfinance in South Asia, Microfinance Information eXchange (MIX)

Authored and published by staff members of the Microfinance Information eXchange (MIX), initiated and funded by the Consultative Group to Assist the Poor (CGAP) and The World Bank, released January 2006, 100 pages, available at http://microfinancegateway.com/files/31049_file_MIX_South_Asia_Performance_and_Transparency_2_.pdf

This report is based on research conducted by the MIX on 125 South Asian microfinance institutions (MFIs) in Afghanistan, Bangladesh, India, Nepal, Pakistan, and Sri Lanka. Analyzing performance and transparency by comparing between institutions, between countries, and between South Asia and other regions, the authors have constructed a clearer picture of microfinance in all six countries. The region has traditionally been paralyzed by incomplete financial reporting, poor dissemination of existing outreach and fiscal information, and a lack of comprehensive industry associations advocating greater transparency and the use of accepted microfinance reporting standards. The study includes data from 2002 and 2003, “with the exceptions of Nepal and India, where significantly larger samples were available for the subsequent years.”

The authors begin with an overview of regional microfinance, noting that South Asian MFIs serve more borrowers than any other region (50 percent of the global market), focus on women (whom constitute 85 percent of regional borrowers), and reach the poorest of the poor with average loan balances below 25 percent of gross national income (GNI) per capita. Additionally, the growth of South Asian MFIs was second to none in raw numbers (adding nearly 3 million borrowers out of total 3.7 million global growth), are highly capitalized by banks and other financial institutions (“funding 80 percent of their assets from loans”), and are both the most efficient (14 cents spent per dollar of loans) and productive (staff members serve nearly 50 percent more customers than in other regions).

Along with Africa, average portfolio quality is poor. Greater than seven percent of loans are at risk with late payments greater than 30 days. However, the authors note that much of the regional risk is concentrated in Pakistan and Sri Lanka.

Despite extremely low cost structures, South Asian MFIs are the least profitable, on average, of any world region. However, there are numerous examples of highly self-sustainable institutions, mostly based in Bangladesh, as shown on page 11 of the report. Notably, average profitability in the region is driven down by Afghanistan and Pakistan. The authors also found that increasing scale was crucial for achieving sustainability (financial revenue increased dramatically after South Asian MFIs reached 10,000 clients).

Moving to the “State of Transparency across South Asia,” the authors evaluate regional microfinance transparency by covering the following eight “Building Blocks of Transparency:” management information systems, internal controls, external audits, performance measurements, benchmarking, performance standards, ratings, and supervision.

The state of MFI performance reporting in South Asia is characterized by poor reporting outside of the leading institutions and project-specific indicators are widely practiced. Many MFIs also obtain audits, but non-governmental organizations (NGOs) providing integrated services often do not separate their microfinance activities, which makes evaluation difficult. Moreover, in many areas, local auditors are not educated on accepted international standards for MFIs and produce reports which fall short of providing a complete picture of fiscal health. Increased education on international MFI reporting standards for both institutions and auditors is presented as the solution.

Performance monitoring is stressed as a tool for potential development throughout the region and the authors encourage the building of long-lasting associations and projects in each country to report on a broad range of institutions, using accepted reporting standards, and the subsequent publishing of the results.

Independent ratings, another important component of transparency, are not readily available in South Asian countries outside of India. The cost of ratings continues to be a barrier for many MFIs. Thus, support from national microfinance associations for the establishment of local ratings expertise is emphasized as an opportunity for improvement.

Finally, there is much room for progress in regulation and supervision. MFIs work through a variety of institutional forms and each form is often regulated through different departments of the respective government. Thus, reporting standards are different for each form and information is decentralized. A more sophisticated understanding of MFIs in South Asia, and the regulations that encourage their development, will help to increase transparency and provide for better governmental management of industry policies.

All six countries are covered in detail. To read country-specific information, please refer to the report found here.

The Regional Overview was written by Blaine Stephens and Hind Tazi of the MIX and contributing country authors included Syed Mohsin Ahmed of the Pakistan Microfinance Network (Afghanistan, Bangladesh, and Pakistan), Sa-Dhan (India), Prahlad Mali of the Centre for Micro-Finance (Nepal), and Indrajith Wijesiriwardana and Anura Athapattu—independent consultants—(Sri Lanka).

By Anthony Busch, Research Assistant

Additional Resources:

“Performance and Transparency: A Survey of Microfinance in South Asia”

Centre for Micro-Finance: Home

MIX Market: Home

Pakistan Microfinance Network: Home

Sa-Dhan: Home

The World Bank: Home

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