PAPER WRAP-UP: Microfinance: An Emerging Asset Class for Equity and Debt Investors, by Marco Coppoolse

With December 2005 data from MIX, the microfinance information clearinghouse, Mr Coppoolse analysed the nine MFIs’ performance with six key performance indicators: return on equity (RoE); number of borrowers; portfolio size; portfolio growth; expense ratio and with the new CRoE indicator.

“Comparable return on equity” (CRoE) is a zero-equity based return, which allows for a correction to be made for the interest earned over the average equity, once the net profit of an MFI has been calculated. This correction is made at the domestic interbank offered rate, at which prime banks can borrow in the currency local to the country in which the MFI operates. The CRoE is return (on top of the interbank money market rate) that is generated by running a business. CRoE can adjust for different high inflation / high interest rate environments, therefore making it applicable for comparisons between markets and regions.

This calculation was scored alongside each of the other indicators, allowing a table to be drawn up comparing and ranking the nine MFIs. ASA came first, followed by Compartmentos, with Equity Bank from Kenya coming third.

The RoE, number of borrowers, portfolio size and portfolio growth figures all indicate that industry is going through a period of high growth. The lowest RoE was 14.3% from ACLEDA, with the highest being 55.2% from Compartmentos. ASA in Bangladesh had by far the highest number of borrowers, with over 4 million, and the largest portfolio, valued at USD 255 million, but with the second lowest growth rate at 21%. With the exception of BancoSol in Bolivia the portfolio growth rate for all the other 7 MFIs was between 34-51%.

In fact their portfolios are growing relatively faster than their number of borrowers, with average portfolio growth of 38% and an average growth in numbers of 33%. Mr Coppoolse suggests this could be down to one of two reasons: either there are repetitive loan cycles with existing customers coming back for higher amounts, or that the MFIs are experiencing ‘mission drift’ and concentrating on higher value loans to the not-so poor. Mr Coppoolse accepts that the answer is not available with his statistics, but states in the paper that the final performance indicator needed for the industry overall is one that measures and tracks the social return of the MFIs.

Amongst all the positive figures, the expense ratios for the leading MFIs are still high, with the average for the sample being 20.6%. Mr Coppoolse thinks that the continued success and growth of the MFIs should see this figure drop, as lower financing costs and operating expenses should be achieved by scale and increased technological and operating prowess.

Mr Coppoolse sees maturity in the microfinance industry with the increasing internationalisation that is taking place, for example, ACLEDA is starting up in Laos and Vietnam; and ASA, in association with Catalyst investors, is seeking further expansion in Asia and Africa.

The RoE figures are so strong that Mr Coppoolse suggests that investors will be turning to MFIs as potential investments in larger numbers, despite the fact that they have traditionally been wary of MFIs because of their mission to serve the unbanked. Mr Coppoolse compares the average RoE for his group of MFIs of 26.5% to the average RoE of listed companies in emerging markets, which he reports at 19%.