By Ajit Jain and Caroline Norton, Deutsche Bank, published by the MixMarket Microbanking Bulletin, Issue 18, Spring 2009, pages 17-20, available at:
http://www.themix.org/sites/default/files/MBB%2018%20Spring%202009.pdf
According to Spring 2009 MixMarket Microbanking Bulletin, many microfinance institutions (MFIs) face challenges as slowing growth and funding opportunities forces them to refine risk, actively manage liquidity and rising delinquencies. While the co-authors view the current global economic situation as an opportunity for best run MFIs to distinguish themselves, this was originally complicated by the increasing appetite of MFIs for a greater levered capital structure (as seen by the increase of structured funds offering private and institutional investors new opportunities to acquire notes collateralized by loans to MFIs in the past few years). Note: Data for these findings have been drawn from portfolios managed by the Global Social Investments Group at Deutsche Bank.
As booming local economies increased the growth of savings deposits prior to 2008, MFIs (whose legal structure permitted savings mobilization) grew their portfolios and client bases in some cases by 50 to 100 percent year on year. The coauthors note that while this meant greater access of financial services to poor clients, not all of the MFIs’ rapid growth was so positive. Some MFIs that sought to take advantage of the commercial funds that were readily available moved into SME lending (less familiar products; away from their traditional areas of strength). This was done so in an effort to attract more clients and cover rising financial and operational costs associated with expansion.
The coauthors also cite a recent Women’s World Banking report that found as MFIs converted from NGOs into commercial entities, the average loan size began to grow coupled with a decline in the number of women served, causing a drift in their mission statement. The brief also notes that as MFIs have grown in certain markets, it has produced fierce competition with other MFIs that have lead to over-indebtedness of the borrower.
With regards to investor’s appetite, Deutsche Bank had been in the process of structuring a USD 350 million global microfinance fund during Q3-2008. Unfortunately, the large widening of credit default spreads and the freeze-up of the structured credit products ( CDO market) had put the investment bank’s plans on hold at the time. According to the coauthors, with fewer funds available to put to work in alternative investments (such as microfinance) investors are now focusing their attention to the risks involved in microfinance investments.
Investors are carefully selecting targeted countries and MFI profiles with continued vigilance placed on portfolio quality, liquidity risk, open FX risk and internal controls and a double bottom line objective. With regards to asset quality, the brief notes that portfolio delinquencies; PAR > 30 and > 90 days have increased over the last two years. Portfolio at Risk > 30 has risen from 1.8 percent to 3.8 percent. MFIs recently appear to be reacting to these risks by tightening their credit standard and lowering the size of loans that they offer. Since the global credit crisis, MFIs are responding to falling portfolio quality and uncertain future funding by shrinking disbursed loans sizes, tightening lending standards, and increasing cash held on hand.
By Zoran Stanisljevic
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