The good name of microfinance is under threat. According to a new survey of the industry, reputation damage is now seen to be one of the fastest-rising risks facing micro-lenders in emerging markets.
Microfinance Banana Skins 2011
The report measures the risk perceptions of more than 500 practitioners and close observers of microfinance in 86 countries. According to the rankings, reputation risk has risen from 17th place in the last survey conducted in 2009 to second place in today’s survey. This is the largest leap recorded by a “Banana Skin” since the series was launched in 2008, and directly reflects recent controversies over microfinance lending practices in various markets, particularly India.
The title of the new report “Losing its fairy dust” conveys the central theme of the report: that microfinance has led a charmed life but now needs to confront new realities if it is to maintain its impressive growth record.
Credit risk remains the top Banana Skin for microfinance, but for different reasons from the previous survey which was conducted at the height of the global financial crisis.
Today, there is still economic stress, but also growing evidence of poor credit management by microfinance institutions (MFIs) caused by competitive pressures, by greater cynicism among borrowers, and by growing interference in the credit process by politicians. Credit risk was listed as a major problem by three quarters of the respondent countries.
The strength of credit risk was also driven by concern about the problem of overindebtedness among microfinance customers: poor people who have accumulated larger debts than they can manage, often as a result of pressure from business-hungry MFIs. The potential for loan losses is seen to be high in some markets, showing a striking departure for an industry which has always prided itself on its “99 per cent” repayment record.
David Lascelles, survey editor, said: “These findings reflect a dramatic change in the perceptions of an industry which has long been seen as an unquestioned good. They suggest that microfinance needs to undergo a radical re-think”.
Centre for the Study of Financial Innovation
The survey was conducted by the Centre for the Study of Financial Innovation (CSFI) and sponsored by Citi and the Consultative Group to Assist the Poor (CGAP) with support from the Council of Microfinance Equity Funds (CMEF).
Robert Annibale, global director of Citi Microfinance said, “This year’s survey highlights the challenges to the microfinance sector as it achieves significant growth and transformation. With increased financial inclusion, clients begin to have wider choices in accessing credit. Combined with increased competition, there are increased expectations for the sector to strengthen business practices, client protection, regulatory oversight, and financial education.”
“As microcredit is maturing in local markets, it is confronting the same forces of growth and consolidation seen in other sectors,” said CGAP CEO, Tilman Ehrbeck. “Yet still more than 2.7 billion people globally have no access to a full range of formal financial services. The microfinance industry must not lose sight of this bigger challenge, and the huge opportunities afforded by the new partners and new business models now coming into view.”
Among other findings, the survey shows a sharp rise in political risk (up from No. 10 to No. 5), again reflecting the impact of recent controversies. Although political risk is confined to a few specific markets, it is feared to be spreading. Another riser is the risk of “mission drift” (up from No 19 to No. 9) because of the perception that MFIs are abandoning their commitment to poverty alleviation in favour of financial profit and stock market flotations. This is adding to reputation risk.
The results also show a strong rise in concern about competition (up from No. 9 to No. 3), which is generally seen as a bad thing in the industry because it is driving down lending standards and fuelling the problem of overindebtedness.
Institutional risks such as weak corporate governance and poor management quality remain in the Top Ten.
However many risks, particularly those associated with the financial crisis, have eased, notably liquidity risk (down from No. 2 to No. 16) and funding risks which are now close to the bottom of the scale.
The 46-page report provides a commentary on each of the 24 risks that were identified, and breaks down responses by type and region, providing detailed views of the concerns by geography and different classes of respondent. These show that risk perceptions vary considerably between markets. For example, reputation risk is seen to be much higher in Asia ( No 2 ) than in Latin America (No 8 ) even though both these regions have highly developed microfinance industries.
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