The
                           MicroBanking
                             BulleTin

                                       ...
We would like to thank the following institutions for their participation in this issue:
REGION          COUNTRY          ...
The MicroBanking Bulletin (MBB)
The MicroBanking Bulletin is one of the principal               benchmark reports, which a...
The MicroBanking Bulletin


issue no. 18
spring 2009


Dedicated to the performance of organizations that provide banking ...
TaBle of conTenTs
From the Publisher.........................................................................................
From the Publisher
                                         Microfinance in the Global Tsunami —
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MICROBANKING BULLETIN, IssUE 18, sPRING 2009                    The Impact of Inflation on ARTICLEs
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MICROBANKING BULLETIN, IssUE 18, sPRING 2009                                                                              ...
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MICROBANKING BULLETIN, IssUE 18, sPRING 2009                                                                              ...
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MICROBANKING BULLETIN, IssUE 18, sPRING 2009                                                                              ...
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MICROBANKING BULLETIN, IssUE 18, sPRING 2009                                           The Impact of the FinancialARTICLEs...
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The MicroBanking Bulletin Spring 2009

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MIX is a non-profit company that
works to support the growth and development of a
healthy microfinance sector. MIX is supported by the
Consultative Group to Assist the Poor (CGAP), Citigroup
Foundation, Deutsche Bank Americas Foundation,
Omidyar Network, Open Society Institute, and others.
To learn more about MIX, please visit the website at
www.themix.org.

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The MicroBanking Bulletin Spring 2009

  1. 1. The MicroBanking BulleTin Issue No. 18 Spring 2009 A publicAtion DeDicAteD to the performAnce of orgAnizAtionS thAt proviDe bAnking ServiceS for the poor Copyright (c) 2009 Microfinance Information Exchange, Inc. The MicroBanking Bulletin is published twice annually by Microfinance Information Exchange, Inc. ISSN 1934-3884. Copyright 2009. All rights reserved. The data in this volume have been carefully compiled and are believed to be accurate. Such accuracy is not however guaranteed. Feature articles in MBB are the property of the authors and permission to reprint or reproduce these should be sought from the authors directly. The publisher regrets it cannot enter into correspondence on this matter. Otherwise, no portion of this publication may be reproduced in any format or by any means including electronically or mechanically, by photocopying, recording or by any information storage or retrieval system, or by any form or manner whatsoever, without prior written consent of the publisher of the publication. Prepared by: Job Continent Inc. www.jobcontinent.com
  2. 2. We would like to thank the following institutions for their participation in this issue: REGION COUNTRY # MFIS NaME OF PaRTICIPaNT africa Benin 2 PADME, Vital Finance (69 MFIs) Burkina Faso 1 RCPB Cameroon 3 CamCCUL, CCA, CDS Congo 1 CAPPED Congo, Democractic Republic of 1 FINCA-DRC Ethiopia 12 ACSI, AVFS, BG, DECSI, Eshet, Gasha, Metemamen, OMO, PEACE, SFPI, Wasasa, Wisdom Ghana 13 APED, Bessfa RB, CFF, FASL, Kakum RB, Maata-N-Tudu, Naara RB, OISL, ProCredit-GHA, SAT, Sonzelle RB, Toende RB, Upper Manya RB Kenya 6 Equity Bank, KADET, K-Rep, KWFT, MDSL, SMEP Malawi 1 FINCA-MWI Mali 4 Jemeni, Kafo Jiginew, Kondo Jigima, Nyèsigiso Mozambique 5 BOM, FCC, FDM, NovoBanco-MOZ, Tchuma Nigeria 2 LAPO, SEAP Rwanda 1 UOMB Senegal 2 ACEP Senegal, CMS South Africa 2 Capitec Bank, SEF-ZAF Swaziland 1 FINCORP Tanzania 4 Akiba, FINCA-TZA, PRIDE-TZA, SEDA Togo 2 FUCEC Togo, WAGES Uganda 5 Centenary Bank, Faulu-UGA, FINCA-UGA, MED-Net, UML Zambia 1 FINCA-ZMB asia Afghanistan 5 ARMP, BRAC-AFG, FINCA-AFG, FMFB-AFG, Parwaz (117 MFIs) Bangladesh 7 ASA, BRAC, BURO Bangladesh, Grameen Bank, IDF, JCF, TMSS Cambodia 9 ACLEDA, AMK, AMRET, CREDIT, HKL, PRASAC, Sathapana Limited, TPC, VFC China 1 CZWSDA India 32 ABCRDM, AML, AMMACTS, Bandhan, BASIX, BFL, BISWA, BSS, Cashpor MC, CReSA, ESAF, GK, GU, GV, KAS, KBSLAB, KRUSHI, Mahasemam- SMILE, MFI, RASS, RGVN, Saadhana, Sanghamithra, Sarvodaya Nano Finance, SHARE, SKDRDP, SKS, SMSS, Spandana, SWAWS, Ujjivan, VFS Indonesia 12 LPD Ambengan, LPD Bayung Gede, LPD Bedha, LPD Buahan, LPD Celuk, LPD Ketewel, LPD Kukuh, LPD Kuta, LPD Pecatu, LPD Sibetan, LPD Ubung, MBK Ventura Nepal 4 DD Bank, MGBB, Nirdhan, PGBB Pakistan 6 DAMEN, FMFB-Pakistan, Kashf, Khushhali Bank, NMFB, Rozgar Philippines 37 1st Valley Bank, ABS-CBN, ASHI, Banco Santiago de Libon, Bangko Kabayan, Bangko Mabuhay, BCB, Cantilan Bank, CARD Bank, CARD NGO, CBMO, CEVI, CMEDFI, ECLOF-PHL, FCBFI, FICO, Green Bank, Kasagana-Ka, Kazama Grameen, KMBI, Mallig Plains RB, MEDF, New RB of Victorias, NWTF, OMB, PALFSI, RB Digos, RB Lebak, RB Mabitac, RB Oroquieta, RB Solano, RB Sto. Tomas, RB Talisayan, TSKI, TSPI, Valiant RB, VEF Samoa 1 SPBD Sri Lanka 1 SEEDS Thailand 1 SED Vietnam 1 CEP ECa Albania 3 BESA, Opportunity Albania, ProCredit Bank-ALB (98 MFIs) Armenia 8 ACBA, AREGAK, ECLOF-ARM, FINCA-ARM, Horizon, INECO, KAMURJ, SEF-ARM Azerbaijan 9 AccessBank, Azercredit, Azeri Star, CredAgro NBCO, FINCA-AZE, FinDev, MikroMaliyye Credit, Normicro, Viator Bosnia and Herzegovina 13 EKI, LIDER, LOK Microcredit Foundation, MI-BOSPO, MIKRA, Mikro ALDI, MIKROFIN, Partner, PRIZMA, ProCredit Bank-BIH, SINERGIJA, Sunrise, Women for Women Bulgaria 4 Mikrofond, Nachala, ProCredit Bank-BGR, USTOI Croatia 2 DEMOS SLC, NOA Georgia 7 CREDO, Crystal, FINCA-GEO, ImerCredit, JSC Bank Constanta, Lazika Capital, ProCredit Bank-GEO Kazakhstan 2 Bereke, KMF Kosovo 7 AFK, BZMF, FINCA-KOS, KEP, KosInvest, KRK Ltd, ProCredit Bank-KOS Kyrgyzstan 4 Aiyl Bank, Bai Tushum, FMCC, Kompanion Macedonia, Former Yugoslav Republic of 4 FULM, Horizonti, Moznosti, ProCredit Bank-MKD Moldova 2 Microinvest, ProCredit-MDA Mongolia 3 Khan Bank, TFS, XacBank Montenegro 2 AgroInvest, OBM Poland 1 Fundusz Mikro Romania 3 CAPA, OMRO, ProCredit Bank-ROM Russia 11 Alternativa, CEF, FFECC, FORUS, Intellekt, KMB, Rost, SBS, Sodeistviye (Pyatigorsk), Sodeystviye, VRFSBS Serbia 3 MDF, OBS, ProCredit Bank Serbia Tajikistan 8 Agroinvestbank, Bank Eskhata, FINCA-TJK, FMFB TJK, Imkoniyat, IMON, MLF HUMO, MLF MicroInvest Ukraine 2 HOPE, ProCredit Bank-UKR LaC Argentina 2 FIE Gran Poder, Grameen Mendoza (179 MFIs) Bolivia 17 AgroCapital, BancoSol, Coop Fátima, CRECER, Diaconia, EcoFuturo FFP, Emprender, FADES, Fassil FFP, FIE FFP, FONCRESOL, Fortaleza FFP, FUNBODEM, IMPRO, ProCredit-BOL, PRODEM FFP, ProMujer-BOL Brazil 5 Banco da Familia, CEADe, CEAPE Maranhão, CrediAmigo, ICC BluSol Chile 3 BancoEstado, BanDesarrollo Microempresas, Credicoop Colombia 14 Actuar Caldas, Actuar Tolima, BCSC, CMM Bogotá, CMM Medellín, Contactar, FinAmérica, FMM Bucaramanga, FMM Popayán, FMSD, Interactuar, Microempresas de Antioquia, OLC, WWB Cali Costa Rica 7 ACORDE, ADRI, CREDIMUJER, FIDERPAC, FOMIC, Fundación Mujer, FUNDECOCA Dominican Republic 3 ADOPEM, Banco ADEMI, Fundación San Miguel Ecuador 20 Banco Solidario, CEPESIU, COAC Acción Rural, COAC Jardín Azuayo, COAC MCCH, COAC Mushuc Runa, COAC Sac Aiet, COAC San José, CODESARROLLO, Credi Fé, D-Miro, FED, FINCA-ECU, FODEMI, Fundación Alternativa, Fundación Espoir, FUNDAMIC, INSOTEC, ProCredit-ECU, UCADE Ambato El Salvador 10 ACCOVI, AMC de R.L., Apoyo Integral, ASEI, ENLACE, Fundación CAMPO, FUNSALDE, Genesiss, ProCredit-SLV, Sociedad Cooperativa PADECOMSM Guatemala 15 AGUDESA, ASDIR, Asociación Raíz, AYNLA, CDRO, CRYSOL, FAFIDESS, FAPE, FINCA-GTM, FONDESOL, Friendship Bridge, Fundación MICROS, FUNDEA, FUNDESPE, Génesis Empresarial Haiti 4 ACME, Fonkoze, MCN, SOGESOL Honduras 10 ADICH, BanCovelo, FAMA OPDF, FINCA-HND, FINSOL, FUNDAHMICRO, FUNED, Hermandad de Honduras OPDF, ODEF Financiera S.A., World Relief-HND Mexico 7 ADMIC, ASP Financiera, Caja Popular Mexicana, CompartamosBanco, FINCA-MEX, FinComún, ProMujer-MEX Nicaragua 16 ACODEP, ADIM, BANEX (ex FINDESA), CEPRODEL, FDL, Financiera Fama, FINCA-NIC, FODEM, Fundación León 2000, Fundación Nieborowski, FUNDENUSE, FUNDESER, PRESTANIC, ProCredit-NIC, PRODESA, ProMujer-NIC Panama 2 Microserfin, ProCaja Paraguay 6 Coop Universitaria, FIELCO, Financiera Familiar, Fundación Paraguaya, Interfisa, Visión Banco Peru 37 ADRA-PER, AMA, Asociación Arariwa, Caja Nor Perú, Caritas, CMAC Arequipa, CMAC Cusco, CMAC Del Santa, CMAC Huancayo, CMAC Ica, CMAC Maynas, CMAC Paita, CMAC Sullana, CMAC Tacna, CMAC Trujillo, COOPAC San Martín, COOPAC Santo Cristo, CRAC Los Andes, Crediscotia, EDAPROSPO, EDPYME Alternativa, EDPYME Confianza, EDPYME Crear Arequipa, EDPYME Crear Tacna, EDPYME Efectiva, EDPYME Nueva Visión, EDPYME Proempresa, Financiera Edyficar, FINCA-PER, FONDESURCO, FOVIDA, IDESI Lambayeque, Manuela Ramos, MiBanco, MIDE, PRISMA, ProMujer-PER Venezuela 1 BanGente MENa Egypt 6 ABA, Al Tadamun, CEOSS, DBACD, Lead Foundation, SBACD (24 MFIs) Jordan 4 AMC, MEMCO, MFW, Tamweelcom Lebanon 2 Al Majmoua, Ameen Morocco 7 Al Amana, Al Karama, AMSSF/MC, FBPMC, FONDEP, INMAA, Zakoura Palestine 2 FATEN, UNRWA Tunisia 1 Enda Yemen 2 Azal, NMF Abbreviations: ECA = Eastern Europe & Central Asia; LAC = Latin America & the Caribbean; MENA = Middle East & North Africa.
  3. 3. The MicroBanking Bulletin (MBB) The MicroBanking Bulletin is one of the principal benchmark reports, which are an important output of publications of MIX (Microfinance Information the benchmarks database, explain the adjustments Exchange, Inc.). MIX is a non-profit company that we made to the data, and compare the institution’s works to support the growth and development of a performance to that of peer institutions. MFI managers healthy microfinance sector. MIX is supported by the and board members use these tools to understand their Consultative Group to Assist the Poor (CGAP), Citigroup institution’s performance in a comparative context. Foundation, Deutsche Bank Americas Foundation, Omidyar Network, Open Society Institute, and others. The third core service is to work with networks of To learn more about MIX, please visit the website at microfinance institutions (i.e., affiliate, national, regional), www.themix.org. central banks, and researchers in general to enhance their ability to collect and manage performance Purpose indicators. MIX provides this service in a variety of ways, including 1) training these organizations to collect, By collecting financial and portfolio data provided adjust and report data on retail MFIs at the local level and voluntarily by leading microfinance institutions (MFIs), use MIX’s performance monitoring and benchmarking organizing the database by peer groups, and reporting software, 2) collecting data on behalf of a network, this information, MIX is building infrastructure that is and 3) providing customized data analysis to compare critical to the development of the microfinance sector. The member institutions to peer groups. This service to primary purpose of this database is to help MFI managers networks, regulatory agencies, and researchers allows and board members understand their performance in MIX to reach a wider range of MFIs in order to improve comparison to other MFIs. Secondary objectives include their financial reporting. establishing industry performance standards, enhancing the transparency of financial reporting, and improving the performance of microfinance institutions. New Participants Institutions that wish to participate in the Bulletin Benchmarking Services database should contact: info@themix.org, Tel +1 202 659 9094, Fax +1 202 659 9095. Currently, the To achieve these objectives, MIX provides the only criterion for participation is the ability to fulfill following benchmarking services: 1) the Bulletin’s fairly onerous reporting requirements. MIX reserves the Tables; 2) customized financial performance reports; right to establish minimum performance criteria for and 3) network services. participation in the Bulletin database. MFIs participate in the MicroBanking Bulletin benchmarks database on a quid pro quo basis. They provide MIX Submissions with information about their financial and portfolio The Bulletin welcomes submissions of articles and performance, as well as details regarding accounting commentaries, particularly regarding analytical work on practices, subsidies, and the structure of their liabilities. the financial performance of microfinance institutions. Participating MFIs must submit substantiating Submissions may include reviews or summaries of documentation, such as audited financial statements, more extensive work published elsewhere. Articles annual reports, ratings, institutional appraisals, and other should not exceed 2,500 words. To submit an article, materials that help us understand their operations. With please contact Elizabeth Downs, Managing Editor, at this information, we apply adjustments for inflation, edowns@themix.org. subsidies and loan loss provisioning in order to create comparable results. Data are presented in the Bulletin anonymously within peer groups. While MIX performs Disclaimer extensive checks on the consistency of data reported, Neither MIX, MBB’s Editorial Board nor do MIX’s funders we do not independently verify the information. accept responsibility for the validity of the information presented or consequences resulting from its use by In return, participating institutions receive a comparative third parties. performance report (CPR). These individualized
  4. 4. The MicroBanking Bulletin issue no. 18 spring 2009 Dedicated to the performance of organizations that provide banking services for the poor. ediTorial sTaff Publisher: Peter Wall, Executive Director, MIX Managing Editor: Elizabeth Downs, Director of Marketing and Communications, MIX ediTorial Board Craig F. Churchill International Labour Organization Asad Mahmood Deutsche Bank J.D. Von Pischke Frontier Finance International Elisabeth Rhyne ACCION International Gabriel Solorzano BANEX Chairman Emeritus: Robert Peck Christen The MicroBanking Bulletin is a publication of MIX (Microfinance Information Exchange, Inc.) To learn more about MIX, please visit the MIX website at www.themix.org
  5. 5. TaBle of conTenTs From the Publisher..............................................................................................................................................vii feaTure arTicles The Impact of Inflation on Microfinance Clients and its Implications for Microfinance Practitioners ............................................................................................................................................................ 1 S. Akbar Zaidi, Maheen Saleem Farooqi and Aleena Naseem, for the Pakistan Microfinance Network Elevated Food Prices — Impact on Microfinance Clients ....................................................................... 6 Zaved Ahmed and Camilla Nestor, Grameen Foundation Microfinance: Where Do We Stand Today? .................................................................................................. 9 By Ajit Jain and Caroline Norton, Deutsche Bank The Impact of the Financial Crisis on Microfinance Institutions — Results from a CGAP Survey ......................................................................................................................................................13 Xavier Reille and Christoph Kneiding, CGAP BulleTin highlighTs Breaking It Down: Subsidy Dependence Index vs. Financial Self-Sufficiency................................16 Scott Gaul, Product Development Manager, MIX MFI Trend Lines Analysis ...................................................................................................................................20 Blaine Stephens, COO, MIX BulleTin TaBles Introduction to the Peer Groups and Tables .............................................................................................27 Trend Lines 2005 – 2007 MFI Benchmarks .................................................................................................29 Institutional Characteristics ................................................................................................................29 Financing Structure ...............................................................................................................................30 Outreach Indicators ...............................................................................................................................31 Macroeconomic Indicators .................................................................................................................34 Overall Financial Performance...........................................................................................................35 Revenues ...................................................................................................................................................37 Expenses ....................................................................................................................................................37 Efficiency ...................................................................................................................................................38 Productivity ..............................................................................................................................................39 Risk and Liquidity ...................................................................................................................................40 Index of Terms and Definitions.......................................................................................................................41 Index of Indicators and Definitions...............................................................................................................43 Guide to Peer Groups — Trend Lines 2005 – 2007 MFI Benchmarks ...............................................45 appendices Appendix I : Notes to Adjustments and Statistical Issues .......................................................................74 Appendix II : Participating MFIs Trend Lines 2005 – 2007 Benchmarks.............................................77
  6. 6. From the Publisher Microfinance in the Global Tsunami — Will It Stay Afloat? T his issue of the MicroBanking Bulletin focuses dramatically since the last major test (Asia Crisis, 1997- on the impacts of the current global economic 2000). MFIs’ relationships to the crises’ epicenters have crises on microfinance. Yes, I do mean “crises” greatly intensified. Also, domestic savings’ funding in the plural, because there are at least two global of microfinance grew greatly in the period, and it crises underway. While much of the world’s attention remains to be seen how the poor’s savings patterns naturally focuses on the epicenters of the global will react in an extended deep crisis. financial crisis, whose ‘tsunami effects’ of toxic asset dumping and deflation are spilling over far and wide, The microfinance industry has been alert to the one shouldn’t forget that an inflation crisis affecting problems, and active in trying to get its hands the food prices began much earlier and continues to around the extent and direction in a fast-changing grow. The UN’s Food and Agricultural Organization environment. Publicly available reports on this include recently reported an increase of 150 million surveys recently released by Intellecap and the rating chronically hungry people in developing economies service MicroRate (focusing on Latin America). Both in 2008 – 2009, with prospects of worse to come. are highly recommended reading, as their findings illustrate a wide range of reactions and perceptions So, in many developing countries, the poor increasingly among MFIs and investors. As the MicroRate report face the worst of all possible worlds – inflation which notes, those shifted over a matter of weeks from the pushes prices of food and shelter beyond their already time MicroRate first began their research until they thin means and which destroys any savings they may had completed it, as the tsunami began to show up. have accumulated, and credit squeezes (if they had any access to credit at all previously), as financial The articles and analyses in this issue of MBB bring liquidity dries up throughout financial systems. To together some of the first broader global overviews these woes are added the decline in remittances to of the impact of the crises, and how MFIs are coping. families in developing economies as jobs dry up in While we at MIX recognize that the situations are developed economies, and price increases associated evolving quickly and that this issue of MBB will very with currency depreciations. likely not be the last to have a focus on microfinance and the global tsunami, we hope it sets a benchmark To return to the earthquake and tsunami analogies, of how things looked, close to the start. microfinance operations will be affected differently in different countries depending on their distance As I step down as executive director of MIX at the end from the epicenters, to their prior exposures/ of June, this is my last letter as publisher of MBB. It dependence to foreign funding, and on whether they has been a privilege to be associated with MBB, and have ‘safe harbors’ or not. Research on microfinance a pleasure to work with the Editorial Board and its institutions’ (MFIs) resilience to past macroeconomic editors. I look forward eagerly to reading future issues crises, including work by MIX, has shown MFIs to have of MBB as another of its thousands of readers. been fairly robust. But the extent of globalization of economies in general and domestic and cross-border - Peter Wall, Publisher, MicroBanking Bulletin commercial funding of microfinance has grown 1 “Microfinance and the Global Recession” Microfinance Insights, Mar/April 2009 , 2 “Cautious Resilience: The Impact of the Global Financial Crisis on Latin American and Caribbean Microfinance Institutions” , MFI Insights, March 2009, MicroRate, Inc. vii
  7. 7. MICROBANKING BULLETIN, IssUE 18, sPRING 2009 The Impact of Inflation on ARTICLEs FEATURE Microfinance Clients and its Implications for Microfinance FEATURE ARTICLEs A study undertaken by S Akbar Zaidi, Maheen Saleem Farooqi and Aleena Naseem, for the Pakistan Microfinance Network MICROBANKING BULLETIN, IssUE 18, sPRING 2009 Introduction Inflation affects different segments of the population very differently, a fact often forgotten by most people A s the inflation rate in Pakistan crosses 25 and often exaggerated or misrepresented in the percent per annum — the highest in almost media. In general, inflation affects the rich far less three decades — there is justifiable concern than the poor, where the rich hold greater assets and that the Pakistani citizen, particularly the poor, will have higher incomes which let them adjust to rising suffer the most and will bear the severest brunt of prices. Salaried individuals tend to be affected a great this economic crisis. Moreover, along with rising deal by inflation as their salaries tend to be ‘sticky’ prices, indications suggest that Pakistan’s economy and often do not rise in proportion to inflation or at is also facing serious constraints and the high growth the same speed. In contrast to salaried individuals, rates between 2002 – 2007 may have slowed down inflation affects many categories of producers in a considerably, affecting economic opportunities for all, neutral manner or can benefit them. For example, to but particularly for the poor. Pakistan Microfinance maintain their profit margins, many producers pass Network in Islamabad has commissioned this study in on all price increases as they take place. Based on the order to understand and document the impact of a elasticity of demand for their product or service this slowing economy and in particular, of rising inflation may result in higher or lower profits, or no change. on microfinance clients. Inflation, in ‘traditional’ or agricultural societies, is considered to be an urban phenomenon far more This short report highlights findings based on than it is a rural one based on assumptions such as discussions with 245 microfinance clients, both men rural populations produce a great deal of what they and women, from very wide and diverse backgrounds, consume, and that they have less access to ‘modern’ and with the staff of microfinance providers (such as facilities, commodities and goods (such as consumer loan or credit officers) who interact with these clients items and utilities), the price for which often rise at the local, first contact, level and are far more aware fastest. Similarly, there is also a marked difference on about the conditions of their clients than are middle savers and borrowers, which has implications for this and senior management officers. It is important to study and on microfinance clients more generally. state at the outset that this study is not an overview or Savers suffer as the purchasing power of their assessment of the microfinance sector, of microfinance monetary assets dwindle in value, whereas those who clients, or of microfinance institutions or providers. It have borrowed benefit as inflation rises, since the real has considerably limited ambitions and objectives value of their debt is reduced. and simply aims to understand and document the impact of inflation on microfinance clients and, to a Just as we assume that many citizens will suffer limited extent, for microfinance practitioners. the consequences of inflation, we should also be open to the possibility that some sections of the Inflation and its Consequences population will benefit from rising prices. This study tries to highlight where and how both trends persist Inflation is the phenomenon where prices rise. Hence, amongst microfinance clients. inflation is not at all an uncommon feature of any economy. In fact, low or manageable levels of inflation — depending on the nature of the economy — are highly beneficial to suppliers and producers and act as an incentive to produce. 1 Microfinance Information Exchange, Inc
  8. 8. FEATURE ARTICLEs MICROBANKING BULLETIN, IssUE 18, sRING 2009 The Pakistan Context: Methodology Inflation, the Economy and This study to assess and observe — but not to measure Microfinance — the impact of inflation on microfinance clients, is built around the Focus Group Discussion (FGD) Before we turn to describe how this study was approach. Despite its many limitations, this approach conducted, it is important to highlight some of the allows us to draw broad conclusions about the impact issues which relate to Pakistan’s inflation rate, its of inflation on microfinance clients. economy, and the microfinance sector. A selection was made of different sorts of microfinance Like much of South Asia, inflation has seldom been providers. In all, nine institutions were selected in three a serious problem in Pakistan, and the inflation rate provinces and 12 FGDs were held. In total, 245 clients has been, for the most part, in single digits. However, were present at the FGD of which 189 (77 percent) for about a year, but perhaps more markedly since were women. early 2008, the inflation rate in Pakistan has become the highest in over three decades, and has shot The FGDs were used to understand how inflation had up dramatically from the annual 9 percent in fiscal an impact on borrowers and how they were coping year 2007 – 2008, to between 23 – 28 percent on under inflationary pressures. Questions were asked an annualised basis today, with food and fuel prices to find out if clients were having problems repaying driving the price spiral. their monthly instalments, whether their economic activity had fallen, and how this affected their While inflation has been perhaps the most visible of household consumption. Information was acquired to Pakistan’s economic problems in the last few months, see if household consumption patterns had changed economic slowdown, as illustrated by falling levels of in the last year or so as prices had risen. There was investment and slowing economic growth, have been also discussion on how clients were prioritizing loan equally troubling. The high growth period of 2002 instalments in relation to other household expenses – 2007, in which growth averaged over 6 percent of in this inflationary environment compared to the past. GDP per annum, has been replaced with a forecast for The issue of inflation was not initiated as it was thought financial year 2008 – 2009, which could be nearer 4 it would be better for clients to volunteer information percent of GDP growth. Similarly, there are predictions and opinions about their concerns themselves and to that a slowing economy and high inflation may raise prioritise their own issues, of which inflation ought to the unemployment level in Pakistan. Most economists have been one. If it was not raised by the discussion agree that economic activity, at least for the next year participants, specific questions on inflation were put or so, will be well below the level of the last five years, to them. affecting profitability, investment, employment and the poverty level. There are concerns that the dual Discussions were held with loan officers and MFP problem of rising inflation and a slowing economy management to assess whether they saw any changes will push more people below the poverty line. in borrowers’ behaviour and their demand for loans and repayments. There are reported to be 1.8 million microfinance clients in Pakistan, which represent different Findings from Focus arrangements of loans — group, individual, etc. Of these, a great majority are rural clients, which Group Discussions has important implications for how inflation has The results from the discussion with microfinance an impact on them. Almost half of microfinance clients regarding the impact of inflation on their clients are women. Often, the average profile of a incomes, assets and repayment capabilities, come as a microfinance client in Pakistan is that she is either a complete surprise. Our assumption was, as it is of most rural entrepreneur, involved in livestock development people, that the high inflation rate in Pakistan has been or passes on her loan to a male member of her family. a disaster for most Pakistanis. However, a predominant Also, importantly, it seems that a very large majority majority of clients who spoke, irrespective of gender, of microfinance clients are repeat clients and once location, type of activity, amount and purpose of they begin to use microfinance services, the majority loan, or by any other criteria, was that inflation was of clients stay loyal to the microfinance provider. ‘not a problem’. While almost every single participant These characteristics of microfinance clients will help in the 12 FGDs felt that the loans were in general determine how inflation affects them. 2 Microfinance Information Exchange, Inc
  9. 9. MICROBANKING BULLETIN, IssUE 18, sPRING 2009 FEATURE ARTICLEs highly beneficial to them and to their economic Not a single client complained that they were unable activities, except for a very small minority, most felt to repay their instalments. that inflation was not resulting in them having a significantly negative impact on their businesses or Moreover, two further explanations were given as lives. In fact, there were a large number of clients who to how in times of high inflation — and every single felt that inflation was a positive aspect and that they client was cognisant of the fact that these were such were capturing higher profits on account of the price times — managed to make profits, were as follows. rises. Overall, one can safely conclude that on the Firstly, clients stated repeatedly that they were basis of the FGDs, it was clear that a huge majority felt working much harder than they had in the past. The that inflation had a neutral influence on them, while a second explanation of how they were dealing with substantial proportion of the clients felt that inflation inflation was that they would include more members was substantially beneficial. from their household in their economic activity if they could. In general, many clients said that there were also The explanations of these unexpected findings were more earners in their family and this was helping them given by the clients themselves. Many felt that in their through these times. Additionally, most clients stated line of business, it was easy to pass-on costs which that they were no longer able to maintain any savings. were imposed on them and were able to argue how the loan had made it easier for them to deal with Without doubt, the greatest beneficiaries of inflation inflation. Moreover, there were certain clients who were agricultural producers and rural dwellers, the confessed that they were passing-on larger amounts latter representing the majority of clients in the of the rise in their costs and were also ‘causing’ microfinance sector in Pakistan. Those who grew inflation. It has to be remembered, that all these some agricultural crop were benefiting from the clients had been given loans in the past and were now higher crop prices and said that they had made many repaying the instalments. Hence, inflation for them times the income they anticipated. As microfinance was a relatively more recent phenomenon and took clients they stated that the lump sum loan amount place largely after they had made use of their loan. had allowed them to purchase inputs for their land in Many urban clients, such as those who had shops or bulk some months ago, and hence cheaply, and now small outlets, all felt that a lump sum loan allows them they were enjoying the double benefits of higher to buy goods in bulk and stock-up. All those clients support prices for key food crops and for cotton. It who had taken a loan to buy stocks in the past had seems that many farmers would have benefited from done so and were now able not just to pass-on prices, the higher output prices of agricultural products, but but also to increase the prices of goods that were the advantage of microfinance clients would be that cheaper earlier. they could use the loan to purchase inputs in bulk and more cheaply. While many farmers borrowed from For the most part, in urban areas, with the exception numerous sources, it seems that those who borrowed of men in Orangi (more below) most clients, such as from non-traditional, formal systems claimed that women who ran beauty parlours in neighbourhoods they were better off. or women who were in the small business of making jewellery or clothes, all claimed to pass-on at least Another category in the rural and peri-urban sectors the full impact of inflation, and hence neutralise the who said that they benefited markedly by the price impact of inflation on them. On being asked if their rise were those who had taken loans for livestock, clientele had declined or their profits denuded on and particularly for buffaloes and milk production. account of higher prices for the goods and services At every FGD, clients claimed that the increase in the they provided, most said that they had not. purchase price of raw milk had caused their incomes to grow very substantially. Similarly, flower producers There was also a general understanding about the in Pattoki also stated that while their input prices had inflation phenomenon in Pakistan by almost all risen slightly, the price they received for flowers in clients. A repeated answer to how these clients, all large urban centres like Islamabad and Lahore was across Pakistan, had become immune to inflation and considerably higher. neutralised its impact was that they were all using their loans for productive purposes rather than for There were a very small minority who stated consumption needs, and hence would be able to that inflation had made them worse off. Of these recoup their investment. Most clients even realised individuals, perhaps three or four had mentioned that that the instalments they were paying back every they may have had to sell a household asset — like a month were declining in real value due to inflation. mobile phone — because they could not afford it and 3 Microfinance Information Exchange, Inc
  10. 10. FEATURE ARTICLEs MICROBANKING BULLETIN, IssUE 18, sRING 2009 because they needed the money. There was just one single case of a woman who had said that she had Is Inflation a Concern for to switch her child from a private school to a public school. But these examples were almost non-existent. Microfinance Clients? However, all the seven clients of the Orangi Charitable Apparently, it seems, it is not. If we assume that Trust in Karachi stated that they were having great most clients are accommodating inflation and even difficulty coping with repayments, not so much due to benefiting from it, is this a matter of concern? We inflation, but because of economic slowdown. These believe it will be, and we try to answer the question clients were all involved in the loom/textile sector, a posed as the title of this section. sector which has suffered a great deal in recent years, and it was clear that they were struggling. For the most There are a couple of reasons why inflation did not part, inflation, per se, was not seen as the main culprit. seem to be a problem for microfinance clients. The first and very probable explanation is that perhaps Discussions with loan and credit officers about inflation has not really hit the clients or producers in whether it had become particularly difficult for clients general, in term of their profits and income stream. It to make the instalment repayments, suggested that is quite possible that the impact of inflation has not there had been some change, but not a great deal. been fully passed through to these clients. If this is In the case of Karachi, it was clear that loan officers the case, then we can be quite sure that some months for the Orangi Charitable Trust had to make extra from now, if inflation continues, it will have a strong visits and accommodate clients. Officers in other impact on the livelihoods of microfinance clients. microfinance institutions did not state that the default rate had risen and few stated that they had Another possible explanation is that the FGD format significant problems. does not allow for a fair and honest depiction and representation of what is actually going on. Perhaps To end this section, one can state that inflation, as inflation is affecting clients quite severely but they are such, did not have the negative outcome we thought not expressing this concern. However, we feel, for the it would. Many clients were using inflationary times reasons given above, that this is unlikely to be the case. to their advantage. Moreover, in urban areas, most While it is true that the FGD format has limitations, it people were complaining about the lack of electricity is improbable that it would have repressed sentiment and power — and not its price — than they were to such an extent that observers would not have been of overall inflation. The table below summarizes the able to probe further and get to the truth. findings from the FGDs. Table 1 Selected Impact of Inflation on Various Categories of Microfinance Clients Positive Neutral Negative Uncertain URBAN Shopkeepers Traders Small manufacturer Textile related business Fixed income business Livestock non-milk producers Milk producers RURAL Shopkeepers Traders Food crop producers Other cash crop producers Livestock non-milk producers Milk producers Household handicrafts 4 Microfinance Information Exchange, Inc
  11. 11. MICROBANKING BULLETIN, IssUE 18, sPRING 2009 FEATURE ARTICLEs What also emerged from the FGD was that most fall and becomes more manageable, it seems that the clients, realising that we are living in inflationary concern for the impact of high inflation will no longer times, felt that the loan amounts made available were exist and that we will return to the situation of a few insignificant and were interested in inflation-indexed years ago. This short, illustrative study suggests that loans. However, many did also state that the instalment most clients have been able to deal with inflation and amounts should not be raised too significantly as this many, particularly those producing food crops and would make repayments difficult. For microfinance agricultural commodities, have actually profited a providers/institutions rather than clients, the concerns great deal from it.These conclusions come as a surprise, that will emerge in the future relate to delinquency, for conventional wisdom would have suggested that delayed payments and default. At the moment, it all citizens suffer the impact of inflation. does not seem like these issues are threatening the functioning of institutions, but it is possible that What emerges from this survey also, is the clear fact they might put a strain on the profitability of some that loans have helped clients, largely because they institutions. Also, it is very clear that if inflation stays have been able to buy cheap, or in bulk, and have at 20 – 25 percent, most microfinance providers will been able to sell at the increased market price. Clearly, have to raise their credit levels to match the real value those who have access to credit are at an advantage of the loans. Whether microfinance providers can do compared to those who do not have access to credit that will depend on their overall financial strength, at cheap rates. This has been the general principle access to funds and ability to respond innovatively. of microfinance and it seems to have particular significance in the times of high inflation. Conclusions If inflation rates persist, some rethinking on the behalf If inflation has not had a damaging effect on of microfinance providers may be necessary. They microfinance clients in the first nine months of 2008 might have to raise their credit ceilings keeping in when inflation has touched 25 percent, as a very high mind the real value of the loan, and may be required to majority of clients claim, it is very likely that it will have increase the loan instalment process by some months an effect some months from now if inflation continues to ease the likely pressure on clients. to persist. However, if as expected, inflation begins to 5 Microfinance Information Exchange, Inc
  12. 12. MICROBANKING BULLETIN, IssUE 18, sPRING 2009 FEATURE ARTICLEs Elevated Food Prices — Impact on Microfinance Clients FEATURE ARTICLEs By Zaved Ahmed and Camilla Nestor, Grameen Foundation MICROBANKING BULLETIN, IssUE 18, sPRING 2009 A pproximately 1 billion people — or nearly Although global food prices have come down from one-sixth of the world’s population — subsist the mid – 2008 highs, data from the United Nations on less than USD 1 per day. Of this population, Food and Agriculture Organization (FAO) indicate 162 million survive on less than USD 0.50 per day. that this has not trickled down to the retail level. For According to the International Food Policy Research example, the price of rice — the principal source of Institute, increasing food prices have the greatest food for much of the developing world — remains effect on poor and food-insecure populations, who significantly higher in most developing countries spend between 70 and 85 percent of their household than it was in December 2006. To demonstrate this, income on food. This issue is especially acute for the Grameen Foundation looked at retail prices of rice in poorest people within developing countries — the 10 countries during the period 2007 to 2008. In our very clients that many microfinance institutions (MFIs) calculations, we took quarterly data listed on the FAO serve. This article will provide a general overview of website and indexed it against Q1 2007 prices. Table 1 the evolving global situation surrounding inflation highlights this. linked to increasing food commodity prices and its impact on microfinance institutions supported by Even as the price of rice fell from the mid–2008 Grameen Foundation and their clients. highs, on average, the price of rice in these countries increased 50 percent between late 2006 and 2008. During mid–2008, rising food prices, particularly This has forced families who previously spent up to for staples like rice, soybeans and wheat, raised 85 percent of their income on food to either eat less significant concern in the microfinance community or consider ways to increase their income. Conversely, given the disproportionate impact of such high prices some microfinance clients are fortunate enough that on microfinance clientele and the potential effects family members are paid in food grains. Anup Kumar on the clients’ long-term health and food security, Singh, Managing Director of Sonata in India observed as well as on the MFIs. While global attention has the role the informal ‘barter system’ has played to largely turned away from this issue to focus on the balance the increased cost of food: “As wages, most global financial meltdown, the reality is that food of the agricultural laborers are not receiving cash, prices in developing countries remain elevated — in but they receive 5 kg grains…per day. During the many cases above international market prices — and harvesting season they try to earn as much as they continue to negatively impact microfinance clients. can… to meet their other daily expenses. They [make] purchases against the exchange of stored grains.” Table 1 Index of Retail Prices of Rice by Quarter Bangladesh Brazil Egypt India Mozambique Pakistan Peru Philippines Senegal Vietnam 1Q 07 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 2Q 07 100.05 96.32 100.00 100.00 100.78 122.36 99.30 102.37 92.40 98.02 3Q 07 110.48 96.32 110.25 100.00 101.71 122.36 105.96 106.48 99.20 99.82 4Q 07 144.06 102.45 112.70 113.33 120.34 130.80 112.63 106.39 107.60 112.16 1Q 08 160.85 107.36 153.69 120.00 123.38 174.26 116.14 136.01 120.00 124.92 2Q 08 160.70 142.33 148.77 133.33 143.65 200.00 135.44 162.07 186.80 184.64 3Q 08 150.38 137.42 N/A 146.67 148.64 200.00 142.81 N/A 184.00 163.11 4Q 08 124.26 126.99 N/A 146.67 156.04 199.83 142.46 N/A 180.00 151.04 6 Microfinance Information Exchange, Inc
  13. 13. MICROBANKING BULLETIN, IssUE 18, sPRING 2009 FEATURE ARTICLEs There are several reasons for the disconnect between a month) or for worse-off clients, cooking rice into international market prices and retail prices in porridge so a kilo of rice would suffice for a day for a developing countries. As reported by the Financial family of six.” Times: “Food aid officials attribute the disconnect between local and international food prices to time In the short-run, such frugal practices by microfinance lags, poor harvests in developing countries and… clients may not have a significant impact, but lack of trade finance.”1 We researched the possibility if continued on a prolonged basis, can lead to that excess profiteering by wholesalers was another permanent health damage to them and their families. cause of the disconnect, but this did not bear out in the analysis.2 Depletion of savings with MFIs: In some of the countries where MFIs are allowed to accept savings, High food prices are likely to persist in the medium MFIs have started reporting a decrease in the term. While forecasts in the current environment are voluntary savings rate. It is still too early to determine subject to considerable uncertainty, the World Bank if this is a general trend or is restricted to specific expects food prices will remain high in 2009 and 2010. regions or countries. However, some MFIs have noticed that mature clients are withdrawing their Table 2 shows that prices are likely to remain well savings to finance their working capital needs, instead above 2004 levels through 2015 for most food crops. of taking a new loan. This has been reported by MFIs These forecasts are broadly consistent with those of in Philippines and in Nigeria. other agencies such as United States Department of Agriculture and the FAO. While world grain production For MFIs that offer savings, this trend has naturally is forecast to grow, increased utilization is expected to impacted savings as a funding source for the MFI. It lead to a decline in stocks in the 2008/2009 crop year. has also reduced the cushion that clients might have The FAO predicts that total grain end stocks will reach to weather continued price increases. a 25 – year low by the end of crop year 2008/2009. Loan Funds Diverted for Consumption: In extreme Impact on Microfinance cases, clients may be diverting loan funds to buy essentials to survive. MFIs have to maintain close Borrowers contact with clients to identify those who are hit the Change in food consumption: During GF’s hardest by inflationary pressures and take specific conversations with MFIs, they raised serious measures to align loan purpose with usage. concerns about the quantity of food consumed by their borrowers. The increased costs of essentials Higher Incidence of school Drop-outs: Some GF are forcing them to eat less. Dr. Aris Alip, Managing partner MFIs reported that their borrowers have Director of CARD in the Philippines brought this out: stopped sending their children to school so that “The immediate impact on our clients was on food children can support the family’s income generating security. I heard stories of mothers cutting down on activities. This may have severe repercussions on consumption of meat (from once a week to once borrowers’ struggle to break free from the cycle of Table 2 Index of Projected Real Food Crop Prices (2004 = 100) 2007 2008 2009 2010 2015 Maize 139 175 165 155 148 Wheat 154 215 191 166 140 Rice 130 243 208 183 160 Soybeans 119 156 147 139 115 Soybean Oil 136 187 173 160 110 Sugar 133 157 167 176 182 SOURCE: The World Bank 1 ‘Poor still hit by high food prices, says UN’ Javier Blas, Financial Times, March 19, 2008. 2 To test this hypothesis, GF did an analysis comparing retail and wholesale prices of rice in four countries; there was not a significant differential between the retail and wholesale prices, indicating that middlemen are not at fault for driving the prices up. Lack of reliable data prevented us from testing this with a larger sample size. 7 Microfinance Information Exchange, Inc
  14. 14. FEATURE ARTICLEs MICROBANKING BULLETIN, IssUE 18, sRING 2009 poverty. In Pakistan, one MFI informally reported see an uptick in portfolio at risk (PAR) if food prices that the drop-out level of clients’ children has almost remain elevated. doubled during this period. Refinancing Risk: As has been reported elsewhere, Impact on Loan sizes: The impact on loan sizes is not refinancing risk is a major issue facing MFIs due to consistent. In some countries, microfinance borrowers the twin pressures of contracting liquidity in local are requesting larger loans, driven in part by the bank markets and among some of the microfinance increased cost of running their existing ventures. In investment vehicles, coupled with a reduction in other cases, the borrowers feel the need to establish risk appetite by lenders. The inability to refinance on new ventures to make ends meet, creating additional attractive terms, or in some cases at all, will likely slow funding pressure for MFIs. For example, the average MFI growth significantly in 2009. Among the 20 MFIs loan size for the three MFIs GF works with in Nigeria in GF’s Growth Guarantees portfolio, average quarterly has increased by 45 percent during the last 12 months. growth slowed to 11.2 percent in Q4 2008 from 25.0 percent in Q4 2007. On the other hand, some MFIs are reporting decreased demand and in turn, decreasing average loan sizes. Increased Operating Expenses: The nature of the For example, in the Philippines, Dr. Alip of CARD said: microfinance industry is such that wages and salaries ”What is striking is that our clients are themselves are the single largest expense component for most reducing their borrowing (eligible for Peso 5,000 but MFIs. Inflation will naturally drive wages and salaries they will now borrow Peso 3,000) since they say that up. Hence, MFIs will either have to find a way to absorb business is not good.” It seems that basic business most of this increase or face the unattractive option of practice of frugality during tough times may be lost raising interest rates to end borrowers. on certain Wall Street executives, but not on poor borrowers in the Philippines. The world in general has moved on from the food price issue and is focusing all of its resources on combating Impact on the MFI the financial sector meltdown. That coupled with the drop in international food prices from mid-2008 The impacts noted below are driven in part by highs has led to a situation where the food price issue inflation (fueled by food price increases) but are also hardly registers on the radar screen now. As we have attributable to the global financial meltdown. Given shown, however, local food prices are not tracking the interconnected nature of global financial and international prices, and it is clear that a prolonged economic trends, it is not possible to cleanly separate period of continued elevated food prices will have a the impact of one particular driver from the others; significant impact on microfinance clientele. as such, GF has noted the general trends it is seeing among the MFIs it supports below. To date, clients have shown an amazing degree of resiliency and innovation in absorbing the increase in Portfolio Quality: Although it was expected that food prices. However, these clients’ coping remedies rising food prices would impact clients’ ability to may have significant long term consequences on repay, based on the 4Q 2008 data, there is no rise yet their families’ well being — the impact of which is still in delinquencies among GF’s partners. Nevertheless, too early to measure. several MFI leaders have noted that they expect to 8 Microfinance Information Exchange, Inc
  15. 15. MICROBANKING BULLETIN, IssUE 18, sPRING 2009 FEATURE ARTICLEs Microfinance: Where do we stand Today? FEATURE ARTICLEs By Ajit Jain and Caroline Norton, Deutsche Bank MICROBANKING BULLETIN, IssUE 18, sPRING 2009 Microfinance — Does Everything to the crisis by shoring up their core operations and returning with new purpose to their social missions. Correlate in Bad Times? The last decade has witnessed a remarkable rise for I n the last ten years, conventional wisdom has microfinance. International investors discovered held that microfinance as an asset class enjoys a the potential of microfinance in zeal in the second striking lack of correlation with trends in the global half of the 2000s, as structured products permitted economy. The informality of most of the micro- microfinance investment vehicles (MIVs) to market businesses feeding into the microfinance industry funds to a wide range of investors, from the socially- was supposed to shield it to a certain degree from oriented development agencies to pension funds macroeconomic booms and busts. Challenging this with fiduciary roles. The first microfinance CDO was assertion, however, is another tenet that emerged closed in 2004, and it was followed shortly afterward from the decade of Long Term Capital Management, by a string of other structured funds, which offered which holds that in bad times, everything correlates. private and institutional investors a new opportunity With waves of the international financial crisis rippling to acquire notes collateralized by loans to MFIs. These through the global economy, the current situation products allowed MFIs to access large new pools of provides an opportune testing ground to determine funding to fuel remarkable expansion. The models which of these seemingly opposed conventional of structured credit products in microfinance have wisdoms holds water. While microfinance has stayed conservative, after an initial spurt in innovative certainly not proved to be immune from the travails risk distribution mechanisms. The first microfinance of the traditional banking sector, it has not come CDO was structured by Blue Orchard and had been close to suffering the same damage, suggesting that offered with a 100 percent guarantee to the Senior opportunities still exist in the microfinance sector note holders. This structure soon gave way to a partial for MFIs and for investors. Indeed, MFIs have shown guarantee structure with 40 percent subordination remarkable resiliency and foresight as they respond to the Senior note holders. The Global Commercial Graph 1 Growth Patterns in Microfinance 150% 120% 90% 60% 30% 0% Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Asset Growth Savings Growth Growth in External Credit Growth in Total Capital Borrower Base Growth The microfinance industry witnessed rapid growth over the last few years and in the recent past, much of this growth was funded through savings deposits and increasing interest of the mainstream finance industry in microfinance balance sheet components. This was complemented by the increasing appetite of MFIs for a more levered capital structure. However, the impact of macroeconomic crisis can be clearly seen in the lowered growth rates over 2008 - 2009. 9 Microfinance Information Exchange, Inc
  16. 16. FEATURE ARTICLEs MICROBANKING BULLETIN, IssUE 18, sRING 2009 Microfinance Consortium transaction structured by A recent Women’s World Banking study discovered Deutsche Bank was one of the first of such kind. Most that as MFIs transformed from NGOs into commercial of the structures marketed since have been modeled entities, their average loan sizes began to grow, and with very similar risk classification mechanisms. the number of women served began to decline, despite the missions of many MFIs in the sample to Risk of Mission Drift serve the poor and in particular, women. Even more disturbingly, in some markets, as MFIs have grown, Booming local economies spurred the growth of they have encroached upon their peers’ areas of savings deposits (among MFIs whose legal structures operation, generating fierce competition and leading permitted savings mobilization), as more clients were to over-indebtedness of the very borrowers that the able to afford to stash away some of their earnings for institutions originally sought to aid. a rainy day. These two pools of funding continued to deepen up until 2008, providing the means for MFIs to grow their portfolios and client bases at a staggering Investor Appetite pace, some by 50 to 100 percent year on year. When the financial crisis struck in its full strength in 2008, blowing out credit default spreads to levels not Although such growth meant that more poor clients seen in decades, it hit the microfinance investment were able to access financial services, not all side industry along with the traditional banking sector. effects of the MFIs’ rapid growth were so positive. As Liquidity dried up almost overnight, with planned the sector has embraced commercialization, some microfinance funds being pulled late in the marketing MFIs seeking to take advantage of the commercial process. Deutsche Bank had been in the process of funds that were suddenly so readily available moved structuring a USD 350 million global microfinance away from their traditional areas of strength, such as fund during Q3-2008 and was forced to shelve the micro group lending, into less familiar products such marketing plans following a precipitous widening of as SME lending, in an effort to attract more clients credit spreads and a near shut-down of structured and cover rising financial costs and operational costs credit products market. associated with expansion. With this move into new businesses came an element of mission drift for some institutions. Graph 3 Key Rates in the G3 Countries 7% Concentration Risk in 6% Graph 2 Microfinance Portfolio 5% 8% 75% 4% 3% 60% 6% 2% 45% 1% 4% 0% 30% 99 00 01 02 03 04 05 06 07 08 09 2% Fed Funds ECB refi BoJ 15% Various central banks across the world have acted in close coordination to bring down the overall cost of borrowing. In microfinance, the cost of borrowing has 0% 0% typically been significantly below commercial funding levels. Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Top 10 Loan Concentration Single Group Exposure Related Party Lending Ratio Finding themselves with fewer funds available % of Women Borrowers % Rural to put to work in alternative investments, such as The rapid growth of the industry also witnessed a spike in concentrated microfinance, investors are now tuning in more closely exposures to specifically profitable loan groups and the larger borrowers. This to the risks involved in microfinance investments. trend however has been on the decline for the last three quarters, possibly due to a conservative approach taken by most MFIs as a response to the global Their questions are centering on topics such as macroeconomic crisis. portfolio quality, liquidity risk, open FX risk and internal controls. In addition, investors are seeking to 10 Microfinance Information Exchange, Inc
  17. 17. MICROBANKING BULLETIN, IssUE 18, sPRING 2009 FEATURE ARTICLEs be as catalytic as possible with their limited funding, These prudent measures have caused a decline in carefully selecting targeted countries and MFI profiles. the average gross loan portfolio for the first time in Commitment to a double bottom line objective many periods, as MFIs respond to falling portfolio has reemerged as a concern for investors, perhaps quality and uncertain future funding by tightening an acknowledgement of the unscrupulous lending lending standards, shrinking disbursed loan sizes, and practices in the developed world that contributed to holding more cash on hand. Interestingly, however, the financial crisis. the average number of active clients has continued to grow, albeit more slowly than before, signaling As investors take a closer look at these elements of that MFIs on the whole have not been dramatically MFIs’operations and finances, the picture that emerges wounded by the recent external shocks. is not as discouraging as the global economic malaise would suggest. While portfolio quality has generally Rather, they seem to be returning to the basics of deteriorated across regions, MFIs are demonstrating microfinance: small loan sizes for short terms provided an ability to return to their operational strengths, even in the form of standard products. in countries that have been hit hardest by the crisis. Profitability has been leaner since the crisis struck, though on average it is still positive. As the US Graph 4 Asset Quality dollar has recently appreciated versus many world 4% 1500% currencies, MFIs that borrowed heavily in hard currency in the last few years without hedging that exposure 3% 1200% are experiencing losses related to foreign currency mismatches. In response, MFIs are demanding more 900% loans in local currency and are working to eliminate 2% 600% these mismatches by all means at their disposal. In addition, MFIs are allocating more expenses toward 1% 300% provisioning to ensure that they have adequately reserved for delinquencies. 0% 0% Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 PAR > 30 LLR Coverage PAR > 30 Key Performance Graph 5 PAR > 90 LLR Coverage PAR > 90 Impacting Trends PAR 1 - 30 Net Charge-offs/Loan Loss Exp 12% The portfolio delinquencies, as measured by PAR > 30 days and PAR > 90 days have been on the rise over the last two years. 11% 10% Responding to the Crisis: 9% Conservative Measures 8% 7% Across Deutsche Bank’s portfolio, in a trend mirrored 6% by the portfolios of other microfinance fund 5% managers, Portfolio at Risk > 30 days has risen from 4% an excellent 1.8 percent to a less spectacular, but 3% hardly alarming 3.8 percent. In some cases, while MFIs 2% were growing rapidly, rising loan portfolio values and 1 2 3 4 5 6 7 8 client counts masked problems in the portfolio. Now Financial Costs Provision Exp/Ave. GLP ROA that the funding that was feeding this growth has Rising Financial costs and loan loss provision expenses have impacted the overall lessened, these problems are beginning to emerge. In profitability of microfinance institutions. other cases, MFI clients are feeling the squeeze of the economic circumstances, as demand for their goods has fallen off, and they are less able to repay their loans. MFIs seem to be reacting to these problems by tightening their credit standards and by lowering the size of the loans that they offer. 11 Microfinance Information Exchange, Inc
  18. 18. FEATURE ARTICLEs MICROBANKING BULLETIN, IssUE 18, sRING 2009 Conclusion To look back to the two original conventional Certainly MFIs face challenges as slowing growth and wisdoms that we began with, perhaps instead of funding opportunities force them to refine their risk debunking one or both, we could add a truism of management systems, to tackle rising delinquencies, our own: microfinance may not have completely and to actively manage their liquidity, for the first time decoupled from the global economy, but its resilience for many MFIs. However, we prefer to view the current in challenging times should be the envy of banks situation in the microfinance market as an opportunity across Wall Street. for the best run MFIs to distinguish themselves, for social investors to prove their commitment to the Note: All charts in this document have been drawn field, and for the industry to return to its original social based on data from the portfolios managed by the mission, with renewed attention to initiatives such as Global Social Investments Group at Deutsche Bank. the Client Protection Principles. 12 Microfinance Information Exchange, Inc
  19. 19. MICROBANKING BULLETIN, IssUE 18, sPRING 2009 The Impact of the FinancialARTICLEs FEATURE Crisis on Microfinance Institutions Results from CGAP’s March 2009 Opinion survey FEATURE ARTICLEs Xavier Reille and Christoph Kneiding1, CGAP MICROBANKING BULLETIN, IssUE 18, sPRING 2009 Introduction CGAP conducted an online survey with MFIs in March 2009 to answer some of these questions and T he global crisis is spreading quickly in emerging to monitor the impact of the crisis. The survey was markets but little is known about its impact on widely disseminated to MFIs with support from MIX the microfinance sector: Which regions are most and the Microcredit Summit Campaign, as well as affected and why? Are microfinance institutions (MFIs) from several large MFI networks2. Over 400 completed resilient to this unprecedented economic downturn? responses3 were sent back from MFI managers, which What is the effect of the crisis on MFI business models? reflected a good distribution among regions4 and And how do MFIs foresee their liquidity situation in institutional sizes.5 the near future? ECA: 44 EAP: 26 SA: 59 MENA: 29 SSA: 115 LAC: 114 1 With research assistance from Meritxell Martinez, CGAP. 2 ACCION, Grameen, FINCA, Freedom from Hunger, MFN, Opportunity, Women’s World Banking, and Sanabel. 3 Respondents were asked to indicate the asset size of their institutions, for which the following brackets were provided: Tier 1 (assets above $50m), Tier 2 (assets between $3 – 50m), and Tier 3 (assets below $3m). Around 76 percent of MFIs in our sample are in Tier 2 or 3 and 24% tier one. Credit unions and cooperatives represent only 14.5% of the sample. 4 EAP East Asia and Pacific, ECA Europe and Central Asia, LAC Latin America and Caribbean, MENA Middle East and North Africa, SA South Asia and SSA sub-Saharan Africa. 5 This article presents the high level findings of the survey with a focus on MFI impact. CGAP will produce another report to be posted on www.cgap.org with the full results. 13 Microfinance Information Exchange, Inc
  20. 20. FEATURE ARTICLEs MICROBANKING BULLETIN, IssUE 18, sRING 2009 Dramatic slowdown in In search of Liquidity Portfolio Growth The liquidity constraints highlighted during CGAP’s virtual conference in December 2008 are still present, Microfinance has enjoyed a decade of exceptional but less dramatic than the drop in portfolio growth growth. In 2007 alone the overall loan portfolio of and the broad increase in non-performing loans. MFIs reporting to MIX Market increased by 47 percent. Overall, 52 percent of the MFI respondents reported However, the survey results show that this period of liquidity constraints over the past six months. As could rapid growth has ended. Sixty-five percent of MFI be expected given their asset size, smaller MFIs are respondents reported that their gross loan portfolios more affected, with 64 percent of small (tier 3) MFIs remained stable or decreased over the last six months. reporting funding problems versus only 35 percent This trend was consistent across all regions, but not for large (tier 1) MFIs. Small and medium MFIs appear across institutional types: MFIs that mobilize savings to be struggling more with liquidity issues: 74 percent (banks and credit unions) experienced significantly of small (tier 3) MFI managers expect their liquidity less reductions in their portfolio than those that situation to worsen in the next 6 months. Regionally, depend solely on credit as a source of funding. This the most pressing needs for capital are in sub-Saharan underlines the importance of alternative funding Africa and in South Asia (with 68 percent and 57 sources in an economic situation like this. Overall, the percent respondents reporting liquidity problems, credit crunch and the economic recession are clearly respectively). forcing most MFIs to slow down the growth of their microcredit portfolios. Liquidity Constraints Now and Portfolio Same or Down Last Figure 2 in the Next 6 - 12 Months, by Figure 1 6 Months, by Size of MFI. Size of MFI. 80 80 60 % of respondents 60 % of respondents 40 40 20 20 0 0 Tier 1 Tier 2 Tier 3 Tier 1 Tier 2 Tier 3 mean of liquidity now mean of liquidity later Portfolio Quality Down Globally The lending business contraction is occurring A majority of savings-based MFIs (56 percent) does not alongside a deterioration in the quality of MFIs’ loan face liquidity constraints. However, these institutions portfolios, a trend that according to MIX numbers are far from being immune to the effects of the crisis had already started in 2007. Sixty-nine percent of and reported higher levels of PAR increases versus MFI respondents reported an increase in Portfolio non-deposit based MFIs (76 percent of the savings- at Risk (PAR). Non-performing loans increased for all based MFIs had an increase in PAR versus 66 percent sizes of MFIs with no significant variations among MFI for non-deposit based MFIs). tiers. The broad increase in non-performing loans as a percentage of gross loan portfolio reflects clients’ economic hardship. The indicator is also pushed No significant Business upwards due to decreasing loan portfolios. The region Adjustments Yet hit hardest by this decrease in portfolio quality is ECA, where 97 percent of institutions report a stagnating What has been the MFIs’ response to the crisis so far? or increasing PAR. Of all regions, EAP and MENA have One could assume that increasing costs of funds (in been most resilient so far, but even there the majority most markets estimated around 200 to 400 basis of MFIs report deteriorations in their PAR. points) could force MFIs to raise their interest rates. 14 Microfinance Information Exchange, Inc

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