Microfinance institutions typically progress through four stages of development: start-up, initial growth, expansion, and maturity. In the start-up stage, MFIs are small and locally-focused with an informal structure, while relying on grants and public funding. As MFIs enter the growth stage, they develop basic management systems, gain market share, and work towards sustainability. During expansion, MFIs aggressively add new branches and services, take on more debt, and face conflicts between social and financial objectives. Finally, mature MFIs prioritize efficiency, maintain market share, and drift from their original social missions as they rely more on capital markets and focus on financial returns.

1. Development Stages of the MFI Life Cycle
Microfinance institution are unique in many ways and in many
contexts but they all pass through commonly defined stages in
BRIEF their life cycle. This paper briefly explores the key issues in the
development stages: strategy, governance, financial structure
and risk management.
Although a wide variety of Early stages
classifications exists, generally,
MFI development stages include MFIs typically originate from
start-up, growth and maturity member based organizations
phases. (NGOs) or increasingly by the
private sector. They generally
operate in a local setting and are
MFI Life Cycle informally led by a key person.
With local roots, they typically
have a strong social mission (in
Level of Sophistication
Maturity terms of fighting poverty) and
MFI Phil face little competition.
Expansion
Life oso Financial resources are restricted
phy to typical funding by friends,
Cycle Initial
Growth family, sweat equity or donors.
Start-
Early risk capital is seldom
Up owned by profit maximizing
investors or institutions.
Life Time
Risk management is in its infant
The value of the life cycle is that stages and predominantly
it provides a framework to geared towards credit risk. MFIs
understand the stages through build internal controls and are
which MFIs pass as they progress typically governed by a Board of
and to assess their challenges, ‘representatives’ of the founding
opportunities and needs. members.
Although for the MFI industry a MFIs are operationally becoming
similar analogy can be applied, break even but need grant
this brief focuses on individual support for building.
MFIs.
Moondance MFI Life Cycle December 2009 1

2. Development Stages of the MFI Life Cycle
Expansion Maturity
BRIEF The strategy of the MFI moves
towards building outreach and
The strategy is focused on
efficiency and maintaining market
increasing professionalization. share. Competition is strong. Cost
Typically, MFIs transform, and cutting rather than investment.
legal structures change to cater Financial returns become more
for growth. MFI management dominant and the MFI drifts from
increasingly struggles to maintain its original social mission. Usually
the balance between social and fully profitable.
financial returns. Mostly a driven,
vibrant corporate culture, but Formal organizational structure,
decreasing touch to community. professional staff runs the MFI.
Internal audit is well organized
Business wise the MFI grows by and competent. Professional
opening new branches, offering a boards are appointed. Liability
wider range of services and face management includes the tapping
increasing competition. MFIs capital markets via an IPO or
operate near or better than break structured products. MFI is playing
MFI even on a fully loaded P&L. regional consolidation/ acquisition
Investment rather than cost. game.
Life
Conclusion
Cycle From a funding perspective, the
investor base widens by the
mobilization of savings /deposits, Although, the emergence along
increasing leverage, mix of hard the MFI life cycle seems
and local currency debt and more ‘inevitable’, there are growing
commercially oriented investors. concerns that particularly mature
MFIs are drifting from the origins
Author: Risk management becomes more i.e. fighting poverty. Although the
Marc A.M. Breij professional and includes asset emergence of this class of
Managing Director and liability management commercial financial institutions is
Moondance not bad in itself , it cannot replace
(including liquidity and foreign
Contact: exchange risk as well as maturity socially driven yet sustainable
www.moon-dance.nl mismatches). MFIs that stay close to their
original social mission and make
Generally, under more regulatory different strategic and financial
oversight. Improving transparency choices as they progress along
and legitimacy. MFIs become the MFI life cycle.
rated.
Moondance MFI Life cycle December 2009 2

3. Development Stages of the MFI Life Cycle
Stage Start-up Initial Growth Expansion Maturity
Business Learning Aggressive Efficiency.
Plan. Start basics. Gain growth. Break Maintain market
Strategy / operations. market share. even. Conflict share. Extend
Main Focus Social Social between social product base.
mission. mission; and financial Financial returns.
Local roots become returns.
sustainable.
Informal. Founder-led. Hiring more Professionally
Governance / NGO. Non- professional managed .
Leadership regulated staff. NBFCs.
Transformation
Public Lack of Creation of Capital markets.
sources. diversification. leverage. Hedging.
Capital structure Grants. 1st Commercial Increasing
& finance Financing international funding. Deposit sophistication.
strategy constraints social mobilization.
investors.
Lack of MIS. Introduction Includes asset & CRO with full
Mostly credit formal MIS & liability market, credit and
Risk risk. No procedures. management. FX operational risk
Management separate risk Risk / liquidity. management unit.
unit. separated.
Moondance MFI Life cycle December 2009 3