Banana Skins - Microfinance 2010

Microfinance Banana Skins 2008
Risk in a booming industry
Sponsored by
Centre for the Study of Financial Innovation
CSFI
C S F I / New York CSFI

The Centre for the Study of Financial Innovation is a non-profit think-tank, established in 1993 to look at future developments in the international financial field particularly from the point of view of practitioners. Its goals include identifying new areas of business, flagging areas of danger and provoking a debate about key financial issues. The Centre has no ideological brief, beyond a belief in open and efficient markets. Trustees Minos Zombanakis (Chairman) David Lascelles Sir David Bell Robin Monro-Davies Sir Brian Pearse Staff Director Andrew Hilton Senior Fellow David Lascelles Programme Coordinator Carole Magnaschi Governing Council Sir Brian Pearse (Chairman) Sir David Bell Geoffrey Bell Robert Bench Rudi Bogni Peter Cooke Bill Dalton Sir David Davies Prof Charles Goodhart John Heimann Rene Karsenti Henry Kaufman Angela Knight Richard Lambert David Lascelles Robin Monro-Davies Rick Murray John Plender David Potter Mark Robson Sir Brian Williamson Peter Wilson-Smith Minos Zombanakis
CSFI publications can be purchased through our website www.bookstore.csfi.org.uk or by calling the Centre on +44 (0) 207 493 0173
Published by Centre for the Study of Financial Innovation (CSFI) Email: info@csfi.org.uk Web: www.csfi.org.uk CSFI 2008 This publication is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of the Centre. ISBN: 978-0-9551811-7-7 Printed in the United Kingdom by Heron, Dawson & Sawyer CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk
CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

NUMBER EIGHTY

Preface Preface
MARCH 2008
The fact that the CSFI was asked to stretch its well-established Banana Skins brand from banking to insurance and now to that the CSFI was asked to stretch its well-established is being taken these days. It has to insurance the The fact microfinance illustrates just how seriously microfinanceBanana Skins brand from banking moved out ofand fringes microfinance illustrates just how seriously microfinance is being taken these days. It 1) into the out of the now to (which is where it was when we published our last report on the subject, in February 1998has movedmainstream at least into is developmental mainstream. When last report on to subject, in February 19981) Mohammed Yunus fringes (whichthewhere it was when we published ourhe came to talkthe us ten years ago, Grameensinto the mainstream was viewed the developmental mainstream. When he came to talk to us ten years sceptical; now, Mohammed prize at least intoby many in the financial sector as a marginal figure, preaching to the ago, Grameens he is a NobelYunus winner and by many in the right up sector as Bono and figure, preaching to the sceptical; now, he is a Nobel prizewas viewed global celebrity, financialthere with a marginalBob Geldof. winner and global celebrity, right up there with Bono and Bob Geldof. But (slightly to my surprise) it seems that the fundamental questions about microfinance remain unanswered. Is it (actually or to my surprise) it seems asset class into which rich country investors can put their savings Is a But (slightly potentially) an investible that the fundamental questions about microfinance remain unanswered.with it reasonable potentially) an return? asset class role as a rich country investors can top-down development (actually orhope of a decent investible Or is its realinto whichbottom-up alternative to theput their savings with a model that has long dominated conventional its real role thinking? reasonable hope of a decent return? Or is development as a bottom-up alternative to the top-down development model that has long dominated conventional development thinking? When the Centre first looked at microfinance, we were hoping we could make the case that it would quickly become a self-sustaining asset looked at microfinance, we were hoping we could their the case that it driving a virtuous cycle When the Centre firstclass in which rich-country pensioners could invest make savings, therebywould quickly become a in which Western investors which rich-country pensioners Unfortunately, savings, thereby driving a of exceptions, self-sustaining asset class in could do well by doing good.could invest theirwith a fairly small number virtuous cycle that proved to be investors could it probably doing though the number of exceptions has certainly grown. In many in which Western too ambitious do well by still is,good. Unfortunately, with a fairly small number of exceptions, circumstances, microfinance still it probably still is, though the number of money, technical assistance, some many that proved to be too ambitious needs a helping hand cheap money, free exceptions has certainly grown. Indegree of regulatory forbearance etc. That doesnt deny hand cheap money, free money, technical assistance, some degree circumstances, microfinance still needs a helpingthat some, perhaps many, microfinance institutions are now investible; it regulatory that one ought to look also at deny that some, perhaps many, microfinance institutions of does mean forbearance etc. That doesntthe developmental rationale for supporting microfinance. are now investible; it does mean that one ought to look also at the developmental rationale for supporting microfinance. A major appeal of microfinance is that it is a bottom up approach to development, very different to the traditional top down approach that dominated academic a bottom up approach development, of this approach are real: whatever A major appeal of microfinance is that it is thinking for many years.toThe advantagesvery different to the traditional top its shortcomings, microfinance academic thinking for many years. The advantages of this approach are real: whatever down approach that dominated does ensure that more of the development dollar gets spent at the local or village level than has historically been the does However, more of price for that not least the spent at of local or village level its shortcomings, microfinancecase. ensure thatthere is athe development dollar gets problem the scalability. How can one has historically been the case. However, there is a price for that not least the problem of scalability. How can than build a microfinance infrastructure that can deliver anything like the same amount of aid as does the conventional approach? one build a microfinance infrastructure that can deliver anything like the same amount of aid as does the conventional approach? This report doesnt address the scalability issue directly, but it does make a number of salutary points that promoters of microfinance need address the scalability issue directly, but it does make a number of salutary points that promoters of This report doesnt to bear in mind. In particular: microfinance need to bear in mind. In particular: With the notable exception of Africa, the perception is that a shortage of funding is not a problem for the microfinance industry at of present time. Indeed, too much capital is probably bigger problem the With the notable exception the Africa, the perception is that a shortage of funding isanot a problem forthan too little in that it may drive present time. Indeed, too much capital is probably a bigger problem than microfinance industry at the standards down. too little in that it may drive standards down. The two biggest problems identified by respondents appear to be growing competition as new players enter the industry, and management quality/corporate governance. Complaints about as new players The two biggest problems identified by respondents appear to be growing competitioncompetition may just the industry, and management quality/corporate governance. Complaints about competition may enterbe special pleading by incumbents; management skills are obviously in short supply in most of the countries where microfinance can play management skills are obviously in short supply in most of the just be special pleading by incumbents; a role. countries where microfinance can play a role. Government often does not help. It is widely felt that regulation is frequently inappropriate, and incentives often does not help. It also be (surprise) political interference. Government can be perverse. There can is widely felt that regulation is frequently inappropriate, and incentives can be perverse. There can also be (surprise) political interference. There appears to be a temptation towards mission drift. We noticed this a decade ago, when it seemed that appears to be a temptation towards mission drift. We full-service bankers. Now, many of them There half the microfinanciers in the world really wanted to benoticed this a decade ago, when it seemed seem to the microfinanciers in the world to flogging high interest rate consumer Now, products. The that half be shifting from serving the poor really wanted to be full-service bankers.finance many of them profits be shifting from serving the the to flogging changed with potentially adverse reputational seem to may be more attractive, but poormission has high interest rateaconsumer finance products. The impact. profits may be more attractive, but the mission has changed with a potentially adverse reputational _____________impact. 1 Peter Montagnon: _____________ Credit where Credit is Due: Bringing Microfinance into the mainstream. CSFI, February 1998.
1
Peter Montagnon: Credit where Credit is Due: Bringing Microfinance into the mainstream. CSFI, February 1998.

I believe that this report written by my colleague, David Lascelles, who has made the Banana Skins patch his own over the last dozen years is genuinely important. It looks at microfinance from the inside, at what those who are most directly involved feel. It differentiates responses and respondents by their role within the industry and by geography. And it raises a number of warning flags that (to our knowledge) have not been raised before. We are very grateful to all those institutions who made this report possible. In particular, our thanks go to our two main sponsors Citi and CGAP (the Consultative Group to Assist the Poor). In addition, the Council of Microfinance Equity Funds (CMEF) and the Microfinance Information eXchange (MIX) provided important support. The report could not have been completed without the help of several individuals from our sponsors, notably Deborah Drake, Philip Brown and Xavier Reille. Finally, a word of thanks to Zach Grafe, who ran the Survey Monkey programme that enabled so many respondents from around the world to join in electronically. Andrew Hilton Director CSFI
Sponsors foreword
In 1998 when the CSFI issued its first Banking Banana Skins report, microfinance was still largely unknown and obscure, a niche-interest for government-sponsored donors. Today, a decade later, with a Nobel Prize under its belt, and with foreign capital investment at US$1.5 billion a year, its a dynamic field, with a slew of new and serious investors. Microfinance is exploding. No longer the provenance only of NGOs offering microcredit to a limited number of entrepreneurs, the word microfinance has entered the general lexicon. It no longer denotes just small loans for productive purposes. Today, it actually means, for many, retail banking for millions potentially billions of poor people. This is the context in which the Citigroup Foundation and CGAP, a leading microfinance group housed at the World Bank, sponsored CSFI to write the inaugural Microfinance Banana Skins Report. This report presents the findings of the first global industry survey on the risks affecting the growth and viability of commercial microfinance institutions. Our ambition is to raise awareness and engage investors, policy makers and microfinance institution managers on the perceived risks facing this new sector. While by no means exhaustive, the twenty-nine risks identified provide a faithful snapshot of the microfinance industry today. None of the risks highlighted here are that surprising for a young, emerging industry that is expanding at breakneck speed. Nonetheless, we hope that by highlighting the perceived risks affecting the global growth of commercial microfinance the report will inject a dose of realism into the debate about the investment boom and the (mis)perception that microfinance, which has enjoyed limited default history, therefore carries little or no risk. The report is intended to distinguish areas where development is needed, particularly at an industry level, to keep things on track. It is notable that the report highlights the importance of qualitative variables, with Management Quality, and Governance topping the list of risks, and points to an old microfinance mantra: the need for increased focus on retail institution capacity building. As sponsors of the report, we are grateful for the 305 industry participants from 74 countries who contributed to the survey and whose comments form the basis of the report. We would like to thank the CSFI and David Lascelles in particular, for producing such a coherent and engaging report. The Council of Microfinance Equity Funds was also an important project partner in this endeavour, and we are grateful to them for co-ordinating the Steering Committees work. We would also like to thank the Microfinance Information eXchange (MIX) for their support in the survey design and outreach. We hope that the Microfinance Banana Skins Report will be a valuable tool in charting the progress of commercial microfinance, highlighting the biggest and rising risk areas on the road ahead. Bob Annibale Global Director Citi Microfinance Elizabeth Littlefield CEO CGAP
About this survey

This survey was conducted in October and November 2007, and is based on 305 responses from 74 countries and multinational institutions. The questionnaire (reproduced in Appendix 1) was in three parts. In the first, respondents were asked to describe, in their own words, their main concerns about the microfinance sector over the next 2-3 years. In the second, they were asked to rate a list of potential risks - or Banana Skins - both by severity and whether they were rising, steady or falling. In the third, they were asked to rate the preparedness of microfinance institutions to handle the risks they identified. Replies were confidential, but respondents could choose to be named. The views expressed in this survey are those of the respondents and do not necessarily reflect those of the publishers or sponsors. The breakdown by type of respondent was as follows:
Respondents by type
Observers 24% Regulators 2% Practitioners 37% Analysts 13% Investors 24%
The observers category included aid officials, academics, accountants, lawyers, consultants etc. The analyst category included rating agencies, investment analysts, and those who compile statistical information on microfinance. The chart shows the distribution of responses by region.
Responses by region
Middle East 4% Far East 4% Asia 10% Africa 8% Multinational 2% North America 29%
Europe 24%
Latin America 19%

The breakdown by countries was as follows Afghanistan Africa Albania Angola Argentina Aruba Australia Azerbaijan Bangladesh Belgium Benin Bolivia Bosnia & Herzegovina Brazil Cambodia Cameroon Canada China Colombia Costa Rica Denmark Dominican Republic Ecuador Egypt El Salvador 3 1 3 1 1 1 1 2 5 2 1 5 7 1 7 1 3 1 5 2 1 2 5 1 1 Ethiopia Finland France Germany Guatemala Guinea-Conakry Haiti Honduras Hong Kong India Italy Jordan Kenya Kosovo Kyrgyzstan Lebanon Luxembourg Mexico Mongolia Montenegro Morocco Multinational Nepal Netherlands 2 1 9 7 4 1 2 1 1 13 2 3 4 1 1 3 3 9 1 1 2 5 2 10 Nicaragua Nigeria Norway Pakistan Palestine Paraguay Peru Philippines Romania Russia Rwanda Slovakia South Africa Sri Lanka Sudan Sweden Switzerland Syria Tajikistan Uganda UK United Arab Emirates US Venezuela Zimbabwe 4 3 2 2 1 2 12 2 1 3 1 1 4 2 1 1 8 1 2 2 11 1 84 2 1
A breakdown of countries by region is given in Appendix 3.
Summary
Biggest risks 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 Management quality Corporate governance Inappropriate regulation Cost control Staffing Interest rates Competition Managing technology Political interference Credit risk Transparency Foreign exchange Unrealisable expectations Mission drift Fraud Strategy Ownership Back office operations Reputation Liquidity Too much funding Profitability Macro-economic trends Product development Capital availability Distribution channels Natural catastrophes Refinancing Too little funding 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 Fastest risers Competition Staffing Political interference Too much funding Credit risk Strategy Mission drift Ownership Interest rates Unrealisable expectations Reputation Corporate governance Managing technology Fraud Natural catastrophes Cost control Management quality Foreign exchange Product development Profitability Inappropriate regulation Distribution channels Liquidity Macro-economic trends Back office operations Transparency Refinancing Capital availability Too little funding
This survey explores the risks and challenges facing microfinance as a business and a social service at a time when the sector is undergoing profound changes. Originally a small-scale, philanthropic movement to provide credit to the neediest, microfinance has grown enormously in recent years and is now firmly established as a major supplier of a wide range of financial services to millions of people around the world. The 1,200 microfinance institutions (MFIs) who report to the Microfinance Information eXchange (MIX) have 53m borrowers and 64m savers,

and numbers are growing by 25 per cent a a year, more in some countries. Total and numbers are growing by 25 per cent year, more in some countries. Total assets ofof these MFIs amount to $33bn. assets these MFIs amount to $33bn. However the sector is is also undergoing great structural changes. Its success is is However the sector also undergoing great structural changes. Its success attracting large volumes ofofoutside investment, both official and commercial. attracting large volumes outside investment, both official and commercial. According toto research by the Consultative Group to Assist the Poor, the stock of According research by the Consultative Group to Assist the Poor, the stock of foreign capital investment inin the sector more than tripled to $4bn between 2004 and foreign capital investment the sector more than tripled to $4bn between 2004 and 2006, much ofof it held by specialised microfinance investment vehicles, and much of 2006, much it held by specialised microfinance investment vehicles, and much of it it coming from the private sector. coming from the private sector.
Big structural Big structural changes changes
Convergence is is occurring between microfinance and mainstream banking as MFIs Convergence occurring between microfinance and mainstream banking as MFIs grow inin size and sophistication, and commercial banks enter the market. These grow size and sophistication, and commercial banks enter the market. These trends have boosted the size and quality ofof the microfinance sector, but also created trends have boosted the size and quality the microfinance sector, but also created new pressures ofof competition and sharper expectations. new pressures competition and sharper expectations. How will these pressures affect the sector? What are the risks posed by rapid How will these pressures affect the sector? What are the risks posed by rapid growth and change? What are the lessons toto be learned by practitioners and those growth and change? What are the lessons be learned by practitioners and those who invest inin the business? This survey was conducted toto seek answers to these who invest the business? This survey was conducted seek answers to these questions, with a a special focus on MFIs with more than $5m in assets which are questions, with special focus on MFIs with more than $5m in assets which are profitable and capable ofof commercial growth. These number about 350, according to profitable and capable commercial growth. These number about 350, according to estimates from MIX, and account for the bulk ofof microfinance assets globally. estimates from MIX, and account for the bulk microfinance assets globally. The survey asked respondents toto identify and comment on the major risks, or The survey asked respondents identify and comment on the major risks, or Banana Skins, which they saw facing the microfinance sector over the next two toto Banana Skins, which they saw facing the microfinance sector over the next two three years. More than 300 people responded from 74 countries. The table shows three years. More than 300 people responded from 74 countries. The table shows the ranking ofof the 29 Banana Skins identified by the survey. the ranking the 29 Banana Skins identified by the survey. The greatest risk facing microfinance is is the uneven quality of management at MFIs The greatest risk facing microfinance the uneven quality of management at MFIs at at a time of rapid change. The survey reveals strong doubts about the ability ofof a time of rapid change. The survey reveals strong doubts about the ability many MFIs toto adapt to new demands while still retaining their social objectives. many MFIs adapt to new demands while still retaining their social objectives. The industry is is seen, particularly by investors, to be lacking in professionalism and The industry seen, particularly by investors, to be lacking in professionalism and management skills, though these deficiencies are not generalised and are being management skills, though these deficiencies are not generalised and are being addressed inin many parts of the world. addressed many parts of the world. Closely linked toto management is concern about the quality of corporate governance Closely linked management is concern about the quality of corporate governance (No 2)2) and staffing (No 5) in MFIs, both of which are seen to be weak and drag on (No and staffing (No 5) in MFIs, both of which are seen to be weak and a a drag on development. High among management concerns are poor cost control (No 4)4) due development. High among management concerns are poor cost control (No due toto lack of commercial awareness, and managing new technology (No 8), often the lack of commercial awareness, and managing new technology (No 8), often the key toto raising business efficiency. key raising business efficiency. A A further obstacle to progress is the existence in many countries of inappropriate further obstacle to progress is the existence in many countries of inappropriate regulation (No 3)3) which prevents MFIs from adopting more commercial form, oror regulation (No which prevents MFIs from adopting a a more commercial form, forces them toto change against their will. A A related concern is the unwelcome forces them change against their will. related concern is the unwelcome growth ofof political interference (No 9) by governments who want to control interest growth political interference (No 9) by governments who want to control interest rates and influence lending. Respondents reported cases ofof populist governments rates and influence lending. Respondents reported cases populist governments encouraging borrowers not toto repay their loans. encouraging borrowers not repay their loans. The rapid growth inin competition (No 7) in the microfinance market, both from new The rapid growth competition (No 7) in the microfinance market, both from new entrants and among MFIs themselves, is is a high level concern among practitioners, entrants and among MFIs themselves, a high level concern among practitioners, though it it is viewed by investors and analysts as a necessary, if painful, force for though is viewed by investors and analysts as a necessary, if painful, force for good. good. Although competition is is stimulating greater efficiency and innovation, it Although competition stimulating greater efficiency and innovation, it may also lead toto an erosion of business standards, in particular to higher credit risk may also lead an erosion of business standards, in particular to higher credit risk (No 10) asas MFIs cut corners to sustain loan volumes. Both these risks are seen asas (No 10) MFIs cut corners to sustain loan volumes. Both these risks are seen fast risers. fast risers.
are throwing up are throwing up new risks new risks

Market risks such as interest rates (No 6), foreign exchange (No 12) and macroeconomic trends (No 23) are moderate though, in the case of interest rates, rising as more MFIs become integrated with mainstream banking. The survey revealed strong concerns about the hype surrounding the industry, and the risk that it may fall foul of unrealisable expectations (No 13) both as to social goals such as poverty alleviation, and commercial ones of investment returns. Many MFIs face what they see as conflicting pressures to deliver equally on both, but since commercial demands tend to win out, this leads to mission drift (No 14) as they get pushed off their social course. This in turn heightens reputation risk (No 19) with accusations that microfinance is failing in its social objectives. The survey showed that the availability of funding (No 29) and capital (No 25) is not seen as a major problem for the industry as a whole, though regional breakdowns revealed shortages in Africa particularly, and in Asia. In fact, the problem is the opposite one of too much funding (No 21) because microfinance is very much in vogue among investors. Respondents said that this flood of investment is adding to the problems of rising competition, falling standards and mission drift, and could heighten refinancing risk (No 28) if microfinance falls out of fashion. How well prepared are MFIs to handle these risks? Just over a quarter of the respondents thought they were well prepared with good management and sound strategies. Only five per cent thought they were poorly prepared, usually because they lacked management skills or sound funding. Over two thirds gave a mixed response, mainly because they differentiated between large MFIs which were on the whole better prepared than small ones, or because they saw some countries offering a better operating environment than others. Many respondents felt that present trends of competition, commercialisation and growing dependence on management and technological skills would widen the gap between MFIs that were well prepared and those that were not.
The problem is too much funding rather than too little
Who said what

Practitioners Biggest
1 2 3 4 5 6 7 8 9 10 Competition Cost control Inappropriate regulation Interest rates Credit risk Mission drift Management quality Managing technology Staffing Corporate governance 1 2 3 4 5 6 7 8 9 10
Fastest risers
Competition Mission drift Credit risk Political interference Staffing Strategy Managing technology Ownership Interest rates Management quality
The biggest concern for microfinance practitioners is the rise of competition from new entrants, which they see putting downward pressure on standards and squeezing margins. Key management challenges of cost control, credit risk and technology are also high on the list, as are people issues such as management quality and staffing. Inappropriate regulation is a widespread concern. A fast-rising risk for this group is mission drift: the danger that MFIs will be driven away from their original social purposes by commercial interests.
Analysts Biggest
1 2 3 4 5 6 7 8 9 10 Corporate governance Management quality Interest rates Managing technology Unrealisable expectations Mission drift Inappropriate regulation Ownership Strategy Transparency 1 2 3 4 5 6 7 8 9 10
Fastest risers
Competition Too much funding Interest rates Unrealisable expectations Natural catastrophes Strategy Staffing Managing technology Mission drift Foreign exchange
Analysts of the microfinance sector focused on the control aspects of MFIs: the quality of management, corporate governance, strategy and transparency. They see the biggest risks in the rise of competition both among MFIs and investors and a greater exposure to interest rate pressure. Generally, their interest lies with the longer term issues of MFI development such as regulation and ownership rather than with short term issues of credit risk and profitability. They were particularly concerned that microfinance might not be able to meet high investor expectations.

Investors Biggest risks
1 2 3 4 5 6 7 8 9 10 Management quality Corporate governance Foreign exchange Inappropriate regulation Staffing Too much funding Political interference Managing technology Interest rates Unrealisable expectations 1 2 3 4 5 6 7 8 9 10
Fastest risers
Too much funding Competition Political interference Reputation Staffing Credit risk Unrealisable expectations Strategy Ownership Interest rates
Investors were interested in the control aspects of MFIs governance, management, staffing - and in broader issues of competition and political interference. As dollar investors, mostly, they are also sensitive to foreign exchange risk. One of their sharpest concerns is with competition from other investors: they see excessive funding as both a high and a rising risk. Their relative lack of concern with issues such as profitability suggests that they are taking a longer term view of the challenges facing the industry.
Observers Biggest risks

1 2 3 4 5 6 7 8 9 10 Corporate governance Staffing Management quality Transparency Inappropriate regulation Interest rates Competition Cost control Managing technology Strategy 1 2 3 4 5 6 7 8 9 10
Fastest risers
Competition Staffing Ownership Corporate governance Political interference Strategy Interest rates Reputation Too much funding Unrealisable expectations
Observers of the microfinance scene (consultants, academics, regulators, lawyers etc) see the main risks lying with internal control issues: corporate governance, staffing, management, transparency, cost control and strategy. They see external risks in inappropriate regulation, pressure on interest rates and rising competition. A growing concern is the rise of political interference and reputational risk, particularly if MFIs fail to deliver on public expectations. They are less concerned than other groups with the problems posed by excessive funding.
10

North America Biggest risks
1 2 3 4 5 6 7 8 9 10 Corporate governance Management quality Inappropriate regulation Staffing Transparency Interest rates Unrealisable expectations Foreign exchange Back office operations Managing technology 1 2 3 4 5 6 7 8 9 10
Fastest risers
Competition Too much funding Unrealisable expectations Reputation Political interference Staffing Ownership Interest rates Strategy Mission drift
Respondents from the US and Canada, who included a large proportion of investors, saw the greatest risks lying in the areas of management of MFIs: corporate governance, management quality, staffing and transparency. They saw external risks in inappropriate regulation and market pressures such as interest rates and foreign exchange. They also focused strongly on the risks to MFI reputations from excessive public expectations and the danger of mission drift, both of which raised the danger of greater political interference.
Latin America Biggest risks

1 2 3 4 5 6 7 8 9 10 Competition Interest rates Political interference Inappropriate regulation Cost control Credit risk Capital availability Profitability Product development Managing technology 1 2 3 4 5 6 7 8 9 10
Fastest risers
Competition Political interference Strategy Credit risk Interest rates Natural catastrophes Foreign exchange Staffing Ownership Fraud
Latin American respondents, who were mostly practitioners, focused closely on external factors bearing on their business: competition, regulatory and political pressures. Their high concern with interest rates reflected the growing commercial pressures to which they feel exposed. Their internal concerns were with improving the quality of the business through better management of costs and credit, by raising profitability, and by expanding the range of products they offer. This group also showed concern with the rising risk of fraud.
11

Europe
1 2 3 4 5 6 7 8 9 10
Biggest risks
Management quality Corporate governance Inappropriate regulation Staffing Cost control Fraud Managing technology Too much funding Transparency Strategy 1 2 3 4 5 6 7 8 9 10
Fastest risers
Competition Too much funding Credit risk Unrealisable expectations Staffing Interest rates Political interference Mission drift Reputation Corporate governance
European respondents, who consisted mostly of investors in West Europe and practitioners in East Europe, saw the greatest risks in internal management issues including corporate governance, staffing, cost control and strategy, though these were not necessarily seen to be the fastest rising risks. Concerns about inappropriate regulation were particularly strong in East Europe. The areas of rising risk are the growth of competition, both in business and funding. They also see rising risks in the areas of reputation and mission drift. This group showed a strong concern with fraud.
Africa Biggest risks

1 2 3 4 5 6 7 8 9 10 Too little funding Management quality Credit risk Managing technology Inappropriate regulation Corporate governance Staffing Cost control Profitability Strategy 1 2 3 4 5 6 7 8 9 10
Fastest risers
Competition Corporate governance Management quality Managing technology Staffing Distribution channels Product development Profitability Strategy Back office operations
African respondents consisted mainly of practitioners and members of aid organisations and NGOs. They were the most concerned of any group about the scarcity of funding for microfinance in contrast to other regions which saw the risk lying in an overabundance. Management issues ranked high on their list, particularly staffing. Credit risk was also seen as a high level problem. African MFIs put profitability and cost control among their strongest concerns, and saw growing challenges in the areas of distribution channels and product development.
12

Asia
1 2 3 4 5 6 7 8 9 10
Biggest risks
Managing technology Management quality Corporate governance Staffing Competition Mission drift Fraud Reputation Strategy Credit risk 1 2 3 4 5 6 7 8 9 10
Fastest risers
Competition Staffing Credit risk Mission drift Strategy Interest rates Fraud Product development Managing technology Corporate governance
The Asian response was strongly tilted towards practitioners who saw the biggest challenges lying in the area of management, particularly technology, and also staffing and corporate governance. The rise of competition is a top level concern. This group saw credit risk as a growing problem, as well as fraud. Reputation risk and mission drift were also among their worries. This group was less concerned than others with the problems of inappropriate regulation.
Far East
1 2 3 4 5 6 7 8 9 10
Biggest risks
Foreign exchange Unrealisable expectations Cost control Competition Inappropriate regulation Management quality Political interference Credit risk Natural catastrophes Mission drift 1 2 3 4 5 6 7 8 9 10
Fastest risers
Competition Ownership Credit risk Distribution channels Mission drift Political interference Staffing Too little funding Management quality Managing technology
Respondents from the Far East included microfinance practitioners, investors and NGOs. Their response was very different from other regions. It showed a stronger concern with operational issues such as foreign exchange risk than with the management themes highlighted by other groups. Many MFI respondents felt they faced growing political pressure because of the excessive expectations that were placed upon them. This group also showed a high concern with the impact of natural catastrophes, not surprising given the number of recent disasters.
13

Middle East
1 2 3 4 5 6 7 8 9 10
Biggest risks
Staffing Capital availability Competition Inappropriate regulation Interest rates Mission drift Managing technology Corporate governance Macro-economic trends Political interference 1 2 3 4 5 6 7 8 9 10
Fastest risers
Competition Mission drift Staffing Capital availability Interest rates Unrealisable expectations Inappropriate regulation Political interference Strategy Credit risk
Middle East respondents, who were mostly practitioners, showed less concern than other groups with high level management issues, apart from staffing shortages which are a problem the world over. Instead they focused on the growing competition in their region for business and capital, and the risk that MFIs will be diverted from their missions by mounting commercial pressures. MFIs in this group feel vulnerable to growing political interference. They also felt the most exposed of any group to economic trends at the macro level.
A full breakdown of the responses by type and region is given in Appendix 2 on p 38.
14
C S F I / New York CSFI 1. Management quality 1. Management quality

The uneven quality ofofmanagement ininmicrofinance institutions (MFIs) is isthe The uneven quality management microfinance institutions (MFIs) the greatest risk facing the industry, according toto respondents to this survey. InIn all the greatest risk facing the industry, according respondents to this survey. all the regions inin which they operate, MFIs are being stretched by hectic rates of growth, by regions which they operate, MFIs are being stretched by hectic rates of growth, by the growing complexity ofoftheir business, and by pressures totobecome more the growing complexity their business, and by pressures become more commercially-motivated. One respondent warned: MFIs which lack management commercially-motivated. One respondent warned: MFIs which lack management breadth and depth will remain higher risk institutions and are not likely toto emerge as breadth and depth will remain higher risk institutions and are not likely emerge as winners inin an increasingly competitive environment. winners an increasingly competitive environment. Concerns about management quality were strongest among investors and analysts ofof Concerns about management quality were strongest among investors and analysts the microfinance sector (who placed this Banana Skin at at No.1 and No.2 respectively) the microfinance sector (who placed this Banana Skin No.1 and No.2 respectively) asas opposed to practitioners who ranked it No 7. Julie Earne, anan investment officer opposed to practitioners who ranked it No 7. Julie Earne, investment officer with the International Finance Corporation inin South Africa, said there were not with the International Finance Corporation South Africa, said there were not enough good managers and a a growing market. Geographically, concerns were enough good managers and growing market. Geographically, concerns were highest inin Europe, North America, Africa and Asia. South America was least highest Europe, North America, Africa and Asia. South America was least concerned, placing it it No 16. concerned, placing No 16. Much ofof the worry about Much the worry about management quality focused on management quality focused on the fact that MFIs tend totobebe the fact that MFIs tend Managing change Managing change dominated by visionaries who dominated by visionaries who The principal risk is isoverheating: high and The principal risk overheating: high and are strong on charisma but less are strong on charisma but less unrealistic expectations for long term returns, unrealistic expectations for long term returns, sosoon management skills and on management skills and excess investor liquidity and appetite, and a a excess investor liquidity and appetite, and strategic flexibility. strategic flexibility. Many Many lack of of clarity about the difference between lack clarity about the difference between respondents felt that MFIs risked respondents felt that MFIs risked mainstream investors and those with a a social mainstream investors and those with social getting trapped between their getting trapped between their motivation. motivation. social and commercial objectives social and commercial objectives Elizabeth Littlefield Elizabeth Littlefield and succeeding at at neither as the and succeeding neither as the Chief executive officer Chief executive officer Consultative Group to to Assist the Poor Consultative Group Assist the Poor industry changed around them. industry changed around them. A AUS practitioner saw MFIs US practitioner saw MFIs having difficulty ininbalancing having difficulty balancing business and social missions, leading toto tension, unclear focus, and inefficiencies in business and social missions, leading tension, unclear focus, and inefficiencies in operations. Several respondents felt that MFIs were not investing enough inin MF operations. Several respondents felt that MFIs were not investing enough MF management skills because the philanthropic culture ofof the industry emphasised management skills because the philanthropic culture the industry emphasised dedication rather than professionalism. dedication rather than professionalism. This risk was closely linked toto concerns about weak corporate governance (see No 2) This risk was closely linked concerns about weak corporate governance (see No 2) and staffing (No 5). and staffing (No 5). However the risks ofof poor management are not seen as rising: this Banana Skin came However the risks poor management are not seen as rising: this Banana Skin came only No 17 on the risers list. Indeed, many respondents saw it it falling as the problem only No 17 on the risers list. Indeed, many respondents saw falling as the problem was increasingly recognised and tackled. Leonor Melo dede Velasco, executive was increasingly recognised and tackled. Leonor Melo Velasco, executive president ofof the Fundacion Mundo Mujer in Colombia, said: It is being strengthened president the Fundacion Mundo Mujer in Colombia, said: It is being strengthened by training. Another respondent said hehe had observed a strong performance among by training. Another respondent said had observed a strong performance among MF managers who have grown with their institutions. MF managers who have grown with their institutions.
MFIs with poor MFIs with poor management management could be the could be the losers losers
2. Corporate governance 2. Corporate governance

Poor corporate governance is is seen an area of high risk, though more by investors, Poor corporate governance seen an area of high risk, though more by investors, analysts and regulators than by MFI practitioners themselves. A ACanadian analysts and regulators than by MFI practitioners themselves. Canadian development expert said that lack ofof governance has been a major risk factor in development expert said that lack governance has been a major risk factor in
CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk 15

many MFIs and will continue toto be an area of concern for the coming years. The many MFIs and will continue be an area of concern for the coming years. The perceived trend inin this risk is moderately upwards. perceived trend this risk is moderately upwards. Investors were particularly concerned. Too often, basic concepts ofof corporate Investors were particularly concerned. Too often, basic concepts corporate governance are little known oror neglected, said Geert Peetermans, chief investment governance are little known neglected, said Geert Peetermans, chief investment officer ofof Incofin in Belgium. At the end ofof the day, the risk is that MFIs will officer Incofin in Belgium. At the end the day, the risk is that MFIs will forego funding if if they lose the confidence of their investors. forego funding they lose the confidence of their investors. Shortcomings typically take the form ofof low calibre personnel, lack of experience, Shortcomings typically take the form low calibre personnel, lack of experience, cronyism and poor transparency. Khirod Chandra Malick, chairman ofof the Bharat cronyism and poor transparency. Khirod Chandra Malick, chairman the Bharat Integrated Social Welfare Agency inin India, said this whole area needs more Integrated Social Welfare Agency India, said this whole area needs more professionalism. professionalism. Many ofof these weaknesses have been shown up by the demands of commercial Many these weaknesses have been shown up by the demands of commercial investors. But this discipline has also had the beneficial effect ofof forcing MFIs to investors. But this discipline has also had the beneficial effect forcing MFIs to raise their game. raise their game. Hanns Martin Hagen, senior financial sector economist at at the Hanns Martin Hagen, senior financial sector economist the KfW Entwicklungsbank inin Germany, said: Many MFIs have opened up to outside KfW Entwicklungsbank Germany, said: Many MFIs have opened up to outside private investors and now have a a much more transparent corporate governance private investors and now have much more transparent corporate governance structure. structure.
3. Inappropriate regulation 3. Inappropriate regulation

The lack ofof appropriate regulatory structures for MFIs in many parts of the world is a The lack appropriate regulatory structures for MFIs in many parts of the world is a threat toto their healthy development. Alejandro Soriano, deputy director ofof the threat their healthy development. Alejandro Soriano, deputy director the Corporacin Andina dedeFomento ininVenezuela, said: Many countries do not Corporacin Andina Fomento Venezuela, said: Many countries do not progress due toto the lack of prudential regulation, view which was widely echoed progress due the lack of prudential regulation, a a view which was widely echoed inin Latin America, Africa, the Middle East and the Far East. A A Cambodian Latin America, Africa, the Middle East and the Far East. Cambodian respondent said the central bank was too slow inin regulating new areas that need respondent said the central bank was too slow regulating new areas that need urgent attention (savings, insurance, etc). Asia was the only region inin which this urgent attention (savings, insurance, etc). Asia was the only region which this Banana Skin did not feature inin the top ten. Banana Skin did not feature the top ten. According toto comments from respondents, inadequate regulatory structures are According comments from respondents, inadequate regulatory structures are restricting MFIs operating freedoms and creating legal uncertainty, particularly by restricting MFIs operating freedoms and creating legal uncertainty, particularly by blocking their efforts toto transform themselves from NGO status to fully-fledged blocking their efforts transform themselves from NGO status to fully-fledged banks, oror alternatively by forcing them to make the change against their will (see banks, alternatively by forcing them to make the change against their will (see box). A A respondent from Angola said: I believe that MFIs must be clearly defined box). respondent from Angola said: I believe that MFIs must be clearly defined within the legal framework toto obtain the clear identity which is necessary in dealing within the legal framework obtain the clear identity which is necessary in dealing with banks and other investors. with banks and other investors. At another level, respondents complained about the hassle factor ofof petty rules At another level, respondents complained about the hassle factor petty rules which looked like political interference inin disguise. Money laundering regulations which looked like political interference disguise. Money laundering regulations were a a particular annoyance. Corruption, delays, and unnecessary cost were extra were particular annoyance. Corruption, delays, and unnecessary cost were extra hazards. hazards. A AUS investor said that the relative lack ofofsophistication and US investor said that the relative lack sophistication and inconsistency ofof many regulators in sub-Saharan Africa is going to stifle growth. inconsistency many regulators in sub-Saharan Africa is going to stifle growth. Poor regulation was attributed variously totoincompetence, bureaucratic heavyPoor regulation was attributed variously incompetence, bureaucratic heavyhandedness, oror simple failure to keep up with a fast-moving industry.InIn India, an handedness, simple failure to keep up with a fast-moving industry. India, an investor said that it it was clear that regulators can afford to ignore MFIs as they investor said that was clear that regulators can afford to ignore MFIs as they have done for years, though this could not continue asasMFIs became more have done for years, though this could not continue MFIs became more important players on the financial landscape. important players on the financial landscape.
Poor regulatory Poor regulatory structures are structures are blocking change blocking change in many countries in many countries
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Despite the gloom, though, this was not seen toto be rising risk (No. 22), and several Despite the gloom, though, this was not seen be a a rising risk (No. 22), and several respondents saw improvements on the way with new legislation and stronger skills inin respondents saw improvements on the way with new legislation and stronger skills the regulator. the regulator.
The transformation challenge The transformation challenge

One of of the biggest challenges facing MFIs is to transform themselves from NGOs into One the biggest challenges facing MFIs is to transform themselves from NGOs into commercial institutions, a a task which is greatly complicated in many countries by commercial institutions, task which is greatly complicated in many countries by unhelpful regulation. unhelpful regulation. The problem is is particularly acute in Bosnia & Herzegovina where MFIs are being The problem particularly acute in Bosnia & Herzegovina where MFIs are being forced byby a new microcredit law to transform themselves into institutions with profit forced a new microcredit law to transform themselves into institutions with profit objectives, regulated byby the central bank.One practitioner from that country said: objectives, regulated the central bank. One practitioner from that country said: The transformation risk will be very high for those MFIs which decide to to transform The transformation risk will be very high for those MFIs which decide transform themselves into for-profit companies because a a company is a very different animal themselves into for-profit companies because company is a very different animal from an NGO. There are associated risks such asasmanagement, governance, from an NGO. There are associated risks such management, governance, regulation and supervision, etc. regulation and supervision, etc. In In Kenya, Phyllis Mbungu, CEO of the Small and Micro-Enterprise Programme, faced a Kenya, Phyllis Mbungu, CEO of the Small and Micro-Enterprise Programme, faced a reverse though not uncommon problem. Regulation of of banks has been tightened up, reverse though not uncommon problem. Regulation banks has been tightened up, and many smaller banking institutions are opting to to become MFIs instead, adding to and many smaller banking institutions are opting become MFIs instead, adding to competition in in the sector. competition the sector.
4. Cost control 4. Cost control

This risk was particularly stressed by microfinance practitioners who put it it No 2 on This risk was particularly stressed by microfinance practitioners who put No 2 on their list, with comments that stressed the need toto keep a tight grip on spending. their list, with comments that stressed the need keep a tight grip on spending. "Obligatory more important than ever before a matter ofof survivalthe number "Obligatory more important than ever before a matter survivalthe number one operational challenge for microfinance today. Geographically, concern was one operational challenge for microfinance today. Geographically, concern was strongest inin Latin America and the Far East. strongest Latin America and the Far East. But respondents recognised that it it wasnt easy.A A Scandinavian government advisor But respondents recognised that wasnt easy. Scandinavian government advisor said: Most MFIs have never been very good at at controlling cost, because so much said: Most MFIs have never been very good controlling cost, because so much MFI work is is labour intensive and requires strong management to stay within budget. MFI work labour intensive and requires strong management to stay within budget. Some respondents felt that MFIs lacked the discipline toto keep costs down because Some respondents felt that MFIs lacked the discipline keep costs down because they could easily pass them on toto their customers through higher loan charges. The they could easily pass them on their customers through higher loan charges. The superabundance ofof capital also made life too comfortable.A A practitioner in Albania superabundance capital also made life too comfortable. practitioner in Albania said that the MFI business model will need toto change to lower the delivery cost of said that the MFI business model will need change to lower the delivery cost of services. services. Some MFIs operate inin high inflation countries where cost control is specially Some MFIs operate high inflation countries where cost control is specially difficult. Nkosilathi Moyo, a a bank supervisor at the Reserve Bank of Zimbabwe, difficult. Nkosilathi Moyo, bank supervisor at the Reserve Bank of Zimbabwe, said that this was aa challenge in hyperinflationary environment and also due toto the said that this was challenge in a a hyperinflationary environment and also due the fact that granting small loans is is expensive. fact that granting small loans expensive. This was not, however, seen asas strongly rising risk (No 16) because it it was widely This was not, however, seen a a strongly rising risk (No 16) because was widely recognised and being acted upon. recognised and being acted upon.
Most MFIs have Most MFIs have never been good never been good at controlling at controlling costs costs
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C S F I / New York CSFI 5. Staffing 5. Staffing

Staffing is isa aperennial and worsening risk for most MFIs. Staffing perennial and worsening risk for most MFIs. The growth inin The growth competition, poaching, the lack ofof training and rising salaries make this one of the competition, poaching, the lack training and rising salaries make this one of the most intractable problems inin the sector. most intractable problems the sector. Responses from all major regions told a similar tale ofof staff shortages holding back Responses from all major regions told a similar tale staff shortages holding back growth and service improvement. growth and service improvement. A critical issuea huge problemhuman A critical issuea huge problemhuman capacity is is key constraint were among the comments made. The lack ofof locally capacity a a key constraint were among the comments made. The lack locally trained staff toto fill management positions is widespread. MFIs are headed by trained staff fill management positions is widespread. MFIs are headed by amazing visionaries and leaders but lack the mid-management resources toto scale up, amazing visionaries and leaders but lack the mid-management resources scale up, said one respondent. said one respondent. Even when they are available, staff are hard toto retain. Poaching is is rife, particularly Even when they are available, staff are hard retain. Poaching rife, particularly by well-heeled new entrants who can outbid the locals. Yousef Mousa Kandah, by well-heeled new entrants who can outbid the locals. Yousef Mousa Kandah, deputy general manager ofof the Ahli Microfinancing Company in Jordan, said that deputy general manager the Ahli Microfinancing Company in Jordan, said that competition will put usus at risk due to the resignation of field loan officers who are competition will put at risk due to the resignation of field loan officers who are attracted by banks entering the MFI business. attracted by banks entering the MFI business. Inadequate training is is serious bottleneck. An Indian investor saw a lack ofof focus Inadequate training a a serious bottleneck. An Indian investor saw a lack focus on quality and training ofof human resources, particularly at the field level, and on on quality and training human resources, particularly at the field level, and on building a a strong second/third line of management. InIn Venezuela, Juan Uslarbuilding strong second/third line of management. Venezuela, Juan UslarGathmann, president ofof BanGente microfinance institution, said that his bank had set Gathmann, president BanGente microfinance institution, said that his bank had set up a training institute and opened it it to the competition in order to address the staffing up a training institute and opened to the competition in order to address the staffing risk. risk. The staff requirements at at MFIs are also specialised: they need people who are The staff requirements MFIs are also specialised: they need people who are dedicated but also able toto handle the new pressures on microfinance. A A dedicated but also able handle the new pressures on microfinance. practitioner inin Angola said I strongly believe that the sustainability of MFIs greatly practitioner Angola said I strongly believe that the sustainability of MFIs greatly depends on the competence and efficiency ofof its personnel. Practitioners saw all depends on the competence and efficiency its personnel. Practitioners saw all these pressures steadily driving up operating costs without delivering any these pressures steadily driving up operating costs without delivering any improvements. improvements.
AA perennial and perennial and worsening risk worsening risk
6. Interest rates 6. Interest rates

Two types ofof risk are identified here: market and political. Two types risk are identified here: market and political. On the market side, many MFIs are protected from interest rate movements by the On the market side, many MFIs are protected from interest rate movements by the insensitivity ofof their borrowers to loan pricing, which can also encourage bad insensitivity their borrowers to loan pricing, which can also encourage bad management practice. But asas competition grows and clients become financially management practice. But competition grows and clients become financially more literate this protection disappears, exposing MFIs toto stronger interest rate more literate this protection disappears, exposing MFIs stronger interest rate pressures. Can they meet this challenge? pressures. Can they meet this challenge? Respondents had their doubts. An Egyptian practitioner said that high interest rates Respondents had their doubts. An Egyptian practitioner said that high interest rates are covering inefficiency and many other respondents thought that rates should bebe are covering inefficiency and many other respondents thought that rates should more market-driven toto instil cost-awareness into MFIs. Bill Harrington, anan advisor more market-driven instil cost-awareness into MFIs. Bill Harrington, advisor toto the Mennonite Economic Development Associates in the US, said: Competitive the Mennonite Economic Development Associates in the US, said: Competitive pressure toto lower interest rates will hurt, but will benefit clients. Another pressure lower interest rates will hurt, but will benefit clients. Another respondent pointed out that high interest rates merely attract new profit maximizing respondent pointed out that high interest rates merely attract new profit maximizing players toto field that was never meant toto be for high profits. Several agreed that players a a field that was never meant be for high profits. Several agreed that high loan rates bring inin the wrong type of competition. high loan rates bring the wrong type of competition.
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On the political side, high interest rates are catching the attention ofof politicians and On the political side, high interest rates are catching the attention politicians and provoking potentially damaging measures such asas interest rate caps (see No 9). provoking potentially damaging measures such interest rate caps (see No 9). Greater competition among MFIs could avert this risk by forcing them toto reduce Greater competition among MFIs could avert this risk by forcing them reduce their costs. Several respondents noted that interest rates on loans are already falling their costs. Several respondents noted that interest rates on loans are already falling inin some countries, for example in Latin America. some countries, for example in Latin America. This was seen asas moderately rising risk (No 9). This was seen a a moderately rising risk (No 9).
The urge to merge The urge to merge

Over the next 2-3 year horizon, I believe the microfinance sector will undergo some Over the next 2-3 year horizon, I believe the microfinance sector will undergo some consolidation, increased competition and deepen itsits market penetration. MFIs will consolidation, increased competition and deepen market penetration. MFIs will need to to do this not only to stay on the path towards profitable growth but, in many need do this not only to stay on the path towards profitable growth but, in many cases, to to stay competitive. cases, stay competitive. Romi Bhatia Romi Bhatia Vice president, International operations Vice president, International operations Microfinance International Corp., US Microfinance International Corp., US
7. Competition 7. Competition
Competition is is rising strongly and having a big impact on the microfinance sector, Competition rising strongly and having a big impact on the microfinance sector, though whether this is is good or bad is an open question. Practitioners are the most though whether this good or bad is an open question. Practitioners are the most worried about it:it: they put competition risk at the top of their list, notably in Latin worried about they put competition risk at the top of their list, notably in Latin America. But other respondents ranked it it much lower, investors at No. 17 and America. But other respondents ranked much lower, investors at No. 17 and analysts at at No. 18.All groups, however, saw it it strongly on the up. analysts No. 18. All groups, however, saw strongly on the up. The facts are that commercial banks, money lenders and consumer finance The facts are that commercial banks, money lenders and consumer finance companies are taking advantage ofof low entry barriers to move into MFI territory with companies are taking advantage low entry barriers to move into MFI territory with aggressive, well-funded campaigns, bringing market forces toto bear on hitherto aggressive, well-funded campaigns, bringing market forces bear on hitherto sacrosanct lending margins. sacrosanct lending margins. MFIs are also competing more strongly among MFIs are also competing more strongly among themselves. themselves. The downside is is that competition could undermine operating standards and erode The downside that competition could undermine operating standards and erode profitability. A A practitioner from Colombia saw bad practices and greater risk profitability. practitioner from Colombia saw bad practices and greater risk emerging inin the sector. Many respondents felt that competition was destroying the emerging the sector. Many respondents felt that competition was destroying the social purpose ofof microfinance by choking off the supply of finance to the most social purpose microfinance by choking off the supply of finance to the most neediest and encouraging overindebtedness ininthe creditworthy. neediest and encouraging overindebtedness the creditworthy. A Afrequent frequent complaint from Latin American practitioners was that new entrants were complaint from Latin American practitioners was that new entrants were prostituting the market. prostituting the market. One respondent from India blamed unethical One respondent from India blamed unethical competition. competition. Ganhuyag Ch. Hutagt, CEO ofof XacBank in Mongolia, said that Ganhuyag Ch. Hutagt, CEO XacBank in Mongolia, said that competitive pressures were pushing MFIs out ofof their traditional market [with] competitive pressures were pushing MFIs out their traditional market [with] abandonment ofof the poor as result. An African regulator described competition asas abandonment the poor as a a result. An African regulator described competition destructive. destructive. But many respondents saw competition asas good thing because it it brought down loan But many respondents saw competition a a good thing because brought down loan costs and encouraged innovation. costs and encouraged innovation. An investor inin India saw it delivering benefits An investor India saw it delivering benefits toto customers through lower interest rates and availability of loans. And while customers through lower interest rates and availability of loans. And while competition might squeeze individual MFIs, it it was good for the industry as whole. competition might squeeze individual MFIs, was good for the industry as a a whole. An analyst inin the Netherlands said: The industry should start to see this as normal. An analyst the Netherlands said: The industry should start to see this as normal.
Practitioners see Practitioners see competition as the competition as the greatest risk greatest risk
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Some respondents were more sanguine about the impact ofof competition, feeling that Some respondents were more sanguine about the impact competition, feeling that itsits harmful effects had been exaggerated by anxious MFI practitioners. A A European harmful effects had been exaggerated by anxious MFI practitioners. European aid official said: Competition is is not a risk there are enough opportunities for all aid official said: Competition not a risk - - there are enough opportunities for all institutions. institutions.
8. Managing technology 8. Managing technology

Although many MFIs do not have sophisticated technology, this is is seen as key area Although many MFIs do not have sophisticated technology, this seen as a a key area because ofof the industrys need for good systems and cost control as it becomes more because the industrys need for good systems and cost control as it becomes more complex and profit-conscious. A A US aid official said that managing technology is complex and profit-conscious. US aid official said that managing technology is a acritical factor ininseparating the winners from the losers ininananincreasingly critical factor separating the winners from the losers increasingly competitive environment. competitive environment. An Indian investor said that the industry needs toto An Indian investor said that the industry needs focus more on building inin robust technology to meet the growing operational focus more on building robust technology to meet the growing operational complexity with volumes and multiple products. InIn Colombia, practitioner said complexity with volumes and multiple products. Colombia, a a practitioner said that the viability ofof the low cost business model depends on technology. that the viability the low cost business model depends on technology. Cost was often cited asas barrier toto getting the most out of technology, as well as a Cost was often cited a a barrier getting the most out of technology, as well as a shortage ofof the right skills. A A US analyst said: There will be temptation toto invest shortage the right skills. US analyst said: There will be a a temptation invest inin new technologies, though some may not be ready to recover the substantial costs new technologies, though some may not be ready to recover the substantial costs ofof such an investment. such an investment. Nonetheless this risk was not seen asas a fast riser; indeed, many respondents were Nonetheless this risk was not seen a fast riser; indeed, many respondents were quite optimistic about it.it. An MFI consultant inin Mexico said: Technology is quite optimistic about An MFI consultant Mexico said: Technology is becoming increasingly attainable and more user friendly (cheaper ATMs, cell phone becoming increasingly attainable and more user friendly (cheaper ATMs, cell phone transfers, finger print signatures, etc). transfers, finger print signatures, etc).
9. Political interference 9. Political interference

The dark side of The dark side of Nobel prizes Nobel prizes
Governments are meddling more inin microfinance markets, and putting new pressures Governments are meddling more microfinance markets, and putting new pressures on the business. One respondent said This may bebe one the most significant areas of on the business. One respondent said This may one the most significant areas of risk on the rise inin the next 2-3 years.Another described it it as the dark side of risk on the rise the next 2-3 years. Another described as the dark side of Nobel prizes.... Nobel prizes.... F.F. Bakx, a programme manager at the Rabobank Foundation in the Netherlands, Bakx, a programme manager at the Rabobank Foundation in the Netherlands, singled out populist governments that wish toto (mis)use microfinance institutions for singled out populist governments that wish (mis)use microfinance institutions for their policies. InIn Nicaragua, Armando Gutirrez Navarro, general manager of the their policies. Nicaragua, Armando Gutirrez Navarro, general manager of the Prestanic MFI, said interference was on the rise with the recent change inin Prestanic MFI, said interference was on the rise with the recent change government. Some respondents highlighted recent incidents inin Andhra Pradesh government. Some respondents highlighted recent incidents Andhra Pradesh where reports ofof hard-pressed MFI borrowers committing suicide prompted the state where reports hard-pressed MFI borrowers committing suicide prompted the state government toto shut number ofof MFIs down and regulate interest rates. government shut a a number MFIs down and regulate interest rates. Political interference takes many forms: caps on interest rates, subsidies for Political interference takes many forms: caps on interest rates, subsidies for government-sponsored institutions, directed lending, pressure toto take on social role government-sponsored institutions, directed lending, pressure take on a a social role such asas job creation. It also corrupts the market. A respondent from the Dominican such job creation. It also corrupts the market. A respondent from the Dominican Republic said that populist attacks on MFIs had given borrowers the idea that they Republic said that populist attacks on MFIs had given borrowers the idea that they did not need toto repay their loans.There is is no greater disincentive to the operation did not need repay their loans. There no greater disincentive to the operation ofof an MFI than people understanding that they do not have to pay their debts. A US an MFI than people understanding that they do not have to pay their debts. A US respondent said that if populists, demagogues and self-serving hypocrites impose respondent said that if populists, demagogues and self-serving hypocrites impose interest rate regulation and other anti-competitive measures, the growth ofof the field interest rate regulation and other anti-competitive measures, the growth the field will bebe stymied. will stymied.
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However, the responses showed that this risk, while rising, is is specific to particular However, the responses showed that this risk, while rising, specific to particular countries. A A respondent in Colombia said: There is no interference here. Some countries. respondent in Colombia said: There is no interference here. Some respondents even welcomed political interference, provided it it was supportive and led respondents even welcomed political interference, provided was supportive and led totobetter regulation. A Abank regulator said that without political interest inin better regulation. bank regulator said that without political interest microfinance there would bebe no conducive and enabling environment to allow microfinance there would no conducive and enabling environment to allow growth inin the sector. growth the sector.
Borrowers hit back Borrowers hit back

What would happen if ifa acampaign developed to tosupport the cancellation of of What would happen campaign developed support the cancellation microfinance debt? Shortly after his arrival asas the new and democratically elected microfinance debt? Shortly after his arrival the new and democratically elected head of of state, the new president of Benin, and former president of the West African head state, the new president of Benin, and former president of the West African Development Bank, declared that microfinance loans were too expensive and incited Development Bank, declared that microfinance loans were too expensive and incited borrowers to to not pay them back. This declaration contributed to sending the local borrowers not pay them back. This declaration contributed to sending the local microfinance sector, which had been the best performing in in West Africa, into severe microfinance sector, which had been the best performing West Africa, into a a severe crisis. crisis. Cyrille Arnould Cyrille Arnould Senior operations officer Senior operations officer European Investment Bank European Investment Bank Luxembourg Luxembourg
10. Credit risk 10. Credit risk

Credit risk is is not traditionally seen as a major threat to the microfinance sector Credit risk not traditionally seen as a major threat to the microfinance sector because the social sanctions against default inin typical MFI markets are strong. InIn because the social sanctions against default typical MFI markets are strong. this survey, it it appears only as moderately high risk though, ominously perhaps, asas this survey, appears only as a a moderately high risk though, ominously perhaps, one ofof the fastest risers, ranking fifth. one the fastest risers, ranking fifth.
Loan default is Loan default is seen as aa seen as fast-rising risk fast-rising risk
Our respondents identified many reasons for the rising trend. One is is the growth in Our respondents identified many reasons for the rising trend. One the growth in lending capacity which is is leading to greater competition and through that to lower lending capacity which leading to greater competition and through that to lower credit standards and tighter margins. A A Mexican analyst warned: As markets credit standards and tighter margins. Mexican analyst warned: As markets become increasingly saturated, the risk ofof default is rising. A A bank regulator from become increasingly saturated, the risk default is rising. bank regulator from Central Africa noted the high rate ofof non-performing loans to several MFIs in her Central Africa noted the high rate non-performing loans to several MFIs in her territory. Banks are also taking on greater risk by extending their reach into territory. Banks are also taking on greater risk by extending their reach into unfamiliar markets and new product areas. unfamiliar markets and new product areas. A A consequence of growing commercial pressure is the spread of overindebtedness as consequence of growing commercial pressure is the spread of overindebtedness as MFIs push more loans on toto their customers.A A respondent from womens bank inin MFIs push more loans on their customers. respondent from a a womens bank Colombia warned ofof the high level of indebtedness in the microfinance sector. Colombia warned the high level of indebtedness in the microfinance sector. Elizabeth Marinelli ofof Norfund in Norway said the greatest risk in the coming years Elizabeth Marinelli Norfund in Norway said the greatest risk in the coming years was potentially a lack ofof proper portfolio monitoring and provisioning. was potentially a lack proper portfolio monitoring and provisioning. Some respondents noted that borrowers were getting the message about lower Some respondents noted that borrowers were getting the message about lower standards and had become more delinquent, running up debts toto several banks at standards and had become more delinquent, running up debts several banks at once. once. Group guarantees, traditionally the underpinning ofof individual Group guarantees, traditionally the underpinning individual creditworthiness, were also weakening. Philip Biswas, executive director ofof the creditworthiness, were also weakening. Philip Biswas, executive director the Rural Reconstruction Foundation inin Bangladesh, said the main risk we are currently Rural Reconstruction Foundation Bangladesh, said the main risk we are currently facing - and it'll bebe critical in future is is the duplication of different MFIs in the same facing - and it'll critical in future - - the duplication of different MFIs in the same area with the same borrowers. area with the same borrowers.
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All this this is taking place against a background in which credit assessment and portfolio All is taking place against a background in which credit assessment and portfolio management skills maymayinadequate, where credit bureaux are lacking, and and where management skills be be inadequate, where credit bureaux are lacking, where legal systems maymay aid the recovery of bad bad debts. legal systems not not aid the recovery of debts. But But improvement mayon the way. Eduardo Carlos Ferreira, executive manager improvement may be be on the way. Eduardo Carlos Ferreira, executive manager of Microinvest in Brazil, said said that international best practices, microcredit tools and of Microinvest in Brazil, that international best practices, microcredit tools and techniques have onlyonly been very recently and partially applied, and could improve techniques have been very recently and partially applied, and could improve and and stabilize loan quality. stabilize loan quality.
Leaders and Luddites Leaders and Luddites

The The adoption of change is one of biggest risksrisksany industry, and and microfinance adoption of change is one of the the biggest for for any industry, microfinance cannot be insulated fromfrom that. the current senior management react positively or or cannot be insulated that. Will Will the current senior management react positively negatively to the change required to manage a business, and and one that is times its its negatively to the change required to manage a business, one that is ten ten times current size? There will be those who who react brilliantly, and those who adopt Luddite current size? There will be those react brilliantly, and those who adopt Luddite attitudes. Either way way therebe stresses, successes and and failures. attitudes. Either there will will be stresses, successes failures. Colin Howard Colin Howard MFDAQ, The microfinance capital market, UK UK MFDAQ, The microfinance capital market,
11. Transparency 11. Transparency

The The risks associated with poor transparency in MFIs highhigh because it drives away risks associated with poor transparency in MFIs are are because it drives away investors and and customers, and attracts unwelcome political attention.practitioner in in investors customers, and attracts unwelcome political attention. A A practitioner Colombia described this thisthethe great challenge andIndian investor said said MFIs Colombia described as as great challenge and an an Indian investor MFIs should act to dispel suspicion about the sector. should act to dispel suspicion about the sector. Several respondents from the investor side side singled out transparencyaas a key risk, Several respondents from the investor singled out transparency as key risk, particularly the lacklack of standardised reporting structures and measurement tools. A particularly the of standardised reporting structures and measurement tools. A director of a of a rating agency said The sector needs more transparency and instruments director rating agency said The sector needs more transparency and instruments to helphelp investors assess risk. Tracey Pettengill Turner, general manager of to investors assess risk. Tracey Pettengill Turner, general manager of MicroPlace in the US, US, felt that transparency shouldmore widely cast castinclude MicroPlace in the felt that transparency should be be more widely to to include financial performance, social metrics and and mission statementsaid aid borrowers as financial performance, social metrics mission statements to to borrowers as wellwellinvestors. An African bank regulator said said transparency shouldextended as as investors. An African bank regulator transparency should be be extended to the pricing of products and and services. to the pricing of products services. However, the the risks poorpoor transparency are widely recognized, and many However, risks of of transparency are widely recognized, and many respondents said said there had been a marked improvement in recent years, even if it had respondents there had been a marked improvement in recent years, even if it had been uneven. been uneven. Credit for for this was given investor pressure as wellwell to to Credit this was given to to investor pressure as as as international accounting and and governance initiatives, and to growing role role of rating international accounting governance initiatives, and to the the growing of rating agencies. An investor in India said said that the involvement of various stakeholders is agencies. An investor in India that the involvement of various stakeholders is leading to an improvement in transparency, and and analyst in Mexico said said that leading to an improvement in transparency, an an analyst in Mexico that accountability is rising as more international funds are usedusedvarious MFIs. accountability is rising as more international funds are by by various MFIs.
MFIs need to to MFIs need dispel suspicion dispel suspicion
12. Foreign exchange 12. Foreign exchange

An An increasing number MFIs faceface foreign exchange risk because they fund increasing number of of MFIs foreign exchange risk because they fund themselves in a in a non-domestic currency. Manythem do not have the means to to themselves non-domestic currency. Many of of them do not have the means protect themselves against currency volatility, notably against the US dollar in which protect themselves against currency volatility, notably against the US dollar in which most foreign funding comes. most foreign funding comes.
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Paul Hamlin, anan advisor at ACDI/VOCA in Azerbaijan said: Given increased Paul Hamlin, advisor at ACDI/VOCA in Azerbaijan said: Given increased volatility inin almost all capital market components, foreign exchange risk will only volatility almost all capital market components, foreign exchange risk will only increase asas well. A practitioner in Egypt said that MFIs are lending in foreign increase well. A practitioner in Egypt said that MFIs are lending in foreign currency assuming that they have no currency risk on the balance sheet, but their currency assuming that they have no currency risk on the balance sheet, but their clients are exposed toto this risk, which could affect their repayment capabilities. clients are exposed this risk, which could affect their repayment capabilities. Some respondents blamed foreign exchange exposure on the shortage ofof local Some respondents blamed foreign exchange exposure on the shortage local funding sources. A A practitioner in Cambodia said that it was easier for banks there to funding sources. practitioner in Cambodia said that it was easier for banks there to lend inin dollars than in local currency, and because of this the supply of small loans in lend dollars than in local currency, and because of this the supply of small loans in riel oror bhat was restricted.InIn Nicaragua, Gabriel Solorzano, president of Findesa, riel bhat was restricted. Nicaragua, Gabriel Solorzano, president of Findesa, said there was aa need for more local currency funding. said there was need for more local currency funding. However a a number of respondents saw local funding on the rise, and therefore However number of respondents saw local funding on the rise, and therefore reducing the risk ofof foreign exposure. One respondent noted that funding was reducing the risk foreign exposure. One respondent noted that funding was increasingly available ininMexican pesos, Peruvian soles and Russian roubles. increasingly available Mexican pesos, Peruvian soles and Russian roubles. Technology and training are also strengthening MFI capability inin this area. Heather Technology and training are also strengthening MFI capability this area. Heather Henyon, general manager ofof Grameen-Jameel Pan-Arab Microfinance in the United Henyon, general manager Grameen-Jameel Pan-Arab Microfinance in the United Arab Emirates said that MFIs inin the Middle East and North African regions have Arab Emirates said that MFIs the Middle East and North African regions have grown increasingly aware ofof their inability to manage forex risk, and have therefore grown increasingly aware their inability to manage forex risk, and have therefore decreased taking on funding inin hard currency. decreased taking on funding hard currency.
13. Unrealisable expectations 13. Unrealisable expectations

So much is is expected of microfinance that it could be riding for fall. Gil Lacson, So much expected of microfinance that it could be riding for a a fall. Gil Lacson, relationship manager with Womens World Banking inin the US, said: With the relationship manager with Womens World Banking the US, said: With the amount ofof attention given to microfinance, it is easy for expectations to dramatically amount attention given to microfinance, it is easy for expectations to dramatically exceed delivery, possibly leading totonegative consequences like microfinance exceed delivery, possibly leading negative consequences like microfinance fatigue. fatigue.
Can MFIs match Can MFIs match up to what is up to what is expected of them? expected of them?
The risk lies on two fronts. One is is that public expectations will be disappointed, The risk lies on two fronts. One that public expectations will be disappointed, leading toto political and regulatory backlash.The other is is that investors, drawn to leading political and regulatory backlash. The other that investors, drawn to microfinance by philanthropic oror commercial motives, will become cynical and go microfinance by philanthropic commercial motives, will become cynical and go elsewhere. Brigit Helms, a a project manager with the IFC in Cambodia, said that elsewhere. Brigit Helms, project manager with the IFC in Cambodia, said that once many ofof the new players seduced into the sector (the Gates and the JP once many the new players seduced into the sector (the Gates and the JP Morgans ofof this world, especially) realise that microfinance may not be able to Morgans this world, especially) realise that microfinance may not be able to resolve all the world's problems asas advertised, the disillusionment may cause them to resolve all the world's problems advertised, the disillusionment may cause them to withdraw their capital and support, toto the detriment to the sector as whole. withdraw their capital and support, the detriment to the sector as a a whole. The denouement could bebe even more dramatic: a few negative newspaper articles The denouement could even more dramatic: a few negative newspaper articles exposing mismanagement and corruption, oror researchers producing evidence that exposing mismanagement and corruption, researchers producing evidence that microfinance is is having minimal impact on poverty could severely damage the microfinance having minimal impact on poverty could severely damage the standing ofof the industry. Anne Hastings, director ofof Fonkoze in Haiti, said standing the industry. Anne Hastings, director Fonkoze in Haiti, said microfinances biggest risk was that it it will not be able to produce credible evidence microfinances biggest risk was that will not be able to produce credible evidence that it it does indeed reduce poverty. that does indeed reduce poverty. Many respondents said it it was up to the industry to respond to these risks by stressing Many respondents said was up to the industry to respond to these risks by stressing that microfinance was not a panacea, and by launching robust studies toto measure that microfinance was not a panacea, and by launching robust studies measure the investment and social performance ofof MFIs. the investment and social performance MFIs.
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C S F I / New York CSFI 14. Mission drift 14. Mission drift

Mounting commercial pressures are pushing MFIs away from their original missions Mounting commercial pressures are pushing MFIs away from their original missions ofof poverty alleviation and financial inclusion. This is is seen as strongly rising risk poverty alleviation and financial inclusion. This seen as a a strongly rising risk inin many parts of the world. many parts of the world. A A respondent from Mexico said that as microfinance becomes more lucrative, the respondent from Mexico said that as microfinance becomes more lucrative, the initial objective ofof sustained socio-economic development is being brushed aside. A initial objective sustained socio-economic development is being brushed aside. A practitioner inin Haiti said that pressures from profit-seeking investors will lead, little practitioner Haiti said that pressures from profit-seeking investors will lead, little
Loans for jewellery and cosmetics Loans for jewellery and cosmetics
Microfinance is isnow seen asasa ahighly profitable area in inwhich to toinvest, Microfinance now seen highly profitable area which invest, forgetting/ignoring that the clients behind the "profits" are people from very low forgetting/ignoring that the clients behind the "profits" are people from very low income sectors, living at at the margin and using microloans as way to to improve their income sectors, living the margin and using microloans as a a way improve their small incomes. This is is attracting many new profit-seeking players with access to small incomes. This attracting many new profit-seeking players with access to funding and technological advances that genuine microcredit players will find very funding and technological advances that genuine microcredit players will find very hard to to compete with. hard compete with. These new players are inducing "the poor" to to take out loans that carry very high These new players are inducing "the poor" take out loans that carry very high interest rates for short term consumer purposes, rather than for productive activities interest rates for short term consumer purposes, rather than for productive activities which require serious loan repayment capacity and lower interest rates. Consumer which require serious loan repayment capacity and lower interest rates. Consumer loans are going to to purchase luxury items such as jewellery, ornaments, perfumes and loans are going purchase luxury items such as jewellery, ornaments, perfumes and cosmetics, even "wellness" products that "poor women sell to to other "poor women". cosmetics, even "wellness" products that "poor women sell other "poor women". In In countries with large populations living below the poverty line (Mexico, Brazil, countries with large populations living below the poverty line (Mexico, Brazil, Argentina to to name few in in this region) this consumer lending mentality will seriously Argentina name a a few this region) this consumer lending mentality will seriously threaten the performance of of the microcredit sector and, more importantly, will threaten the performance the microcredit sector and, more importantly, will produce clients who are unable to to repay their loans, who end up in credit risk produce clients who are unable repay their loans, who end up in credit risk bureaux, and will never again have access to to a loan. In the meantime, the new bureaux, and will never again have access a loan. In the meantime, the new players will make enough profits soso that, when the going gets tough, they will get out players will make enough profits that, when the going gets tough, they will get out of of the market and no one will care about the many who are left in "civic death" on the the market and no one will care about the many who are left in "civic death" on the way. way. Pilar Ramirez Pilar Ramirez General manager General manager Locfund Locfund Bolivia Bolivia
The initial The initial objective is being objective is being brushed aside brushed aside
by little, toto MFIs putting profitability ahead of social development objectives. In by little, MFIs putting profitability ahead of social development objectives. In Syria, Namaan Adra, country manager ofof the Aga Khan Agency for Microfinance, Syria, Namaan Adra, country manager the Aga Khan Agency for Microfinance, feared that due toto pressure to be sustainable, MFIs will change their focus from feared that due pressure to be sustainable, MFIs will change their focus from poverty reduction totoprofit-making. This is iscompounded by the increase inin poverty reduction profit-making. This compounded by the increase competition from the commercial sector. Prakash Raj Sharma, general manager ofof competition from the commercial sector. Prakash Raj Sharma, general manager Nirdhan Utthan Bank inin Nepal, said that in the name of sustainability, some Nirdhan Utthan Bank Nepal, said that in the name of sustainability, some institutions are trying toto make themselves more commercialI think the challenge is institutions are trying make themselves more commercialI think the challenge is toto create balance between a pro-poor system and commercialisation. create a a balance between a pro-poor system and commercialisation. This Banana Skin provoked dozens ofof passionate responses, most of which blamed This Banana Skin provoked dozens passionate responses, most of which blamed return-hungry investors for turning up the commercial heat on MFIs. A A respondent return-hungry investors for turning up the commercial heat on MFIs. respondent from India said investors were pushing MFIs toto deliver faster growth at the cost of from India said investors were pushing MFIs deliver faster growth at the cost of sacrificing their reach totothe underprivileged community. sacrificing their reach the underprivileged community. Jerome Aba, a a Jerome Aba, microfinance expert at at PlaNet Finance in France, said that too many financiers are microfinance expert PlaNet Finance in France, said that too many financiers are imposing their diktats supposedly on the basis ofof sustainability. Malcolm Harper, imposing their diktats supposedly on the basis sustainability. Malcolm Harper, anan independent researcher, said that microfinance was in danger of becoming just independent researcher, said that microfinance was in danger of becoming just another exploitative business which will continue the trend towards growing another exploitative business which will continue the trend towards growing inequity, worldwide. inequity, worldwide.
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The consequence is is not just that MFIs are deserting their original social missions, but The consequence not just that MFIs are deserting their original social missions, but that they are being pushed into business areas where they may not have the right that they are being pushed into business areas where they may not have the right skills and management tools. This increases the risk ofof business failure. It It also skills and management tools. This increases the risk business failure. also raises the microfinance sectors vulnerability toto a change investment fashions.As raises the microfinance sectors vulnerability a change investment fashions. As many respondents pointed out, the flood ofof investment could just as quickly flow out many respondents pointed out, the flood investment could just as quickly flow out again asas investors pursue new fad. again investors pursue a a new fad.
15. Fraud 15. Fraud

Responses toto this Banana Skin had a resigned tone to them: always with us, a Responses this Banana Skin had a resigned tone to them: always with us, a natural business risk, manageable etc But a a number of respondents felt there natural business risk, manageable etc But number of respondents felt there were worrying trends. Some commented on the growth ofof fraud by staff and white were worrying trends. Some commented on the growth fraud by staff and white collar workers, others on the new possibilities for fraud opened up by MFI moves collar workers, others on the new possibilities for fraud opened up by MFI moves into unfamiliar markets oror by the introduction of new but unreliable technologies. into unfamiliar markets by the introduction of new but unreliable technologies. Geographically, concerns about fraud were strongest inin Asia.It It was also leading Geographically, concerns about fraud were strongest Asia. was also a a leading concern among investors inin North America and Europe.One US investor felt the concern among investors North America and Europe. One US investor felt the fraud problem was underplayed because MFIs were frightened ofof airing their dirty fraud problem was underplayed because MFIs were frightened airing their dirty laundry. Their reluctance toto share fraud experience meant that other MFIs were laundry. Their reluctance share fraud experience meant that other MFIs were condemned toto repeat their mistakes. condemned repeat their mistakes. But many felt these concerns were overdone, and that the fraud experience ofof MFIs But many felt these concerns were overdone, and that the fraud experience MFIs was not exceptional inin the financial field. Better controls and a stronger anti-fraud was not exceptional the financial field. Better controls and a stronger anti-fraud culture were being introduced. A A South African respondent said that fraud was culture were being introduced. South African respondent said that fraud was being mitigated by licensing, better governance and best practice organisations. being mitigated by licensing, better governance and best practice organisations.
MFIs are reluctant MFIs are reluctant to share to share fraud experience fraud experience
The trust factor The trust factor

The present situation looks 'to'to good to be true'.sense that every day we are coming The present situation looks good to be true'. I I sense that every day we are coming closer to to failing institution (too high portfolio at at risk, or more likely, fraud).How will closer a a failing institution (too high portfolio risk, or more likely, fraud). How will the market react to to this? AtAt the same time, every day without such an event the market react this? the same time, every day without such an event confirms the trust people have in in this sector, and the likelihood increases that they confirms the trust people have this sector, and the likelihood increases that they will stay on. will stay on. Els Boerhof Els Boerhof Manager Manager Micro and Small Enterprise Fund Micro and Small Enterprise Fund FMO FMO Netherlands Netherlands
16. Strategy 16. Strategy

Weaknesses inin MFIs strategic planning are perceived to be only middle level risk, Weaknesses MFIs strategic planning are perceived to be only a a middle level risk, but nonetheless a a rising one (No 6) as the microfinance sector becomes more but nonetheless rising one (No 6) as the microfinance sector becomes more complex and competitive. Many respondents felt that strategy could soon become a a complex and competitive. Many respondents felt that strategy could soon become survival issue. survival issue. Philippe Serres, network director ofof PlaNet Rating, said this was major risk given Philippe Serres, network director PlaNet Rating, said this was a a major risk given that many institutions simply do not know how toto plan or are too ambitious. Xavier that many institutions simply do not know how plan or are too ambitious. Xavier Reille, manager with CGAP ininFrance, saw MFIs suffering from a alack ofof Reille, manager with CGAP France, saw MFIs suffering from lack
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awareness of competition and and market developments. bank regulator said said that awareness of competition market developments. A A bank regulator that MFIs lack strategic imperatives. MFIs lack strategic imperatives. Some respondents felt felt that MFIs were too hooked ideology when it came to to Some respondents that MFIs were too hooked on on ideology when it came strategic planning, and and shouldmore open-minded. Elissa McCarter, director of of strategic planning, should be be more open-minded. Elissa McCarter, director development finance at CHF International in the US, US, said that microfinance had development finance at CHF International in the said that microfinance had accumulated a veryvery solid base of experience and had much to applaud, there is is accumulated a solid base of experience and had much to applaud, but but there likely more thanthan one truthas it develops further!Swiss investor said said that likely more one truthas it develops further! A A Swiss investor that those MFIs which position themselves in a in a mature market will be able to handle the those MFIs which position themselves mature market will be able to handle the challenges successfully. challenges successfully.
17. Ownership 17. Ownership

As more MFIs make the transition from NGO-type organisations to commercial As more MFIs make the transition from NGO-type organisations to commercial companies, potentially destabilising tensions are arising among the different types of of companies, potentially destabilising tensions are arising among the different types owner. These surround key key issues such as nature of the MFIs mission, the role role owner. These surround issues such as the the nature of the MFIs mission, the of profit, whether to remain local or broaden out etc... Some respondents saw saw the of profit, whether to remain local or broaden out etc... Some respondents the problem in terms of founding owners trying to cling to theirtheir original missions, others problem in terms of founding owners trying to cling to original missions, others in terms of newnew realities forcing MFIs to move with times. ThisThis was seen as a in terms of realities forcing MFIs to move with the the times. was seen as a rising problem in all regions. rising problem in all regions. Ira Lieberman, president of Lipam International and and advisor to microfinance Ira Lieberman, president of Lipam International an an advisor to microfinance funds, said said that new investors push market too fast. Yet Yet Deborah Drake, vicefunds, that new investors push the the market too fast. Deborah Drake, vicepresident of ACCION International, said said that founder syndrome continues to president of ACCION International, that founder syndrome continues to plague the NGOs transforming into into regulated MFIs. Another respondent said that plague the NGOs transforming regulated MFIs. Another respondent said that multi-stakeholder MFIs are still still difficult. multi-stakeholder MFIs are difficult. Some respondents saw sawownership issue in terms of a of a regulatory bias which forces Some respondents the the ownership issue in terms regulatory bias which forces newnew ownership structures MFIs or makes it difficult for them to transform ownership structures on on MFIs or makes it difficult for them to transform themselves into into regulated entities.BobBob Annibale, global director Citi Citi themselves regulated entities. Annibale, global director of of Microfinance, tooktook issue with view that that MFIs neededtransform themselves Microfinance, issue with the the view MFIs needed to to transform themselves into into for-profit banks in order to succeed.Bangladesh it was was BRAC NGO, not not for-profit banks in order to succeed. In In Bangladesh it BRAC the the NGO, BRAC Bank, that that completedAAA rated securitisation because of the quality of of BRAC Bank, completed an an AAA rated securitisation because of the quality its management. its management.
18. Back office operations 18. Back office operations

Many MFIs lack lack the strong management and accounting systems which are Many MFIs the strong management and accounting systems which are necessary to control risk risk keepkeep costs down, particularly as they expand in size and necessary to control and and costs down, particularly as they expand in size and complexity. In general, this this was seen toabe a middle level risk, not on the rise rise complexity. In general, was seen to be middle level risk, but but not on the owing to the amount of work that that is being into into it. owing to the amount of work is being put put it.
Neglecting the Neglecting the back endis not a a back endis not healthy trend healthy trend
Concerns focused particularly on larger MFIs which might be overwhelmed by rapid Concerns focused particularly on larger MFIs which might be overwhelmed by rapid growth or which put backback office upgrading low lowtheirtheir of priorities, though growth or which put office upgrading too too on on list list of priorities, though many smaller MFIs were also also seen todangerously under-equipped. many smaller MFIs were seen to be be dangerously under-equipped. Howard Howard Brady, president and and CEO of MFI Resources in US, US, said that system providers Brady, president CEO of MFI Resources in the the said that system providers are not doing a veryvery good of training and and implementing systems, and MFIs are are not doing a good job job of training implementing systems, and MFIs are not willing to pay the costs of a of a good MIS. The result is systems thatinferior and and not willing to pay the costs good MIS. The result is systems that are are inferior are heldheld together with frequent patches that create more problems. are together with frequent patches that create more problems. Maria Nerissa Cochingco, an MF MF consultantthe Philippines, said said that as the Maria Nerissa Cochingco, an consultant in in the Philippines, that as the volume of transaction increases, systems fail to adapt most of the time. C.O.C.O. Joby, volume of transaction increases, systems fail to adapt most of the time. Joby,
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a manager with ICICI Bank inin India, said: The whole concentration right now is on a manager with ICICI Bank India, said: The whole concentration right now is on expanding at at any cost and being everywhere possible. This is not healthy trend expanding any cost and being everywhere possible. This is not a a healthy trend neglecting the back end. neglecting the back end. Weaknesses were specially marked inin India and Africa where respondents said that Weaknesses were specially marked India and Africa where respondents said that unregulated MFIs tended toto put their faith in social networks rather than IT systems; unregulated MFIs tended put their faith in social networks rather than IT systems; this held back modernisation. this held back modernisation.
19. Reputation 19. Reputation

The reputation ofof the microfinance sector looks vulnerable. Large profits, high The reputation the microfinance sector looks vulnerable. Large profits, high interest rates and unfulfilled promises have attracted public interest and adverse interest rates and unfulfilled promises have attracted public interest and adverse publicity. publicity.
Potential for Potential for backlash backlash
Gloomy responses on this issue tended toto come from investors in the developed Gloomy responses on this issue tended come from investors in the developed world rather than practitioners inin the developing. An investor inin the US said that world rather than practitioners the developing. An investor the US said that microfinances image was threatened by profits off high interest rates, misguided microfinances image was threatened by profits off high interest rates, misguided expectations and a lack ofof studies demonstrating the effectiveness of microfinance in expectations and a lack studies demonstrating the effectiveness of microfinance in
Reputation at risk Reputation at risk

The unwillingness of of larger MFIs (over $10m in assets) to keep serving the poorer The unwillingness larger MFIs (over $10m in assets) to keep serving the poorer populations [would make] this industry solely a a very profitable emerging market populations [would make] this industry solely very profitable emerging market business. business. Stephanie Cohn, Senior investment officer, PlaNet Finance, US Stephanie Cohn, Senior investment officer, PlaNet Finance, US The extreme profits that many MFIs are generating through deceptive marketing of of The extreme profits that many MFIs are generating through deceptive marketing high-priced products will generate a backlash against the image of of microfinance as a high-priced products will generate a backlash against the image microfinance as a means to to alleviate poverty. Microfinance could become synonymous with money means alleviate poverty. Microfinance could become synonymous with money lending if we don't fight for consumer protection. lending if we don't fight for consumer protection. Chuck Waterfield, CEO, MFI Solutions, US Chuck Waterfield, CEO, MFI Solutions, US Too much fragmentation leads to to more opportunity for a small failure to taint the Too much fragmentation leads more opportunity for a small failure to taint the whole field of of microfinance. whole field microfinance. Michael Mainelli, Executive chairman, Z/Yen Group, UK Michael Mainelli, Executive chairman, Z/Yen Group, UK
poverty alleviation. A A Dutch investor said that there was potential for backlash. poverty alleviation. Dutch investor said that there was potential for backlash. Jeremy Leach, executive director ofof FinMark Trust in South Africa, saw the risk of Jeremy Leach, executive director FinMark Trust in South Africa, saw the risk of consumer and regulatory backlash against (a) compulsory financial products (eg consumer and regulatory backlash against (a) compulsory financial products (eg credit life insurance) (b) high interest rates (c) sub-standard products (especially credit life insurance) (b) high interest rates (c) sub-standard products (especially contractual savings products). contractual savings products). Reports from practitioners tended toto be more upbeat. A A Latin American respondent Reports from practitioners tended be more upbeat. Latin American respondent said that the reputation ofof MFIs was safe so long as management was transparent said that the reputation MFIs was safe so long as management was transparent and profitable. and profitable.
20. Liquidity 20. Liquidity

Liquidity risk comes relatively low on the risk scale because money was at least Liquidity risk comes relatively low on the risk scale because money was at least until recently plentiful and there were few cases ofof difficulty in the commercialised until recently plentiful and there were few cases difficulty in the commercialised sector ofof microfinance. MFIs have also become, asas one respondent put it, more sector microfinance. MFIs have also become, one respondent put it, more savvy inin the management of liquidity. Those MFIs making the transition toto savvy the management of liquidity. Those MFIs making the transition
CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk 27

banking status have gained access to wider funding options, while the emergence banking status have gained access to wider funding options, while the emergence of of liquidity facilities such as Costa Rica-based Emergency Liquidity Facility has has liquidity facilities such as thethe Costa Rica-based Emergency Liquidity Facility set set anan example that others might follow. example that others might follow.
Some respondents thought thethe risk layMFIs failing to understand as asworlds Some respondents thought risk lay in in MFIs failing to understand the the worlds biggest banks also do do that liquidity hashasnasty habit of drying up when mostmost biggest banks also that liquidity a a nasty habit of drying up when needed. Peter Wall, executive director of the the Microfinance Information Exchange, needed. Peter Wall, executive director of Microfinance Information eXchange, said there was a risk toto the extent that domestic MFIs are linkingto today's said there was a risk the extent that domestic MFIs are linking in in to today's extraordinary international liquidity levels, andand get usedthese. Liquidity risk risk extraordinary international liquidity levels, get used to to these. Liquidity could also rise as as MFIs expand into more complex liability side products. One US could also rise MFIs expand into more complex liability side products. One US investor warned that it would only take oneone default for MFI liquiditybe moremore investor warned that it would only take default for MFI liquidity to to be widely affected. widely affected. Smaller MFIs face greater liquidity risks because of aof a lackskills and and restricted Smaller MFIs face greater liquidity risks because lack of of skills restricted access to to money markets, though their dependence outside funding tends to be be access money markets, though their dependence on on outside funding tends to lower. There was little geographical variation in thisthis risk. lower. There was little geographical variation in risk.
21. Too much funding 21. Too much funding

An excess of funding can create as much risk as a shortage. The flood of money An excess of funding can create as much risk as a shortage. The flood of money pouring into the MFI sector is stirring up irrational exuberance and undermining pouring into the MFI sector is stirring up irrational exuberance and undermining discipline. Though ranked low, this was seen as a strongly rising risk. discipline. Though ranked low, this was seen as a strongly rising risk. Respondents feared that easy Respondents encourage money would feared that easy money would encourage The risk is that we fall short of the goal of uncontrolled growth and bad The risk is microfinance into of banking uncontrolled growth and bad mainstreaming that we fall short the the goal of investment decisions. An mainstreaming microfinance into instead a sectors of poor countries, and create the banking investment officer with a G7 An investment decisions. sectors of poor countries, and create instead social entrepreneurial space that produces a investment officer with a G7 social entrepreneurial space that produces aid agency said: This is programs that operate with minimal profits and no aid agency said: increasingly becomingThis is a programs that operate with minimal retard the real market-making returnsThis would profits and no increasingly need the real of the largest number of financial services to the critical issue. MFIsbecoming a market-making returnsThis would retard supply critical issue. effectively the MFIs need supply of array of clients around the world. to the broadestthe largest number of financial services to capacity capacity effectively USthe broadest array of clients around the world. investor deploy fundsto on a US investor deploy funds on commercially sustainable a commercially sustainable basis. If funders focus their attention on a small group of MFIs, there is a risk that basis. If will lack the systems, technology, management capability and risk these MFIsfunders focus their attention on a small group of MFIs, there is aother that these MFIs will lack the this capital. Several respondents capability and other resources to prudently deploy systems, technology, management said this showed resources was not for deploy this but for a Several respondents said this showed that the need to prudentlymore money, capital. greater number of commercial MFIs. that the need was not for more money, but for a greater number of commercial MFIs. Respondents were also concerned about the hype. Peter Platan of Finnfund in Finland warned were a bubble might about the hype. John Wilson of Christian in Respondents that also concerned be growing. Peter Platan of Finnfund Brothers Investmentthat a bubble might be growing. Finland warned Services in the US feared that imprudent lending would bump John Wilson of Christian upBrothers and lead to Services in the US fearedthe industry. An analystwould bump defaults Investment a decline in confidence of that imprudent lending in India saw the boomand leadto aa bust whichconfidence ofoff the capital markets tap in India up defaults leading to decline in could turn the industry. An analyst for some time, boom leading to a bust during the Asian crisis in thecapital markets tap for saw the similar to what happened which could turn off the mid-90s. some time, similar to what happened during the Asian crisis in the mid-90s. Excessive funding is also widening the tiers between the haves and the have-nots. Rakhat Uraimova, training and consulting manager at the the haves and Center for Excessive funding is also widening the tiers between Microfinance the have-nots. Central and Eastern Europe and the NIC in Kyrgyzstan,at the that the sector Center for Rakhat Uraimova, training and consulting manager said Microfinance in her part of the and Eastern see a growing gap between very few large MFIsthe sector in her Central world will Europe and the NIC in Kyrgyzstan, said that created and supported the world will see networks, donors and financial large MFIs created and part of by international a growing gap between very few organizations, and emerging MFIs often created by new donor funding. and financial organizations, and supported by international networks, donors emerging MFIs often created by new donor funding.
The profit imperative The profit imperative
Overfunding is a Overfunding is a strongly rising risk strongly rising risk
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The risk also lies in the type of investor getting into microfinance. Matthew Gamser, principal operations officer at the International Finance Corporation in Hong Kong, said: The quantity is not the problem, it's who is bringing the new money to the table, with also littlein the type of investorsituation. microfinance. Matthew Gamser, The risk too lies understanding of the getting into principal operations officer at the International Finance Corporation in Hong Kong, But some respondents is notissueproblem, it's who is bringingtoo much funding. A said: The quantity took the with the fact that there was the new money to the Colombian practitioner said: No scenario exists with that type of funding supply. table, with too little understanding of the situation.
Profitable growth is only possible for the Profitable growth top only possible is 50-75 MFIs for the top 50-75 MFIs
22. Profitability
But some respondents took issue with the fact that there was too much funding. A Colombian practitioner said: No scenario exists with that type of funding supply.
The profitability of MFIs is being squeezed by greater competition, though this is not seen as a risk everywhere. The picture painted by respondents was patchy with MFIs in some regions doing well, in others less so. Concerns were strongest in Latin America and of MFIsfollowed squeezed by greater competition, though this is not The profitability Africa, is being by Asia. seen as a risk everywhere. The picture painted by respondents was patchy with One respondent said the sector was rich in success storiesConcerns were strongest in but Jan Lamboo, CEO of MFIs in some regions doing well, in others less so. MFDAQ, the microfinance capital market, in Aruba, said that profitable growth was Latin America and Africa, followed by Asia. only possible for the top 50-75 MFIs. Many of the other 3,000 MFIs need to upgrade in all managerial aspectswasorder in success top. Abut Jan Lamboo, CEO of One respondent said the sector in rich to join the stories respondent from India said that increasing competition leading to in Aruba, said that profitable growthby MFDAQ, the microfinance capital market, falling interest rates, compounded was rising costs, is leading totop drop in MFIs. Many of the other 3,000 MFIs need to only possible for the a 50-75 margins. This sense of imminent profitability decline was widely shared. aspects in order to join the top. A respondent from India upgrade in all managerial said that increasing competition leading to falling interest rates, compounded by The need for MFIs to focusa more on margins. This sense of imminent profitability rising costs, is leading to drop in profitability was a strong message. Andrew Pospielovsky, widely shared. decline was general manager of Microfinance Bank of Azerbaijan, said that in order to ensure their long-term sustainability, MFIs have to ensure that they are profitable and MFIs to focus more on profitability technical assistance or Andrew The need for commercially viable without any was a strong message. other Pospielovsky, general manager of Microfinance Bank of Azerbaijan, said that in order to ensure their long-term sustainability, MFIs have to ensure that they are The Compartamos affair without any technical assistance or other profitable and commercially viable
Compartamos, the hugely successful Mexican MFI, is a living example that microfinance can be commercially viable. But has it done more harm than good? The Compartamos affair Founded in the 1990s, Compartamos grew at breathtaking speed, achieving annual Compartamos, the hugely successful Mexican MFI, is a living example that growth rates of 50 per cent and profits of $50m a year. By the time it was floated on microfinance can be commercially viable. But has it done more harm than good? the public markets in April 2007, it had over 600,000 borrowers. The flotation valued the bank at over $400m and made many of its shareholders millionaires. Founded in the 1990s, Compartamos grew at breathtaking speed, achieving annual growth rates of 50 per cent and profits of $50m a year. By the time it was floated on But Compartamos also acquired a reputation for aggressive business tactics, charging the public markets in April 2007, it had over 600,000 borrowers. The flotation valued its borrowers over 100 per cent a year, all of which made it highly controversial among the bank at over $400m and made many of its shareholders millionaires. our respondents.
22. Profitability
But Compartamos also acquired a reputation for aggressive business tactics, charging Although many argued that MFIs must become more commercial, they feared that its borrowers over 100 per cent a year, all of which made it highly controversial among Compartamos had damaged the industrys image and stoked investor expectations up our respondents. to unrealistic levels. A backlash might be in the offing. A US investor saw the danger of greater political interference due to deals like the Compartamos IPO where super Although many argued that MFIs must become more commercial, they feared that high profits are made on the back of very high interest rates. Richard Rosenberg, a Compartamos had damaged the industrys image and stoked investor expectations up senior adviser with CGAP, said that the disastrous publicity generated by to unrealistic levels. A backlash might be in the offing. A US investor saw the danger Compartamos showed that the industry needed to strike a better balance in its of greater political interference due to deals like the Compartamos IPO where super double bottom line. high profits are made on the back of very high interest rates. Richard Rosenberg, a senior adviser with CGAP, said that the disastrous publicity generated by But others drew encouragement from the strong commercial message in Compartamos showed that the industry needed to strike a better balance in its Compartamos. A South African analyst said that successful MFI flotations would double bottom line. attract private capital to the sector. This is a good thing as long as it does not mean exploitation of the end client through very high interest rates. What the sector needs But others drew encouragement from the strong commercial message in is more competition to keep services appropriate and affordable, but also profitable. Compartamos. A South African analyst said that successful MFI flotations would attract private capital to the sector. This is a good thing as long as it does not mean CSFI / New York CSFI E-mail: info@csfi.org.uk exploitation of the end client through very high interest rates. What the sector needs Web: www.csfi.org.uk 29 is more competition to keep services appropriate and affordable, but also profitable.

subsidies. A A risk analyst in Peru said: Whenever possible, and without affecting subsidies. risk analyst in Peru said: Whenever possible, and without affecting the soundness ofof the business, profitability should be as high as possible. the soundness the business, profitability should be as high as possible. But some respondents alluded toto the Compartamos affair to warn against excessive But some respondents alluded the Compartamos affair to warn against excessive profitability (see box). A A respondent from Bolivia said: The vision of quick profitability (see box). respondent from Bolivia said: The vision of quick profitability is is the highest risk for this field. The strength ofof feeling about the profitability the highest risk for this field. The strength feeling about the dangers ofof mission drift (see No 14) suggests that profitability needs to know its dangers mission drift (see No 14) suggests that profitability needs to know its place. place.
23. Macro-economic trends 23. Macro-economic trends

The localised nature ofof microfinance tends to insulate it from wider economic trends, The localised nature microfinance tends to insulate it from wider economic trends, and the evidence is is that MFIs have weathered recent storms quite well. The and the evidence that MFIs have weathered recent storms quite well. The growth ofoflocal funding sources has helped, and the low correlation with growth local funding sources has helped, and the low correlation with developments at at the macro level has appealed to outside investors. But this could developments the macro level has appealed to outside investors. But this could change asas more MFIs move into the mainstream and expose themselves to forces change more MFIs move into the mainstream and expose themselves to forces beyond their control, such asas the current global credit crunch. beyond their control, such the current global credit crunch. Furthermore, MFI vulnerability toto macro trends may not have been fully tested Furthermore, MFI vulnerability macro trends may not have been fully tested because many emerging economies are still strong and provide good conditions for because many emerging economies are still strong and provide good conditions for profitable growth. This too could change. Chikako Kuno ofof the EBRD in London, profitable growth. This too could change. Chikako Kuno the EBRD in London, said: Countries are booming[but there is is a] need to manage for the eventual said: Countries are booming[but there a] need to manage for the eventual downturn. downturn. Marcelino San Miguel, president ofofFundacion San Miguel Arcangel ininthe Marcelino San Miguel, president Fundacion San Miguel Arcangel the Dominican Republic, said that MFIs were only vulnerable toto macro trends in the Dominican Republic, said that MFIs were only vulnerable macro trends in the short term. In the medium and long terms, MFIs operate inin market that depends short term. In the medium and long terms, MFIs operate a a market that depends more on microeconomic conditions than macro fluctuations, though macro trends more on microeconomic conditions than macro fluctuations, though macro trends affect everything ...... But I do not believe that this determines the survival and affect everything But I do not believe that this determines the survival and operational management ofof successful MFI. operational management a a successful MFI.
There is aa need There is need to manage for to manage for the eventual the eventual downturn downturn
What about the global credit crunch? What about the global credit crunch?
Although MFIs are traditionally seen to to be insulated from trends in global markets, Although MFIs are traditionally seen be insulated from trends in global markets, that could change asas they become more integrated with mainstream banking and that could change they become more integrated with mainstream banking and therefore more vulnerable to to contagion. Several respondents raised the risk that therefore more vulnerable contagion. Several respondents raised the risk that liquidity and investment might become harder for MFIs if global markets continue to to liquidity and investment might become harder for MFIs if global markets continue deteriorate. A A Canadian economist said that this could have direct impact onon the deteriorate. Canadian economist said that this could have a a direct impact the cost of of capital for microfinance institutions leading to slow down in in the growth of the cost capital for microfinance institutions leading to a a slow down the growth of the sector. sector. If If MFIs suffer, they will also lose one of their investment appeals: lack of correlation MFIs suffer, they will also lose one of their investment appeals: lack of correlation with global markets. In In this case they would have to find other elements of with global markets. this case they would have to find other elements of attractiveness to to compensate, according to one MFI investor. Such a a dose of attractiveness compensate, according to one MFI investor. Such dose of reality might bebe healthy for an overfed industry, said another. reality might healthy for an overfed industry, said another.
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C S F I / New York CSFI 24. Product development 24. Product development

Despite all the callscallsmicrofinanciers to expand theirtheir services, responses to this this Despite all the for for microfinanciers to expand services, the the responses to Banana SkinSkin suggested that MFIs doing OK OKthe product development front. Banana suggested that MFIs are are doing on on the product development front. The The great majorityour respondents felt that that MFIs appreciated needneed to widen great majority of of our respondents felt MFIs appreciated the the to widen theirtheir product range, and were able to deliver, whether it be more sophisticated loans, product range, and were able to deliver, whether it be more sophisticated loans, insurance, savings accounts or products targeted at particular groups. Competition insurance, savings accounts or products targeted at particular groups. Competition was wasspur. the the spur. A practitioner at aatLatin American womens bank said:said: MFIs understand the A practitioner a Latin American womens bank MFIs understand the importance of having attractive products for niche markets. An investor in India importance of having attractive products for niche markets. An investor in India said said aof innovation was was occurringvarious levels on introducing new new types of a lot lot of innovation occurring at at various levels on introducing types of products. An investor in the Netherlands said said that the trend away from credit products. An investor in the Netherlands that the trend away from credit only is firmly underway. only is firmly underway. But But some respondents that that MFIs were risking losing customersfailing to be be some respondents felt felt MFIs were risking losing customers by by failing to more innovative. Perlat Sula, chief financial officer of Partneri Shqiptar ne ne more innovative. Perlat Sula, chief financial officer of Partneri Shqiptar Mikrokredi in Albania, said said this was particularly casecaseEastEast Europe. Vanya Mikrokredi in Albania, this was particularly the the in in Europe. Vanya Pasheva, a student of microfinance at MIT, said said that MFIs would have to provide a Pasheva, a student of microfinance at MIT, that MFIs would have to provide a more diverse product offering but but without losing efficiency and increasing more diverse product offering without losing efficiency and increasing transactions costs. transactions costs. Those respondents whowho less less positively about this topic stressed highhigh cost of Those respondents felt felt positively about this topic stressed the the cost of product development and and wondered whether MFIs had necessary resources to to product development wondered whether MFIs had the the necessary resources fundfund it or were willing to spend moneymarket research. An Indian investor said said it or were willing to spend money on on market research. An Indian investor that that serious investment to be made in this area serious investment has has to be made in this area OneOne straw in wind blew in from Russia where a respondent said said that MFIs were straw in the the wind blew in from Russia where a respondent that MFIs were experiencing a decline in demand for theirtheir services as self-employed segment of of experiencing a decline in demand for services as the the self-employed segment the the workforce advanced become business owners withwith larger and more workforce advanced to to become business owners larger and more sophisticated needs. sophisticated needs.
Competition is is Competition spurring new spurring new products products
Wrong money, wrong place Wrong money, wrong place

Although capital for microfinance is abundant, it doesdoesreach everywhere. Although capital for microfinance is abundant, it not not reach everywhere. Respondents comments suggested that that Latin America the Far East East enjoy more of Respondents comments suggested Latin America and and the Far enjoy more of it thanthan Africa and Asia where a numberpractitioners complained of sourcing it Africa and Asia where a number of of practitioners complained of sourcing difficulties. Teshome Dayesso, general manager of Buusaa Gonofaa MFI in Ethiopia, difficulties. Teshome Dayesso, general manager of Buusaa Gonofaa MFI in Ethiopia, said said that capital was scarce in countries like where the financial sector is not not that capital was scarce in countries like his his where the financial sector is liberalized (no foreign participation) and and banks not yet convinced that that MFIs are liberalized (no foreign participation) banks are are not yet convinced MFIs are 'investment- or credit-worthy'. A bank inspector in Central Africa commented that that 'investment- or credit-worthy'. A bank inspector in Central Africa commented many MFIsMFIs don't have enough meansobtain the required minimum capital. many don't have enough means to to obtain the required minimum capital. Generally, access to capital was was linked to size: smaller MFIs greater difficulty thanthan Generally, access to capital linked to size: smaller MFIs had had greater difficulty large ones. large ones. The type type of capital was alsoissue. DebtDebt financing tends to be plentiful, long-term The of capital was also an an issue. financing tends to be plentiful, long-term equity financing less less so. equity financing comes with with strings: expensive and and equity financing so. But But equity financing comes strings: it is it is expensive carries high high investor expectations. Egyptian practitioner said said commercial capital carries investor expectations. An An Egyptian practitioner commercial capital was was available, but with it came pushpush commercialisation and and higher profit available, but with it came a a for for commercialisation higher profit margins. Lulzim Sadrija, CEO CEO of Kreditimi Rural i Kosoves in Kosovo, complained of margins. Lulzim Sadrija, of Kreditimi Rural i Kosoves in Kosovo, complained of the the high interest rate of financial sources (9-12%). high interest rate of financial sources (9-12%).
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C S F I / New York CSFI 25. Capital availability 25. Capital availability

The The availability of capital is a widespread problem for MFIs. An analyst in Mexico availability of capital is not not a widespread problem for MFIs. An analyst in Mexico said:said: As microfinance becomes increasingly profitable and transparent, capital As microfinance becomes increasingly profitable and transparent, capital availability is rising, a viewview was was widely reflected by other respondents who saw the availability is rising, a that that widely reflected by other respondents who saw the problem more in terms of MFIMFI abilityabsorb a strong supply of capital. Timothy problem more in terms of ability to to absorb a strong supply of capital. Timothy Lyman, an advisor at CGAP, said said the the flood of international capital, coupled with new Lyman, an advisor at CGAP, that that flood of international capital, coupled with new domestic sources in many markets, means capital availability isn't isn't problem. In fact fact domestic sources in many markets, means capital availability the the problem. In overover abundance presents a much bigger risk. US investor thought availability would abundance presents a much bigger risk. A A US investor thought availability would onlyonly be difficult if there were some high profile failures public backlash against highhigh be difficult if there were some high profile failures or a or a public backlash against interest rates. interest rates.
26. Distribution channels 26. Distribution channels

Too little retail Too little retail capacity to to handle capacity handle rapid growth rapid growth
Improvements in distribution channels are being driven by newnew technology such as Improvements in distribution channels are being driven by technology such as cashcash machines and mobile phone banking, but also the microfinance sectors machines and mobile phone banking, but also by by the microfinance sectors mission to reach the financially disadvantaged. mission to reach the financially disadvantaged. Both of these drivers posepose challenges which respondents thought MFIs might be be Both of these drivers challenges which our our respondents thought MFIs might pressed to meet. OneOne investor said: Branchless banking and other technologies pressed to meet. investor said: Branchless banking and other technologies will will hopefully bring delivery costs down, this this is very uncertain. The difficulties hopefully bring delivery costs down, but but is very uncertain. The difficulties lie in the cost cost of investment, speed of change, the regulatory environment (often lie in the of investment, the the speed of change, the regulatory environment (often involving several different regulators, eg finance, electricity and and telecoms) and involving several different regulators, eg finance, electricity telecoms) and simply getting it right. A Swiss investor agreed; there was was too little MFI retail simply getting it right. A Swiss investor agreed; there too little MFI retail capacity for the huge amounts of debtdebt funding becoming available. particular capacity for the huge amounts of funding becoming available. A A particular challenge is getting distribution channels out to remote or poorpoor areas which need the challenge is getting distribution channels out to remote or areas which need the service but lack lackinfrastructure to support modern branches and technology. service but the the infrastructure to support modern branches and technology. Robert Akode, director of Papme in Benin, observed that that a common problem in Robert Akode, director of Papme in Benin, observed a common problem in reaching the markets is that that the educational level of customers is veryvery low and reaching the markets is the educational level of the the customers is low and afterafter sales service is non-existent. But as many respondents pointed out, those who sales service is non-existent. But as many respondents pointed out, those who do get it rightright should reap cost savings competitive advantage. do get it should reap cost savings and and competitive advantage.
27. Natural catastrophes 27. Natural catastrophes

Many MFIs operate in risk-prone regions, and and have been affectedclimate change, Many MFIs operate in risk-prone regions, have been affected by by climate change, earthquake and and tsunami.Stephen Nnawuba, chief accountant of Centenary Bank earthquake tsunami. Stephen Nnawuba, chief accountant of Centenary Bank in Uganda, commented on the the difficulty working in the the drought-stricken in Uganda, commented on difficulty of of working in drought-stricken countries of Africa. countries of Africa. The The impact of catastrophe is always direct physical damage. In the Philippines, impact of catastrophe is not not always direct physical damage. In the Philippines, Joy Joy Cadangen, manager Cadangen Lending, said said that government and private Cadangen, manager of of Cadangen Lending, that government and private sector lenders were imposing tougher terms on borrowers living in areas affected by by sector lenders were imposing tougher terms on borrowers living in areas affected natural calamities. natural calamities. Daniel Kalbassou, general manager of Credit du Sahel in in Daniel Kalbassou, general manager of Credit du Sahel Cameroon, said said that the draught the the Sahelien arearesulting in the the nonCameroon, that the draught in in Sahelien area is is resulting in nonrepayment of loans. repayment of loans. But But MFIs do more to protect themselves against these risks? A respondent from can can MFIs do more to protect themselves against these risks? A respondent from Colombia said said that MFIs there were not preparedcovered for suchsuch afflictions. Colombia that MFIs there were not prepared or or covered for afflictions. From PeruPeru a respondent said MFIs should spread out moreavoid the risk risk of From a respondent said MFIs should spread out more to to avoid the of
32 CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

concentration. Several respondents pointed out that the risk can mitigated by concentration. Several respondents pointed out that the risk can bebe mitigated by insurance or through use of the growing number of emergency funding facilities. or through use of the growing number of emergency funding facilities. Generally, though, the incidence of natural catastrophes seen more as as a of of Generally, though, the incidence of natural catastrophes is is seen more a costcostdoing doing business than as a business challenge. business than as a majormajor business challenge.
28. Refinancing 28. Refinancing

MFIs face the risk that they may be unable to renew financing commitments from MFIs face the risk that they may be unable to renew financing commitments from their investors when these fall due. But this risk was generally considered be their investors when these fall due. But this risk was generally considered to to be small. small. In cases where donors might fall away, private capital was ready to to step in, In cases where donors might fall away, private capital was ready step in, and where private capital was already there, it would renew its commitments for and where private capital was already there, it would renew its commitments for well-run and profitable MFIs. A Peruvian respondent saw difficulties only in very well-run and profitable MFIs. A Peruvian respondent saw difficulties only in very special circumstances and with due process. special circumstances and with due process. However some respondents felt that MFIs could encounter problems if they drifted However some respondents felt that MFIs amounts of term debt. A US aid official too far from their missions, or took on large could encounter problems if they drifted too far from their missions, or took on largewarned: It is very important that MFIs amounts of term debt. A US aid official warned: It is very important that MFIs develop a funding plan that incorporates A flight of fashion? develop financial plan that incorporates sufficient a fundingflexibility. A flight of fashion? sufficient financial flexibility. A heightened understanding of the A heightened understanding lead the Microfinance is currently very much in of to causes and nature of poverty will Microfinance currently could face causes and nature of poverty will lead to fashion, which ismeans it very much in other development interventions fashion, problems if investor interest other development interventions refinancingwhich means it could face replacing microfinance as fashionable. replacing microfinance as fashionable. refinancing problems if investor interest Allan Bussard moves elsewhere. A US investor Allan Bussard Managing director moves elsewhere. A US is the warned: right now microfinance investor Managing director Integra Co-op warned: thing so the money the hot new right now microfinance isis Slovakia Integra Co-op hot new thing so the money there...[but]there will be a NEW hot is Slovakia there...[but]there will vogue now new thing soon. A German practitioner agreed: Microfinance is en be a NEW hot new thing soon. A Germanfinancial institutions] Microfinanceto othervogue now what happens if [international practitioner agreed: interests shift is en sectors? what happens if [international financial institutions] interests shift to other sectors?
29. Too little funding 29. Too little funding

Funding shortages Fundingashortages are not general are not a general problem problem
If funding problems exist for MFIs, they are very selective. Respondents singled out MFIs problems small, unprofitable, are very selective. in remote areas, or If fundingwhich wereexist for MFIs, they unregulated or located Respondents singled those with exclusive small, unprofitable, unregulated or located in remote Some out MFIs which were missions that were unlikely to become commercial. areas, or funding-starved institutions also operate unlikely to become commercial. or those with exclusive missions that werein countries with inhibiting politicalSome regulatory environments, particularly in Africa where large numbers of political or MFIs are funding-starved institutions also operate in countries with inhibiting very small, non-viable and non-profitable according to large numbers regulatory environments, particularly in Africa whereone respondent. of MFIs are very small, non-viable and non-profitable according to one respondent. In Bangladesh, Moiz Ahmed Chowdhury, chief financial officer of the Shakti Foundation for Moiz Ahmed Chowdhury, chief financial officer of financial In Bangladesh,Disadvantaged Women, said local MFIs had only limited the Shakti resources for Disadvantaged Women, said Due to this scarcity, he said, financial Foundationto meet unlimited client demand. local MFIs had only limited many of our clients are unlimited client demand. Due to this scarcity, he said that resources to meetleaving our organization. A practitioner in Guatemalasaid, many financial resources to take of our clients are leavingon more customers will be limited.in Guatemala said that our organization. A practitioner
financial resources to take on more customers will be limited. Several respondents also said that the overabundance of funding for top tier MFIs was not trickling down to tiers two and three, though this was often because MFIs Several respondents also said that the overabundance of funding for top tier MFIs were reluctant to come to terms with market forces or obtain credit ratings which was not trickling down to tiers two and three, though this was often because MFIs might open the door to capital investment. were reluctant to come to terms with market forces or obtain credit ratings which might open the door to capital investment.
33

Gavin Oldham, chairman of The Share Foundation in the UK, said that funding shortages could be due to too many intermediaries extracting value from investors and recipients.
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C S F I / New York CSFI Preparedness Preparedness

We asked respondents howhow well prepared they thought MFIs were to handle risksrisks We asked respondents well prepared they thought MFIs were to handle the the theythey had identified. Just over a quarter thought they were well prepared with good had identified. Just over a quarter thought they were well prepared with good management and and sound strategies.Only five five centcent thought they were poorly management sound strategies. Only per per thought they were poorly prepared, usually because theythey lacked management skills or sound funding.Over prepared, usually because lacked management skills or sound funding. Over
Poorly Poorly 5% 5%
Well Well 27% 27%
Just over a quarter Just over a quarter of of respondents respondents say that MFIs are say that MFIs are well prepared to to well prepared handle risks handle risks
Mixed Mixed 68% 68%
two two thirds gave a mixed response, mainly because they differentiated between large thirds gave a mixed response, mainly because they differentiated between large MFIs which were on the whole better prepared thanthan small ones, or because they saw MFIs which were on the whole better prepared small ones, or because they saw some countries offering a better operating environment thanthan others. some countries offering a better operating environment others. The The breakdowntypetype of respondent shows a quarter of practitioners and analysts breakdown by by of respondent shows a quarter of practitioners and analysts thinking that that MFIs were well prepared, onlyonly a fifth of investors. Investors also thinking MFIs were well prepared, but but a fifth of investors. Investors also led led those who gave a mixed rating. Practitioners led led the (small) number of those who gave a mixed rating. Practitioners the (small) number of respondents whowho thought they were poorly prepared. respondents thought they were poorly prepared.
Response by type of respondent % % Response by type of respondent

Well Well Mixed Mixed Poorly Poorly Practitioners Practitioners Investors Investors Analysts Analysts Others Others 25 25 20 20 25 25 37 37 69 69 75 75 71 71 59 59 6 6 5 5 4 4 4 4
Many respondents felt felt that present trends competition, commercialisation and and Many respondents that present trends of of competition, commercialisation growing dependence on management and and technological skills would widen gap gap growing dependence on management technological skills would widen the the between MFIs that that were well prepared those that that were not. between MFIs were well prepared and and those were not.
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CSFI
CENTRE FOR THE STUDY OF FINANCIAL INNOVATION
5, Derby Street, London W1J 7AB, UK Tel: +44 (0)20 7493 0173 Fax: +44 (0)20 7493 0190

This survey seeks to identify the risks facing the microfinance industry (MFI) over the medium term, as seen by practitioners, investors and other close observers. Its focus is the commercial MFI sector, by which we mean institutions which are run for profit and have assets of more than US$5 million. Please read the accompanying guide for information on how to complete the questionnaire. Please complete and return this questionnaire to us by October 31st 2007 Name Institution Position Country Replies are in confidence, but if you are willing to be quoted in our report, please tick What is your perspective on the microfinance industry? Practitioner Regulator Other (please state) Investor Analyst
Question 1. Please describe the main risks you see facing the microfinance industry (both
individual institutions and the sector as a whole) over the next two to three years.
Please turn over
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Question 2. Here are some areas of risk which have been attracting attention. How do you rate their severity, and what is their trend: rising, steady or falling? Use the right hand column to add comments. Insert more risks at the bottom if you wish.
Severity
1=low 5=high 1 Back office operations 2 Capital availability 3 Competition 4 Corporate governance 5 Cost control 6 Credit risk 7 Distribution channels 8 Foreign exchange 9 Fraud 10 Funding - too little 11 Funding - too much 12 Inappropriate regulation 13 Interest rates 14 Liquidity 15 Macro-economic trends 16 Management quality 17 Managing technology 18 Mission drift 19 Natural catastrophes 20 Ownership 21 Political interference 22 Product development 23 Profitability 24 Refinancing 25 Reputation 26 Staffing 27 Strategy 28 Transparency 29 Unrealisable expectations 30
Trend
Rising Steady Falling
Comment
Question 3. How well prepared do you think your own and other institutions are to handle
the risks you have identified? Poorly Mixed Well
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Appendix 2:
Practitioners Biggest risks 1 Competition 2 Cost control 3 Inappropriate regulation 4 Interest rates 5 Credit risk 6 Mission drift 7 Management quality 8 Managing technology 9 Staffing 10 Corporate governance 11 Macro-economic trends 12 Political interference 13 Fraud 14 Profitability 15 Foreign exchange 16 Capital availability 17 Strategy 18 Product development 19 Liquidity 20 Transparency 21 Unrealisable expectations 22 Too little funding 23 Ownership 24 Reputation 25 Back office operations 26 Distribution channels 27 Natural catastrophes 28 Refinancing 29 Too much funding Fastest risers 1 Competition 2 Mission drift 3 Credit risk 4 Political interference 5 Staffing 6 Strategy 7 Managing technology 8 Ownership 9 Interest rates 10 Management quality 11 Cost control 12 Corporate governance 13 Profitability 14 Foreign exchange 15 Natural catastrophes 16 Unrealisable expectations 17 Product development 18 Fraud 19 Liquidity 20 Macro-economic trends 21 Transparency 22 Refinancing 23 Back office operations 24 Inappropriate regulation 25 Distribution channels 26 Reputation 27 Capital availability 28 Too much funding 29 Too little funding
Sector breakdowns
Analysts Corporate governance Management quality Interest rates Managing technology Unrealisable expectations Mission drift Inappropriate regulation Ownership Strategy Transparency Staffing Back office operations Product development Credit risk Foreign exchange Liquidity Political interference Competition Cost control Fraud Capital availability Too much funding Refinancing Too little funding Reputation Distribution channels Natural catastrophes Profitability Macro-economic trends Competition Too much funding Interest rates Unrealisable expectations Natural catastrophes Strategy Staffing Managing technology Mission drift Foreign exchange Liquidity Inappropriate regulation Fraud Political interference Credit risk Ownership Product development Refinancing Reputation Distribution channels Back office operations Corporate governance Management quality Cost control Profitability Macro-economic trends Capital availability Too little funding Transparency Investors Management quality Corporate governance Foreign exchange Inappropriate regulation Staffing Too much funding Political interference Managing technology Interest rates Unrealisable expectations Reputation Transparency Back office operations Cost control Ownership Credit risk Competition Fraud Liquidity Profitability Strategy Mission drift Macro-economic trends Distribution channels Refinancing Natural catastrophes Product development Capital availability Too little funding Too much funding Competition Political interference Reputation Staffing Credit risk Unrealisable expectations Strategy Ownership Interest rates Distribution channels Mission drift Corporate governance Fraud Managing technology Natural catastrophes Product development Management quality Foreign exchange Transparency Cost control Macro-economic trends Inappropriate regulation Profitability Back office operations Liquidity Refinancing Too little funding Capital availability Observers Corporate governance Staffing Management quality Transparency Inappropriate regulation Interest rates Competition Cost control Managing technology Strategy Back office operations Reputation Unrealisable expectations Ownership Too much funding Political interference Fraud Credit risk Liquidity Distribution channels Product development Capital availability Mission drift Natural catastrophes Profitability Foreign exchange Refinancing Macro-economic trends Too little funding Competition Staffing Ownership Corporate governance Political interference Strategy Interest rates Reputation Too much funding Unrealisable expectations Credit risk Mission drift Managing technology Cost control Fraud Product development Back office operations Inappropriate regulation Distribution channels Management quality Profitability Natural catastrophes Transparency Macro-economic trends Foreign exchange Capital availability Refinancing Liquidity Too little funding
38

North America Biggest risks 1 Corporate governance 2 Management quality 3 Inappropriate regulation 4 Staffing 5 Transparency 6 Interest rates 7 Unrealisable expectations 8 Foreign exchange 9 Back office operations 10 Managing technology 11 Political interference 12 Reputation 13 Cost control 14 Too much funding 15 Ownership 16 Liquidity 17 Competition 18 Fraud 19 Credit risk 20 Mission drift 21 Strategy 22 Distribution channels 23 Profitability 24 Refinancing 25 Product development 26 Natural catastrophes 27 Macro-economic trends 28 Capital availability 29 Too little funding Fastest risers 1 Competition 2 Too much funding 3 Unrealisable expectations 4 Reputation 5 Political interference 6 Staffing 7 Ownership 8 Interest rates 9 Strategy 10 Mission drift 11 Corporate governance 12 Managing technology 13 Credit risk 14 Distribution channels 15 Foreign exchange 16 Management quality 17 Inappropriate regulation 18 Transparency 19 Fraud 20 Natural catastrophes 21 Liquidity 22 Back office operations 23 Cost control 24 Profitability 25 Macro-economic trends 26 Product development 27 Refinancing 28 Capital availability 29 Too little funding South America Competition Interest rates Political interference Inappropriate regulation Cost control Credit risk Capital availability Profitability Product development Managing technology Macro-economic trends Strategy Natural catastrophes Transparency Staffing Management quality Mission drift Corporate governance Too little funding Ownership Liquidity Unrealisable expectations Distribution channels Foreign exchange Fraud Reputation Back office operations Refinancing Too much funding Competition Political interference Strategy Credit risk Interest rates Natural catastrophes Foreign exchange Staffing Ownership Fraud Mission drift Capital availability Managing technology Cost control Product development Refinancing Macro-economic trends Profitability Inappropriate regulation Distribution channels Reputation Transparency Too little funding Management quality Corporate governance Liquidity Unrealisable expectations Back office operations Too much funding Europe Management quality Corporate governance Inappropriate regulation Staffing Cost control Fraud Managing technology Too much funding Transparency Strategy Back office operations Unrealisable expectations Competition Interest rates Credit risk Ownership Foreign exchange Reputation Profitability Mission drift Macro-economic trends Political interference Liquidity Capital availability Product development Distribution channels Refinancing Natural catastrophes Too little funding Competition Too much funding Credit risk Unrealisable expectations Staffing Interest rates Political interference Mission drift Reputation Corporate governance Cost control Fraud Strategy Ownership Managing technology Profitability Natural catastrophes Management quality Product development Macro-economic trends Back office operations Liquidity Distribution channels Foreign exchange Inappropriate regulation Transparency Refinancing Capital availability Too little funding Africa Too little funding Management quality Credit risk Managing technology Inappropriate regulation Corporate governance Staffing Cost control Profitability Strategy Capital availability Distribution channels Foreign exchange Macro-economic trends Unrealisable expectations Competition Interest rates Political interference Fraud Liquidity Mission drift Ownership Product development Transparency Back office operations Reputation Natural catastrophes Refinancing Too much funding Competition Corporate governance Management quality Managing technology Staffing Distribution channels Product development Profitability Strategy Back office operations Cost control Inappropriate regulation Mission drift Ownership Transparency Credit risk Natural catastrophes Political interference Refinancing Reputation Unrealisable expectations Foreign exchange Fraud Interest rates Liquidity Capital availability Too little funding Macro-economic trends Too much funding
39

Asia Biggest risks 1 Managing technology 2 Management quality 3 Corporate governance 4 Staffing 5 Competition 6 Mission drift 7 Fraud 8 Reputation 9 Strategy 10 Credit risk 11 Product development 12 Foreign exchange 13 Liquidity 14 Ownership 15 Profitability 16 Back office operations 17 Interest rates 18 Political interference 19 Cost control 20 Inappropriate regulation 21 Transparency 22 Macro-economic trends 23 Unrealisable expectations 24 Too little funding 25 Refinancing 26 Natural catastrophes 27 Capital availability 28 Distribution channels 29 Too much funding Fastest risers 1 Competition 2 Staffing 3 Credit risk 4 Mission drift 5 Strategy 6 Interest rates 7 Fraud 8 Product development 9 Managing technology 10 Corporate governance 11 Foreign exchange 12 Ownership 13 Political interference 14 Cost control 15 Natural catastrophes 16 Liquidity 17 Too much funding 18 Back office operations 19 Macro-economic trends 20 Profitability 21 Refinancing 22 Management quality 23 Transparency 24 Unrealisable expectations 25 Too little funding 26 Inappropriate regulation 27 Reputation 28 Distribution channels 29 Capital availability Far East Foreign exchange Unrealisable expectations Cost control Competition Inappropriate regulation Management quality Political interference Credit risk Natural catastrophes Mission drift Distribution channels Ownership Interest rates Liquidity Macro-economic trends Staffing Too little funding Managing technology Product development Transparency Back office operations Corporate governance Fraud Too much funding Capital availability Refinancing Reputation Profitability Strategy Competition Ownership Credit risk Distribution channels Mission drift Political interference Staffing Too little funding Management quality Managing technology Natural catastrophes Product development Reputation Unrealisable expectations Corporate governance Liquidity Refinancing Strategy Back office operations Cost control Foreign exchange Too much funding Capital availability Inappropriate regulation Macro-economic trends Transparency Interest rates Profitability Fraud Middle East Staffing Capital availability Competition Inappropriate regulation Interest rates Mission drift Managing technology Corporate governance Macro-economic trends Political interference Ownership Credit risk Too little funding Foreign exchange Fraud Liquidity Management quality Product development Profitability Refinancing Strategy Transparency Cost control Back office operations Distribution channels Too much funding Unrealisable expectations Natural catastrophes Reputation Competition Mission drift Staffing Capital availability Interest rates Unrealisable expectations Inappropriate regulation Political interference Strategy Credit risk Fraud Liquidity Management quality Product development Profitability Back office operations Corporate governance Cost control Foreign exchange Too little funding Too much funding Macro-economic trends Managing technology Natural catastrophes Ownership Refinancing Reputation Transparency Distribution channels
40

Appendix 3: Respondent countries by region
Africa
Angola Benin Cameroon Ethiopia GuineaConakry Rwanda South Africa Uganda Zimbabwe
Asia
Afghanistan Azerbaijan Bangladesh India Kyrgyzstan Mongolia Nepal Pakistan Sri Lanka Tajikistan
Europe
Albania Belgium Bosnia & Herzegovina Denmark Finland France Germany Italy Kosovo Luxembourg Montenegro Netherlands Norway Romania Russia Slovakia Sweden Switzerland UK
Far East
Australia Cambodia China Hong Kong Philippines
Middle East
Egypt Jordan Lebanon Morocco Palestine Sudan Syria United Arab Emirates
North Latin America America

Canada US Argentina Aruba Bolivia Brazil Colombia Costa Rica Dominican Republic Ecuador El Salvador Guatemala Haiti Honduras Mexico Nicaragua Paraguay Peru Venezuela
41
CSFI PUBLICATIONS 1. Financing the Russian safety net: A proposal for Western funding of social security in Russia, coupled with guarantee fund for Western investors. By Peter Ackerman/Edward Balls. September 1993 Derivatives for the retail client: A proposal to permit retail investors access to the risk management aspects of financial derivatives, currently available only at the wholesale level. By Andrew Dobson. Nov 1993 (Only photostat available) Rating environmental risk: A proposal for a new rating scheme that would assess a companys environmental exposure against its financial ability to manage that exposure. By David Lascelles. December 1993 Electronic share dealing for the private investor: An examination of new ways to broaden retail share ownership, inter alia, by utilising ATM networks, PCs, etc. By Paul Laird. January 1994 The IBM dollar: A proposal for the wider use of target currencies, i.e. forms of public or private money that can be used only for specific purposes. By Edward de Bono. March 1994 UK financial supervision: A radical proposal for reform of UK financial regulation, (prepared pseudononymously by a senior commercial banker). May 1994 Banking banana skins: The first in a periodic series of papers looking at where the next financial crisis is likely to spring from. June 1994 A new approach to capital adequacy for banks: A proposal for a market-based alternative, using the concept of value-at-risk, to the present mechanistic Basle approach to setting bank capital requirements. By Charles Taylor. July 1994 New forms of Euro-Arab cooperation: A proposal for a new public/private development finance corporation to promote employment-generating projects in the Arab world. By Jacques Roger-Machart. October 1994 Banking banana skins II: Four leading UK bankers and a senior corporate treasurer discuss lessons for the future from the last banking crisis. November 1994 IBM/CSFI essay prize: The two winning essays for the 1994 IBM/CSFI Prize. November 1994 Liquidity ratings for bonds: A proposed methodology for measuring the liquidity of issues by scoring the most widely accepted components, and aggregating them into a liquidity rating. By Ian Mackintosh. January 1995 Banks as providers of information security services: Banks have a privileged position as transmitters of secure data: they should make a business of it. By Nick Collin. February 1995 An environmental risk rating for Scottish Nuclear: An experimental rating of a nuclear utility. By David Lascelles. March 1995 EMU Stage III: The issues for banks: Banks may be underestimating the impact of Maastrichts small print. By Malcolm Levitt. May 1995 Bringing market-driven regulation to European banking: A proposal for eliminating systemic banking risk by using cross-guarantees. By Bert Ely (Only photostat available). July 1995 The City under threat: A leading French journalist worries about complacency in the City of London. By Patrick de Jacquelot. July 1995 The UK building societies: Do they have a future?: A collection of essays on the future of UK building societies and mutuality. September 1995 (Only photostat available). Options and currency intervention: A radical proposal on the use of currency option strategies for central banks. By Charles Taylor. October 1995 Twin peaks: A regulatory structure for the new century A proposal to reform UK financial regulation by splitting systemic concerns from those involving consumer protection. By Michael Taylor. December 1995 Banking banana skins III: The findings of a survey of senior UK figures into where the perceived risks in the financial system lie. March 1996 Welfare: A radical rethink - The Personal Welfare Plan: A proposal (by a banker) for the private funding of health, education, unemployment etc. through a lifetime fund. By Andrew Dobson. May 1996 Peak Practice: How to reform the UKs regulatory structure. Implementing Twin Peaks. By Michael Taylor. October 1996 Central bank intervention: a new approach: A radical approach to central bank intervention without foreign exchange reserves. By Neil Record. November 1996 40/$65
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The Crash of 2003: An EMU fairy tale.: An all too plausible scenario of what might happen if EMU precedes economic convergence. By David Lascelles. December 1996 Banking Banana Skins: 1997: A further survey showing how bankers might slip up over the next two or three years. April 1997 Foreign currency exotic option: A trading simulator for innovation dealers in foreign currency (with disc). Winner of the 1997 ISMA/CSFI Prize for financial innovation. By Stavros Pavlou. September 1997 Call in the red braces brigade... The case for electricity derivatives: Why the UK needs an electricity derivatives market, and how it can be achieved. By Ronan Palmer and Anthony White. November 1997 The fall of Mulhouse Brand: The City of Londons oldest merchant bank collapses, triggering a global crisis. Can the regulators stave off the disaster? A financial thriller based on a simulation conducted by the CSFI, with Euromoney and PA Consulting Group, to test the international system of banking regulation. By David Shirreff. December 1997
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30. Credit where credit is due: Bringing microfinance into the mainstream: Can lending small amounts of money to poor peasants ever be a mainstream business for institutional investors? By Peter Montagnon. February 1998 31. 32. 33. Emerald City Bank... Banking in 2010: The future of banking by eminent bankers, economists and technologists. March 1998. (Only photostat available). Banking Banana Skins: 1998: The fifth survey of possible shocks to the system. July 1998 Mutuality for the 21st Century: The former Building Societies Commissioner argues the case for mutuality, and proposes a new legislative framework to enable it to flourish. By Rosalind Gilmore. July 1998 The role of macroeconomic policy in stock return predictability: The 1998 ISMA/CSFI prizewinning dissertation analyses how government policies affect stock values in markets in Japan and the Far East. By Nandita Manrakhan. August 1998 Cybercrime: tracing the evidence: A working group paper on how to combat Internet-related crime. By Rosamund McDougall. September 1998 The Internet in ten years time: a CSFI survey: A survey of opinions about where the Internet is going, what the main obstacles are and who the winners/losers are likely to be. November 1998 Le Prix de lEuro Competition between London, Paris and Frankfurt: This report sizes up Europes leading financial centres at the launch of monetary union. February 1999 Psychology and the City: Applications to trading, dealing and investment analysis: A social psychologist looks at irrationality in the financial services sector. By Denis Hilton. April 1999
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39. Quant & Mammon: Meeting the Citys requirements for post-graduate research and skills in financial engineering. A study for the EPSRC on the supply of and demand for quantitative finance specialists in the UK, and on potential areas of City/academic collaboration. By David Lascelles. April 1999 40. A market comparable approach to the pricing of credit default swaps. Winner of the 1999 ISMA/CSFI prize for financial innovation. By Tim Townend. November 1999 Europes new banks: The non-bank phenomenon. A report for euro-FIET on the threat posed by new technology to European banks traditional franchise. By David Lascelles. November 1999
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42. In and Out: Maximising the benefits/minimising the costs of (temporary or permanent) non-membership of EMU. A look at how the UK can make the best of its ambivalent euro-status. November 1999 43. Reinventing the Commonwealth Development Corporation under Public-Private Partnership. By Sir Michael McWilliam, KCMG. March 2000
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25/$40 25/$40 25/$40 25/$40
44. Internet Banking: A fragile flower Pricking the consensus by asking whether retail banking really is the Internets killer app. By Andrew Hilton. April 2000 45. 46. Banking Banana Skins 2000 The CSFIs latest survey of what UK bankers feel are the biggest challenges facing them. June 2000 iX: Better or just Bigger? A sceptical look at the proposed merger between the Deutsche Boerse and the London Stock Exchange. By Andrew Hilton and David Lascelles. August 2000 Bridging the equity gap: a new proposal for virtual local equity markets A proposal for local stock exchanges, combining Internet technology and community investment. By Tim Mocroft and Keith Haarhoff. Waking up to the FSA How the City views its new regulator. By David Lascelles. May 2001
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The Short-Term Price Effects of Popular Share Recommendations Winner of the 2001 ISMA/CSFI Essay Prize. By Bill McCabe. September 2001 Bumps on the road to Basel: An anthology of views on Basel 2 This colleaction of sixteen (very brief) essays offers a range of views on Basel 2. Edited by Andrew Hilton. January 2002 Banana Skins 2002: A CSFI survey of risks facing banks What bankers are worrying about at the beginning of 2002. Sponsored by PricewaterhouseCoopers. By David Lascelles. February 2002 Single stock futures: the ultimate derivative A look at a new product being introduced almost simultaneously on each side of the Atlantic. By David Lascelles. February 2002. Harvesting Technology: Financing technology-based SMEs in the UK DTI Foresight sponsored report, which examines what has been done (and what will be done) on the financing tech-based SMEs. By Craig Pickering. April 2002
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54. Waiting for Ariadne: A suggestion for reforming financial services regulation A new proposal for fund management. By Kevin James. July 2002 55. Clearing and settlement: Monopoly or market? An argument for breaking the monopoly mindset for ACHs. By Tim Jones. October 2002. ISBN 0-9543145-1-4.
25/$40/40 25/$40/40 25/$40/40
56. The future of financial advice in a post-polarisation marketplace A discussion of the structure of financial advice post-CP121 and post-Sandler, with support from Accenture. By Stuart Fowler. November 2002. ISBN 0-9543145-2-2 57. Capitalism without owners will fail: A policymakers guide to reform A comprehensive look at the debate over transatlantic corporate governance, with detailed recommendations. By Robert Monks and Allen Sykes. November 2002. ISBN 0-953145-3-0. Who speaks for the city? Trade associations galore A survey of trade association effectiveness. By David Lascelles and Mark Boleat. November 2002. ISBN 0-9583145-4-9. A new general approach to capital adequacy: A simple and comprehensive alternative to Basel 2 By Charles Taylor. December 2002. ISBN 0-9583145-4-9. Thinking not ticking: Bringing competition to the public interest audit A paper discussing how the system for auditing large company financial statements can be made better. By Jonathan Hayward. April 2003. ISBN 0-9543145-6-5. Basel Lite: recommendations for the European implementation of the new Basel accord By Alistair Milne. April 2003. ISBN 0-954145-8-1.
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62. Pensions in crisis? Restoring confidence: A note on a conference held on February 26, 2003 May 2003. ISBN 0-954145-7-3. 63. The global FX industry: coping with consolidation Sponsored by Reuters. By Christopher Swann. May 2003. ISBN 0-9545208-0-7. Banana Skins 2003 What bankers were worrying about in the middle of 2003. Sponsored by PricewaterhouseCoopers. By David Lascelles. September 2003. ISBN 0-9545208-1-5. The curse of the corporate state: Saving capitalism from itself: A proposal, by a leading US corporate activist, for winning back control of the political process from big corporations, and for giving stakeholders a real say in how business is run. By Bob Monks. January 2004. ISBN 0-9545208-2-3. Companies cannot do it alone: An investigation into UK management attitudes to Company Voluntary Arrangements A survey into why CVAs (the UKs equivalent of the US Chapter XI) have failed to take off. By Tim Mocroft (with Graham Telling and Roslyn Corney). July 2004. ISBN 0-9545208-3-1.
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67. Regulation of the non-life insurance industry: Why is it so damn difficult? A serious look at the problems of regulating insurance by a senior practitioner. It is not like banking. By Shirley Beglinger. November 2004. ISBN 0-9545208-4-X. 68. Betting on the future: Online gambling goes mainstream financial A look at the future of online gambling and its convergence with conventional finance - particularly insurance. By Michael Mainelli and Sam Dibb. December 2004. ISBN 0-9545208-5-8. 69. Banana Skins 2005 Our latest survey of where bankers, regulators and journalists see the next problems coming from. Sponsored by PricewaterhouseCoopers. By David Lascelles. February 2005. ISBN 0-9545208-6-6. Not waving but drowning: Over-indebtedness by misjudgement A former senior banker takes an iconoclastic look at the bottom end of the consumer credit market. By Antony Elliott. March 2005. ISBN 0-9545208-7-4. Surviving the dogfood years: Solutions to the pensions crisis New thinking in the pensions area (together with a nifty twist by Graham Cox). By John Godfrey (with an appendix by Graham Cox). April 2005. ISBN 0-9545208-8.
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72. The perversity of insurance accounting: In defence of finite re-insurance An industry insider defends finite re-insurance as a rational response to irrational demands. By Shirley Beglinger. September 2005. ISBN 0-9545208-9-0.
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Banking Banana Skins 2006 The latest survey of risks facing the banking industry. Sponsored by PricewaterhouseCoopers. By David Lascelles. April 2006. ISBN 0-9551811-0-0. Big Bang: Two decades on City experts who lived through Big Bang discuss the lasting impact of the de-regulation of Londons securities markets. Sponsored by Clifford Chance. February 2007. ISBN 978-0-9551811-1-5. Insurance Banana Skins 2007 A survey of the risks facing the insurance industry. Sponsored by PricewaterhouseCoopers. By David Lascelles. May 2007. ISBN 978-0-9551811-3-9. Principles in Practice An antidote to regulatory prescription. The report of the CSFI Working Group on Effective Regulation. June 2007. ISBN 978-0-9551811-2-2. Web 2.0: How the next generation of the Internet is changing financial services. By Patrick Towell, Amanda Scott and Caroline Oates. September 2007. ISBN 978-0-9551811-4-6. A tough nut... Basel 2, insurance and the law of unexpected consequences. By Shirley Beglinger. September 2007. ISBN 978-0-9551811-5-3. Informal money transfers: Economic links between UK diaspora groups and recipients back home. By David Seddon. November 2007. ISBN 978-0-9551811-5-3.
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Sponsorship
The CSFI receives general support from many public and private institutions, and that support takes different forms. In 2007 and the first quarter of 2008, we received unrestricted financial support from:
Barclays Group Citigroup JPMorgan Chase Abbey Aberdeen Asset Management Accenture Alliance & Leicester AVIVA plc AXA Bank of England BT Global Building Societies Association City of London Euroclear SA/NV Deloitte DTCC DTI Ernst & Young Euronext.liffe Eversheds Fidelity Investments Finance and Leasing Association Financial Services Authority Fitch Ratings Futures & Options Association Halifax plc 1776 Consulting Association of Corporate Treasurers Bank of Italy Banking Code Standards Board Brigade Electronics Chown Dewhurst LLP FSA Solutions International Financial Services, London Morgan Stanley International PricewaterhouseCoopers HM Treasury HSBC Holdings plc International Capital Market Association KPMG Law Debenture Corporation plc Lloyds of London Lloyds TSB LogicaCMG London Stock Exchange Man Group plc McKinsey & Co Monitise Moodys Investors Service Ltd Nomura Institute of Capital Markets Research PA Consulting Prudential plc Record Currency Management Reuters Royal Bank of Scotland Standard & Poors Swiss Re Z/Yen Zurich Financial Services LandesBank Berlin Lombard Street Research NM Rothschild & Sons The Housing Finance Corporation The Share Centre Threadneedle Investments Watson Wyatt Winterflood Securities Limited
We also received important support in kind from, inter alia: EFG Private Bank Financial Times GISE AG Linklaters The CSFI also received special purpose support during 2007/08 from, inter alia: Bank of America BVCA Brunswick Group CGAP Citigroup Cityforum Clifford Chance Edgar Miller Farrer & Co FOA ifs School of Finance International Capital Market Association JPMorgan Martin Hall Morgan Stanley Open Europe Optimum Population Trust PricewaterhouseCoopers
CSFI
Registered Charity Number 1017353 Registered Office: North House, 198 High Street, Tonbridge, Kent TN9 1BE Registered in England and Wales limited by guarantee. Number 2788116

Banana Skins - Microfinance 2010

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Banana Skins - Microfinance 2010

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Microfinance Banana Skins 2008

Risk in a booming industry

Centre for the Study of Financial Innovation

C S F I / New York CSFI

CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

C S F I / New York CSFI

C S F I / New York CSFI

CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

C S F I / New York CSFI

CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

C S F I / New York CSFI

CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

C S F I / New York CSFI

About this survey

Latin America 19%

CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

C S F I / New York CSFI

A breakdown of countries by region is given in Appendix 3.

CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

C S F I / New York CSFI

CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

C S F I / New York CSFI

Big structural Big structural changes changes

are throwing up are throwing up new risks new risks

CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

C S F I / New York CSFI

The problem is too much funding rather than too little

CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

C S F I / New York CSFI

Who said what

CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

C S F I / New York CSFI

Observers Biggest risks

CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

C S F I / New York CSFI

Latin America Biggest risks

CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

C S F I / New York CSFI

Africa Biggest risks

CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

C S F I / New York CSFI

CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

C S F I / New York CSFI

CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

C S F I / New York CSFI 1. Management quality 1. Management quality

2. Corporate governance 2. Corporate governance

C S F I / New York CSFI

3. Inappropriate regulation 3. Inappropriate regulation

CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

C S F I / New York CSFI

The transformation challenge The transformation challenge

4. Cost control 4. Cost control

CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

C S F I / New York CSFI 5. Staffing 5. Staffing

AA perennial and perennial and worsening risk worsening risk

6. Interest rates 6. Interest rates

CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

C S F I / New York CSFI

The urge to merge The urge to merge

CSFI / New York CSFI E-mail: info@csfi.org.uk Web: www.csfi.org.uk

C S F I / New York CSFI

8. Managing technology 8. Managing technology