CGAP just recently published a report (that I have co-authored) showing that operating expenses are the most important cost component of microfinance institutions (MFIs). Institutional efficiency is generally measured by dividing operating expenses by the size of the loan portfolio. A given MFI is usually regarded as having become more efficient when this indicator gets lower. The figure below shows the trend of efficiency for all MFIs in the MIX Market sample over time. Efficiency has improved significantly over the last 7 years, with the median operating efficiency ratio falling from 28 to 19 percent. MFIs recorded average efficiency improve¬ments of roughly 10 percent annually. Read the rest of this page »

At a meeting last month, the Russian Government Committee on SME development discussed its concern about the decrease in bank lending to SMEs in the second half of 2008. This decrease in lending (and indeed in demand for loans) was apparently in response to the unfolding economic crisis, compounded by an increase in interest rates and stricter—and often unjustified—requirements of banks to their SME clients. Read the rest of this page »

With only 1 in 5 households having access to financial services, the microfinance sector in Sub-Saharan Africa is still facing challenges but it is also rapidly evolving on every front. Microfinance institutions are facing increased competition and the entrance of new players. Governments are increasingly recognizing the importance of access to formal financial services as a key component to economic development. Funders are strongly committed to support access to financial services. I recently worked with my colleague Jennifer Isern of CGAP and Audrey Linthorst of the MIX on a report that analyses the development of the African microfinance field. The report focuses on the key growth trends, the national and regional regulatory environments, funding flows and structure, and performance of microfinance institutions. Read the rest of this page »

As the global crisis has felled numerous venerable financial institutions, not just a few corporations, but also at least one government, optimists need to work hard to look for silver linings. So here’s one: it was reported on the Wall Street Journal that the US savings rate has increased. Not just by a little, but a lot. Try by a factor of 28! And the next round of data is quite likely to show an even sharper increase. (Admittedly, this is from an exceedingly low base — while the personal savings rate averaged 10% in the 1980s, it “soared” to 2.8% in November and is predicted to be in the 3-5% range in 2009). How does this square with the long-held image of the West as the epicenter of the “credit card culture”? Read the rest of this page »

Some colleagues in CGAP (including myself) and at JP Morgan just published a report showing that private equity valuations for MFIs have varied widely over the past few years. Traditional value measures like price/book and price/earnings ratios depend very much on institutional features like income growth and asset quality, but also on where the MFI is located. For example, Indian MFIs are valued far above their peers from other countries, which has certainly to do with the large growth potential for microfinance in India, but also reflects the lack of reliable market benchmarks.

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A couple of weeks ago, I attended a very interesting roundtable on the risks landscape and outlook of the microfinance sector in India for 2009. It was organized by CGAP and Intellecap and held in Mumbai. This was my first visit to India in 21 years, and it was a unique opportunity to discover the microfinance scene. Read the rest of this page »

Photo: Subhrajit Basu.

“It’s not often that a photograph draws you in when you can’t see the person’s face,” Gary Cameron told me. “But this photo takes you into the gritty reality of this woman’s life.” Jez Coulson agreed: “It’s a proper piece of reportage,” he said.

Gary and Jez were two judges in the 2008 CGAP Microfinance Photography Contest. And they were commenting on Subhrajit Basu’s black-and-white image of a woman returning home after a day of selling milk in the Calcutta market—one of more than 700 entries in this year’s Contest. Read the rest of this page »

For those familiar with the Indian microfinance scene the slower growth rates of SHG linkage (only 18% compared to 40%+ in the previous year) should be a good opportunity to think.  Is the slowdown (State of the Sector Report – Microfinance India 2008) just a pause or a stop? I wonder where the enthusiasm of the past years has gone.  Neither NGOs, nor donors or the policy establishment seem to be pushing the SHG model with same vigor as in the past years.  Read the rest of this page »

Lately, I’ve noticed several versions of the statement, “Although much is made of MFIs becoming subsidy independent, few of them have reached this goal.”  I find it pretty hard to square such statements with the evidence.

Among roughly 1300 MFIs reporting to the MIX for 2006, about 565 showed a positive return on assets. Let’s assume that some of these aren’t really sustainable, either because their results are incorrectly reported or because adequate adjustments weren’t made for subsidies they received.  That still leaves hundreds of sustainable MFIs. Read the rest of this page »

Casual empirical evidence suggests that borrowers who take loans from more than one MFI are more likely to default on their loans. Here is a graph that researchers from BRAC, one of Bangladesh’s largest MFIs, have produced based on client data in the district of Tangail. While 9 out of 10 BRAC-only clients repay their loans regularly, repayment drops to 50% for households with membership in three or more MFIs other than BRAC (we should add, though, that this finding is not representative for the whole industry, and other experiences are reported elsewhere). What are we observing here? Rising competition of MFIs that leads to a lack of repayment discipline? Or is it due to the effects of over-indebtedness caused by multiple loans from different institutions? Read the rest of this page »