can bad micro finance be attributed to too much funding chasing too few mfis

8/3/2019 Can Bad Micro Finance Be Attributed to Too Much Funding Chasing Too Few MFIs

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F ll - p ADA DISCUSSI PAP | 2

Can Bad Microfinancepractices Be the Consequenceof Too Much Funding ChasingToo Few MicrofinanceInstitutions?

pI I & F T ACTI ADA, June 2011

Sophie Wiesner, David Quien


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INTRODUCTION

In December 2010, ADA published its second Discussion Paper, entitled Can BadMicrofinance Practices Be the Consequence of Too Much Funding Chasing Too FewMicrofinance Institutions?. We presented the paper at different conferences, seminars and

workshops and discussed the question with microfinance professionals from around the worldin ADAs second Virtual Debate.

The present Follow-Up Paper takes up some key points from the Discussion Paper, summa-rizes the opinions expressed during these different discussions and offers a perspective on

what future action might be possible.

1. Key Points from the ADA Discussion Paper No.2

The second ADA Discussion Paper analysed recent trends in microfinance funding and foundthat too much funding is chasing too few MFIs.

As shown in Table 1, in 2007, the 7 top MIVs analysed1, funded 405 MFIs and had outstan-ding amounts of 1.07 billion USD. In 2008, they funded 508 MFIs for outstanding amountsof 1.57 billion USD, and in 2009, they funded 574 MFIs for outstanding amounts of 1.60billion USD.

2007 Growth inercentage2007-2008

2008 Growth inercentage2008-2009

2009

umber of MFIs funded 405 25.43% 508 12.99% 574

Total outstanding amounts (in thousand USD)

1 066 296 47.54% 1 573 240 1.53% 1 597 321

Average outstanding amounts(in thousand USD) 2 633 17.62% 3 097 -10.14% 2 783

MB F MFIs F D D, T TAl T TA DI G AM T A D AV AG T TA DI G AM T F TH 7 T p MIVsF M 2007 T 2009

TABl 1

The increase in the number of funded MFIs and total outstanding amounts from 2007 to2009 shows that the 7 top MIVs continued to support the microfinance sector during andafter the financial crisis.

The relatively high average outstanding amounts to microfinance institutions over the sameperiod, however, indicate that funding focused mainly on larger, older and more mature institu-tions a fact that is even more apparent when analysing the data in detail.

1 Unfortunately, we were unable to conduct an anal ysis of the entire group of top 10 funders, as only 8 of these funders provided us withtheir complete data, 7 of whom MIVs.


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As illustrated in Figure 1, every year, around 86% of the total outstanding amounts of the 7top MIVs went to the first 250 MFIs (with total assets over 30 million USD). The next 150MFIs (with total assets between 10 and 30 million USD) garnered 10% of funding, while onlyabout 4% went to the remaining MFIs (with total assets below 10 million USD).

T TA DI G AM T F TH 7 T p MIVsF M 2007 T 2009 BY G p F MFIs

FIG 1

Group 1: MFIs with total assets of over 30 million USDGroup 2: MFIs with total assets between 30 million and 10 million USDGroup 3: MFIs with total assets below 10 million USD

Years

1 600

1 400

1 200

1 000

800

600400

200

02007 2008 2009

86.13%

9.56%

4.31%

86.83%

9.59%

3.58%

85.35%

9.78%

4.87%

utstandingamounts (inthousandUSD)

Furthermore, as the paper revealed, MIV funding in 2007, 2008 and 2009 was not onlyconcentrated on particular groups of MFIs, but also on particular world regions.

As illustrated in Figure 2, every year from 2007 to 2009, the part of the outstanding amountsto MFIs in astern urope and Central Asia ( CA), Latin America and the Caribbean (LAC),as well as ast Asia and the Pacific ( AP), together amounted to 78%, while the part goingto MFIs in the rest of the world amounted to only 22%.


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T TA DI G AM T F TH 7 T p MIVs F M 2007 T 2009BY lD GI

FIG 2

100%

80%

60%

40%

20%

0%2007 2008 2009

48.69%

21.99%

7.43%

21.89%

47.88%

23.58%

9.51%

19.03%

44.9%

22.87%

8.42%

23.81%

CA: astern urope and Central AsiaLAC: Latin America and the Caribbean

AP: ast Asia and the Pacificther regions of the world

Years

Parts of theoutstandingamounts (inpercentage)

The second ADA Discussion Paper also assessed the funding situation from the perspectiveof MIVs and from the perspective of MFIs, and suggested that there are valid reasons to

conclude that bad microfinance practices can be the consequence of too much fundingchasing too few MFIs.

For MIVs with abundant funds at their disposal and pressing investment objectives, the pastperformance and the future potential of large and more mature MFIs are naturally easier andless costly to evaluate; at the same time, funding smaller and less mature MFIs is perceivedas riskier.

However, as the paper points out, while concentrating funding on older and more matureinstitutions may enable them to grow even faster, it may also lead to less rigorous analysis andfollow-up of clients, and higher risk loans for consumer or other non-productive purposes,thus contributing to over-indebtedness of clients. Meanwhile, with fewer opportunities for younger, less mature MFIs to grow, the latter may see no other choice but to go considerablydown-market, entering riskier areas, accepting riskier clients and offering riskier productsand services. All of this, once again, could contribute to client over-indebtedness.


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2. Exchanging Opinions

The second ADA Discussion Paper was presented at different conferences and workshops,including the AMT Investors Fair 2010 in Douala, the e-MFP uropean Microfinance Week2010 in Luxembourg, and the LS Insights into Microfinance Conference 2011 in London.

Furthermore, ADA organized its second Virtual Debate2 which took place from March 1st toMarch 9th 2011 on the e-MFP website 3. Some 225 participants registered for the VirtualDebate and actively dialogued with 11 VIP contributors 135 comments were submitted.

The exchanges concentrated on two points: possible explanations for and consequences ofthe concentration of microfinance funding in a limited number of MFIs; and possible advantagesand disadvantages of combining funding and technical assistance provision for MFIs.

2.1. Possible Explanations for and Consequences of the Concentrationof Microfinance Funding in a Limited Number of MFIs

The participants in ADAs second Virtual Debate identified several factors that could explainthe concentration of foreign microfinance investment in a limited number of large and matureMFIs. Among those mentioned were the all-too-strict application of free market principlesby MIVs and other funders, mission-drift, aversion to the risks associated with investment insmaller and less mature MFIs, and these MFIs limits in terms of performance, transparencyand management.

The participants also pointed out the possible consequences of concentrating funding in fewMFIs. n the one hand, large MFIs, under pressure from investors and significant capitalflows, risk prioritizing their financial objectives to the detriment of their social goals. n theother hand, the high potential of some smaller MFIs who reach underserved segments of the

population (rural areas, marginalized groups, etc.), might remain unacknowledged andunexploited.

In conc usion, the most im ortant and sti unreso vedissue in the eyes of the discussants was how to bettermatch MFIs with MIVs, as we as other funding artners.

The discussants stressed that MFIs and funders themselves have a role to play in this respect.MFIs should comply with the sectors best practices and communicate better about their activities and performance via websites and annual reports, for instance, and by undertakingratings (perhaps to be paid for by funders in the future?). MIVs should establish genuinepartnerships with MFIs and act as responsible investors by better defining and adjusting their investment criteria. They, too, should comply with best practices and provide detailed informationon their aims, objectives and achievements via publications and by obtaining labels.

However, also microfinance associations or networks might have an important role toplay when it comes to matching up MFIs and funders. Part 3 will address this point in moredetail.

2 To find out more about ADAs Virtual Debates, plea se consult http://www.microfinance.lu .3 The complete content of ADAs second Virt ual Debate, as well as t he daily summaries of the discussions, are now public ly accessible at

http://community.e-mfp.eu/virtual-debates . The Virtual Debates platform in the Community section of the e-MFP website was set upin response to the demand for a better communication tool for MFIs, funders and other actors from the microfinance sector, which wasexpressed during ADAs first Vir tual Debate. All of ADAs future Virtual Debates w ill take place on this pl atform, but the platform ca n alsobe used for discussions organized by you and your organization!


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2.2. Funding and Technical Assistance Provision

The participants in ADAs second Virtual Debate underlined that MFIs need both funding andtechnical assistance. The opinions, however, were divided between those in favour ofseparating the two services and those who would like to combine the two.

Those in favour of combining the two argue that alignment of technical assistance and fundingcan lead to a more holistic development approach to MFIs; can reduce investment risk; andcan allow MIVs to both support large, mature MFIs while still creating opportunities for futureinvestment in high potential newcomers.

The disadvantages were also highlighted. Given the concentration of funding in a limitednumber of MFIs, a similar concentration of technical assistance would likely occur. Another point of concern was the influence of MIVs and other funding partners on the (financial as wellas social) objectives of MFIs and the possible loss of autonomy by these MFIs. A final pointmentioned was the difficulty for MIVs maybe more than for other funding partners andespecially public actors to provide well-adapted technical assistance services at all.

Thus, the most im ortant issue for the discussants againturned out to be how to better match MFIs to both fundingand technica assistance artners.

Technical assistance providers should, of course, adapt their services to the needs of MFIs,comply with best practices and inform MFIs of their services. But as the discussants pointedout, microfinance associations or networks might again have an important role to play

when it comes to matching MFIs to funders and/or technical assistance providers.

3. Evaluating Suggestions and Initiating Future Action

As outlined above, the debates around ADAs second Discussion Paper revealed that there isa mismatch between MFIs, funders and/or technical assistance providers. Despite theenormous amounts of funding and expertise that are currently available within the sector,many high potential institutions are not being served adequately.

In our opinion, microfinance associations or networks have the potential to play an importantmatch-making role between MFIs, funders and/or technical assistance providers by buildingrelationships with the funding and technical assistance community, and developing servicesthat meet both the needs of this community and those of the MFIs.

The provision of these kinds of services would also strengthen the networks position:financially, because funders and technical partners might be willing to pay for the respectiveservices, but also institutionally, because it would reinforce the position of the microfinanceassociations as key players in the microfinance sector, representing and acting in the interestof their members.


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etwork activities which might be developed could include the following:

Advice on the country context: etworks often have intimate knowledge of the specificities of the country in which they

operate, including information on the (standards of) provision of different types of microfi-nance products and key players in the sector.Microfinance associations could deepen this knowledge and provide foreign partners withservices such as organizing field visits or arranging meetings with experts in a specificarea.

Microfinance sector ana ysis: Microfinance associations could also consider offering a service to analyze the microfi-nance sector in their respective country to identify opportunities for new partnerships withpromising development prospects. The establishment, regular update and active promotionof an inventory of MFIs, funders, technical assistance providers and other organizationsalready active or with a high potential for becoming active in the country could be the firststep towards the provision of such a service.

lega advice: Finally, microfinance associations could also deepen their knowledge of the regulatorycontext in their country and offer external partners advice on their strategy and operations,as well as the different types of contracts to be established when working in the country.

In order to discuss these ideas together with representatives of microfinance associations andnetworks and follow-up with some concrete actions, ADA and the e-MFP will participate in

workshops held during the Asian etwork Summit 2011 and the Microfinance Council of thePhilippines Annual Conference 2011, to take place in July in the Philippines.

Furthermore, both ADA, who since its inception has collaborated with microfinanceassociations, and the e-MFP, whose broad member base includes key players from all kindsof funding, technical assistance and other bodies, are ready to provide networks with anyinformation or contact details necessary to start the described activities in Asia, but also inany other region of the world.


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CONCLUSION

The debates around ADAs second Discussion Paper, which assessed whether too muchfunding is chasing too few microfinance institutions, revealed that there is indeed a mismatchbetween MFIs, MIVs, other funding partners and also technical assistance providers.

In ADAs and the e-MFPs opinion, microfinance associations or networks have the potentialto play an important match-making role by building relationships with the funding andtechnical assistance community, and developing services that meet both the needs of thiscommunity and those of the MFIs. In particular, microfinance associations or networks couldstrengthen their position by offering well-honed advisory and liaison services.

ADA and the e-MFP will par ticipate in several workshops in order to discuss the points broughtforward in this Follow-Up Paper together with different partner organizations, and both ADAand the e-MFP are ready to follow-up on these discussions with concrete actions, and toprovide microfinance networks and associations with any information and/ or contact details

necessary to start the described activities.

If you are interested in su orting ADA and the e-MFp in this effort, if you wou dike to share with us your o inion on some or a of the suggestions ut forward

in this Fo ow- pa er, or if you wou d sim y ike to stay i nformed about ADAsand the e-MFps undertakings, ease dont hesitate to send an emai todiscussion.ada@microfinance. u.

Your input is most appreciated!


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