The impact of the economic

and financial crisis on MFIs

Msc. Thesis Corporate Finance

University of Groningen

Sascha Huijsman

Outline

1. Introduction of study

2. Background: previous studies

3. Impact of the current crisis on MFIs a) Survey results

b) Financials

4. Conclusions

1. Introduction research

Research objective To investigate the impact of the crisis on the financial performance of MFIs and to

analyze which MFIs are affected.

Research question: How are MFIs’ and their main financial performance drivers affected?

1. How does the impact differ across regions? 2. How does the impact differ across MFIs?

Methodology Literature research Surveys Analysis of financials: fixed effects regressions

Sample

Surveys: MFIs SNS Institutional Microfinance Fund & Triple Jump MFIs 84 MFIs

Financials: MFIs SNS Institutional Microfinance Fund 64 MFIs

• Muhammed Yunus (August 2008) :“Crisis has not hit microfinance system yet; in the middle of all the bad news, microfinance still works”

• Bill Clinton (October 2008): “Investors should consider the poor of developing nations as viable investment alternatives to today‟s volatile markets.”

2. Background (1): Why some expected

microfinance to be resilient to the crisis

1. MFIs do not have „toxic assets‟ on their balance sheet

2. Clients active in informal economy/subsistence activities

3. Lending techniques: high incentives & close monitoring

4. Favorable maturity mismatch (L>A) due to long term-commited funding and assets with short maturities

Evidence from the past:

1. Case studies: microfinance in times of crisis (Bolivia, South East Asia)

2. Previous literature:

Walter & Krauss (2008): MFIs have no exposure to international capital markets.

Gonzalez (2007): Microfinance portfolios have high resilience to economic shocks.

•November 2008: Concerns expressed about observed and expected effects of the crisis on MFIs (CGAP virtual conference) •May 2009: Microrate downgrades ratings of many MFIs (D. von Stauffenberg)

However…..

2. Background (2): Why today’s microfinance

could be affected?

1. Crisis hits funders (of all types)

2. Microfinance today more integrated in international financial markets

3. Developing countries (and the poor) more integrated in global economy (FDI, Trade, Remittances)

4. MFIs increasingly divert from microfinance fundamentals (larger loans, non-productive loans)

5. Concurrent events pre-existing to economic crisis: e.g. food and fuel crisis.

6. Tremendous growth MFIs past years- quantity above quality?

Financial crisis

MFI’s liability side 1. Less funding available 2. Higher cost of funding 3. Refinancing problems

Economic crisis

Economies Developing countries

Economies Developed countries

FDI Trade

Aid

1. Unemplo

yment 2. Demand prod-ucts

MFI’s Asset side 1. Clients‟ capacity to

repay 2. Demand for

productive loans

MFI Growth

MFI Profitability

Financial systems

developed countries

Financial systems

developing countries

Int‟l fu

nd

ing

Do

mest. fu

nd

ing

Donors

2. Background (3): Impact of the current crisis on MFIs

Exchange rates

3a. The impact of the current crisis: survey results more than 90% feels the effects

• 11 out of 84 MFIs have problems to find funding in order to roll over part

of their liabilities

Most urgent concerns raised by media:

Refinancing problems

All: Non-deposit taking MFIs

Highly dependent on foreign or domestic commercial funding

0%

10%

20%

30%

40%

50%

60%

70%

80%

Less access tofunding

Higher cost offunding

Lowerrepayment rates

Higher FX losses

84 respondents 46 SIMF MFIs 38 Non-SIMF MFIs

3a. The impact of the current crisis: survey

results (2) Reasons for lower repayment rates

0,0%

10,0%

20,0%

30,0%

40,0%

50,0%

60,0%

70,0%

80,0%

3a. The impact of the current crisis: survey

results

response of MFIs to the crisis

• Group loans • Smaller loan sizes • Productive loans • Portfolio quality above growth

MFIs refocus

on:

Are MFIs returning to

their original

principles?

49,2% of respondents lowered portfolio growth targets by: an average of 21%, a median of 15%, and range 2%-80%

High net interest margin

High interest rates charged to clients

Impact crisis

(survey)

1. Higher financial expenses

2. Unable to pass these on to clients

Excellent asset quality

High incentives to repay

Lending techniques

Impact crisis

(survey)

1. Incentives enhanced

2. Repayment ability reduced

3. Overindebtedness

High growth outlook

Extremely high growth of loan

portfolio

Impact

Crisis

(survey)

1. Lower demand

2. Less financial resources to

support growth

3. Stronger focus portfolio quality

High operational costs

Already high due to small transaction size and intense

monitoring

Impact crisis

(survey)

1. More personnel needed for

monitoring and to recover loan losses

2. Improvement of internal systems

3a. Impact of the current crisis: Survey results (4) What happens to profitability?

3b. The impact of the crisis on MFIs: fixed effect regressions monthly financial data

Column1Portfolio at

risk <30 days

Portfolio at Risk

+ Restructured

& Refinanced

Return on

Assets

Operational

Self-

Sufficiency

Loan

Portfolio

Growth

Average

Loan Size

Breakpoint nov-08 jan-09 okt-08 jan-09 sep-08 dec-08

Eastern Europe

And Russia0.038 0.028 -0.036 -0.456 -0.035 -0.017

Caucasus and

Central Asia0.011 0.013 -0.036 -0.456 -0.035 -0.017

Central America

and the Carribean0.010 0.014 -0.036 -0.114 -0.035 0.013

South America 0.009 0.002 -0.007 -0.053 -0.035 -0.017

South- and South-

East Asia0.008 0.005 -0.036 -0.456 -0.060 -0.017

Constants 0.028 0.021 0,043 1.283 0.050 0,0121

3b. The impact of the crisis on MFIs: fixed effect regressions monthly financial data

Column1 PAR ROAOperational

Selfsufficiency

MFIs with a high %

female clients-0,0295 0,608

MFIs with a high % of

clients in de agri

sector

0,044

MFIs offering a high %

of individual loans0,023

MFIs offering other

services-0,009

MFIs with a high %

savings/liabilities-0,0295

Conclusions

Clear impact on MFIs

Impact so far highest on:

Eastern Europe and Russia, Caucasus and Central Asia, Central America,

• Some evidence that MFIs least affected have a high %:

• Female clients

• Clients in agri sector

• Clients in grouplending/villagebanking

• And MFIs offering other services and offering savings

Impact of the crisis on individual MFIs: necessarily bad?

Halt to tremendous growth

Problem of overindebted clients becomes more transparant

Signs that MFIs refocus of on original principles

• Limitations

• Suggestions further research:

• How will the impact of the crisis on MFIs further develop during 2009

• Which MFIs will come out of the crisis least affected

Appendix 1

Latin America *decline in commodity prices •Weaker external demand •*tighter financial conditions

Africa & the Middle-East *decline in commodity prices

Eastern and Central Asia *capital flow reversal *commodity prices down

Emerging Asia *weaker external demand *cut back on investments

Appendix 1

Appendix 2

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Annual change GDP

2007

2008

2009

2010