Management Weakness is the Greatest Risk Facing Microfinance, Says New 'Banana Skins' Survey

LONDON, March 3 /PRNewswire/ -- The current flood of investment intothe microfinance industry could overwhelm those microfinance institutions(MFIs) that are not equipped to meet the pressures of rapid growth andrising competition. The high expectations that people have of microfinanceboth as a social movement and a financial investment could be disappointedas a result, says a new survey of the risks facing the industry. Microfinance Banana Skins 2008, published at a time when the sector isundergoing dramatic changes, reveals strong doubts among microfinancepractitioners, investors and observers about the ability of many MFIs toadapt to new demands while still retaining their social objectives. Currentlevels of management experience and financial skills are seen as achallenge for the industry, though these deficiencies are not universal,and are being addressed in many parts of the world. The Banana Skins report reflects the views of more than 300 respondentsfrom 74 countries, and is the most comprehensive survey undertaken of therisk outlook for microfinance. The survey focuses on MFIs with more than$5m in assets which are profitable and capable of commercial growth. Thesenumber about 350 and account for the bulk of microfinance assets globally. The survey was sponsored by Citi Foundation and CGAP (the ConsultativeGroup to Assist the Poor) with support from the Council of MicrofinanceEquity Funds (CMEF) and the Microfinance Information eXchange (MIX). "The views of the field come together in this report to highlight themost urgent need facing the industry," said Xavier Reille of CGAP. "Andthat is the need to strengthen institutions at the local level --management, boards, as well as government regulation."
Microfinance Banana Skins 2008 Biggest risks Fastest risers 1 Management quality 1 Competition 2 Corporate governance 2 Staffing 3 Inappropriate regulation 3 Political interference 4 Cost control 4 Too much funding 5 Staffing 5 Credit risk 6 Interest rates 6 Strategy 7 Competition 7 Mission drift 8 Managing technology 8 Ownership 9 Political interference 9 Interest rates 10 Credit risk 10 Unrealisable expectations 11 Transparency 11 Reputation 12 Foreign exchange 12 Corporate governance 13 Unrealisable expectations 13 Managing technology 14 Mission drift 14 Fraud 15 Fraud 15 Natural catastrophes 16 Strategy 16 Cost control 17 Ownership 17 Management quality 18 Back office operations 18 Foreign exchange 19 Reputation 19 Product development 20 Liquidity 20 Profitability 21 Too much funding 21 Inappropriate regulation 22 Profitability 22 Distribution channels 23 Macro-economic trends 23 Liquidity 24 Product development 24 Macro-economic trends 25 Capital availability 25 Back office operations 26 Distribution channels 26 Transparency 27 Natural catastrophes 27 Refinancing 28 Refinancing 28 Capital availability 29 Too little funding 29 Too little funding "Risks can only be understood with hindsight," said Philip Brown, RiskDirector of Citi-Microfinance. "By pooling the different views of hundredsof sector participants, this report offers a broad overview of sector riskissues. We hope that it will inject a dose of realism by heighteningawareness of current risks, raise debate and provide a view out of thewindscreen of the perceived risks on the road ahead." Of the 29 risks -- or "Banana Skins" -- identified by the survey, manyof the top ones are linked to factors directly under MFIs' own control,such as the quality of management and corporate governance, rising costs,staffing, managing technology, and credit risk. The main risks in the operating environment are bad regulation andpolitical interference, though market risks such as interest rates andforeign exchange are growing as MFIs become more integrated with mainstreammarkets. The fastest rising risk is identified as the growth of competition,driven by the appeal of microfinance to outside investors and commercialbanks. Competitive pressures are seen to be undermining standards, cuttinginto profitability and aggravating staffing problems, though they are alsospurring innovation and forcing down prices. Unless MFIs can manage thesepressures, some could fail and damage the reputation of microfinance morewidely. The survey was carried out by the Centre for the Study of FinancialInnovation, an independent not-for-profit think tank based in London whichexplores the future of financial services. The CSFI has been runningregular "Banana Skins" surveys of the banking and insurance industries formore than ten years, and has taken a close interest in the prospects formicrofinance. David Lascelles, the survey editor, said: "The Banana Skins reportpaints a vivid picture of the risks faced by microfinance in its rapidevolution from NGO to commercial status. The scale and the speed of changeare enormous and will need to be carefully managed." The 40-page report provides a commentary on each of the 29 risks, andbreaks down responses by type and region, providing a detailed view of theconcerns by geography and different classes of respondent.
Microfinance Banana Skins 2008 is available from CSFI: info@csfi.org.uk. Sponsors: CGAP (Consultative Group to Assist the Poor) is an independentmicrofinance group that provides the financial industry, governments andinvestors with objective information, expert opinion, and innovativesolutions to effectively expand access to finance for poor people aroundthe world. More information: http://www.cgap.org Citi, the leading global financial services company, has some 200million customer accounts and does business in more than 100 countries,providing consumers, corporations, governments and institutions with abroad range of financial products and services, including consumer bankingand credit, corporate and investment banking, securities brokerage, andwealth management. Citi's major brand names include Citibank,CitiFinancial, Primerica, Smith Barney, Banamex, and Nikko. Additionalinformation may be found at http://www.citigroup.com or http://www.citi.com.