Report on Microfinance Institutions in Asia - Positives and Negatives

Microfinance Information Exchange, Inc. (MIX) and Intellecap released the “Asia Microfinance Analysis and Benchmarking Report 2008″ this March. The study covers a lot of ground, analyzing the performance of Microfinance Institutions (MFIs) in South Asia and East Asia and the Pacific during the fiscal year 2007, and provides a comparative analysis of individual institutions, countries, and regions. Here are some of the key points of the report:

The Positives

• The Microfinance Industry is expanding rapidly.
  Gross loan portfolio in Asia grew at more than 60%. The sampled MFIs served 47 million active borrowers, with over $10 billion in loans and $7 billion in deposits in FY 2007.
  BRAC had almost 6.4 million borrowers, over 25% of borrowers in Bangladesh.
  
• Bangladeshi MFIs remain strong performers
  In Cambodia and India growth rates were over 90%, compared to little over 20% for Bangladesh. However, the report acknowledges that the low rate of growth is a reflection of the existing scale of microfinance activities in Bangladesh. In fact, the 20% growth figure represented the largest increase in actual number of borrowers, with 3.3 million new active borrowers, compared to the second largest increase of 2.9 million new borrowers in India.
  Bangladeshi MFI operations are the largest in the world with 24.8 million borrowers. India comes in second with 10.9 million borrowers.
  
• Asian MFIs are becoming more efficient.
  While efficiency improvements slowed, MFIs in Asia served borrowers at the lowest cost level of any region globally at $37 per borrower.
• Afghanistan MFIs are improving financial performance
  Slowly increasing revenues in Afghanistan matched operating cost levels by the end of 2007. While there is still a way to go for full cost recovery, this was the first time breaking even was in sight since the microfinance sector's inception in 2002. As the largest NGO in and a microfinance pioneer in Afghanistan, this is excellent news for BRAC.
• Tremendous opportunities for future growth.
  The report concludes that the "Asian microfinance market, with large underserved markets, new business models and innovative technologies, offers tremendous opportunities for investment".

The Negatives

• Penetration remains low.
  The flip side of the opportunity for growth is that there are still scores of poverty-stricken people who are yet to be reached by the activities of MFIs. The report notes that Bangladesh, Sri Lanka, and Vietnam have 'achieved significant depth [of penetration]'; however, Bangladesh, which has the highest rate of penetration only reaches 35% of the potential population. And despite the spectacular growth of Indian microfinance, penetration is still only at 3.5% of a target population of 312 million people.
• Delinquency rates rising.
  While it varied from country to country, the overall trend was of rising delinquency. In Bangladesh, the delinquency rate almost doubled to over 3%.
  
• Bangladeshi record on deposits poor.
  Bangladeshi MFIs fall in the middle of those relying heavily on debt and those relying on deposits. However, most deposits in Bangladesh are compulsory, and voluntary deposits are lagging far behind Indonesia, Cambodia, and Sri Lanka. The average deposit in Bangladesh is only $25 (although the exchange rate plays a part in that paltry figure) and trails Indonesia, the leader in this category, by 7 million deposits. In addition, the debt to equity ratio of Bangladeshi MFIs such as BRAC and Grameen are increasing. This is a problem because:
• The financial crisis will affect heavily leveraged MFIs
  The report concludes that the growth of MFIs will be constrained by reduced market liquidity, making it difficult to raise funds through debt. In addition, highly leveraged MFIs (Indian MFIs are almost 80% financed by debt) will suffer from the increased financial costs of having to service large amounts of debt while finding it difficult to raise capital. This will potentially affect overall performance and loan rates significantly.

The performance of Asian MFIs over the next few years should be instructive, especially the performance of highly leveraged MFIs compared to MFIs with a larger capital base. It would seem that due to the relative solidity of their financial structures Bangladeshi MFIs are likely to fare better in this economic climate; however, MFIs in India are largely indebted because they are trying to take advantage of a rapidly expanding market which, despite the downturn, retains potential for significant returns. Consequently it will be very interesting to compare the health of the well established MFIs in Bangladesh to the upstarts in India a few years down the line.

Click here to read the full report (pdf).