5th Annual Conference Nice - European-microfinance.org

34
5 th Annual Conference Nice
(i.e. interest rates charged, current loan officer productivity) and product mix (i.e. a high
reliance on contractual income negatively affects the operational sustainability ratio).
So far we have assumed that the MFIs have access to interest free capital for on-lending.
However, a potentially very important barrier for the expansion and future sustainability of
the sector may be the availability of lending capital. Currently the MFI sector is not able to
offer deposit services, except on an agency basis, and even if they were, it is questionable the
extent to which the funds raised through medium and long-term savings products would be
able to significantly contribute towards loan capital.
Chart 4 displays the size of the gap in funding (expressed in £‘000) to support a 10% annual
growth in their personal loan portfolio using best-practice approaches (e.g. in terms of
interest rates, productivity and home improvement loans), once the MFIs have recycled their
existing loan capital (i.e. the opening balance at the beginning of 2007/2008). Here we
exclude the capital requirements for the home improvement loan given that there are
particular funding arrangement in which it is given that the MFI borrows to on-lend part of
the home improvement loans.
£'000
700
600
500
400
300
200
100
0
Chart 4: Future capital requirements
07/08 08/09 09/10 10/11 11/12 12/13 13/14
MFI A MFI B MFI C MFI D
The chart reveals that even if the MFIs were to implement best practice there would still be a
considerable funding gap. Already in Year 1 (2007/2008), MFI A experiences a six-digit
funding gap, whilst MFI C has a shortfall of £75,000. The figures for MFI B are similar to
MFI C, whilst MFI D first experiences funding shortages in year 2011/2012 because of its
slower projected volume growth in personal loans and considerable reserves.
The future capital requirements for MFI A are considerably greater than those of the other
MFIs, because of the much greater scale of its operation. For example, according to our
projections, MFI A will lend out more than £1 million in personal loans alone in year 1
(2007/2008) and over £3.5 million in year 7 (2013/2014). In comparison, MFI C will make
loans (business and personal loans) for less than £350,000 in year 1 and less than £900,000
in year 7. This would suggest that a recapitalisation strategy based exclusively on recycling
existing loan capital is not a viable means of supporting the expansion of the sector. The
sector remains dependent on raising funds through grants, contract income and through
borrowing loan capital.