Microfinance

GLOBAL INVESTOR FOCUS
Microfinance—15
How to achieve repayment rates of 98% // The current microfinance industry
could grow into a USD 15–20 billion financial market in the coming years – if the microfinance
industry is able to grasp the market potential. The industry’s profitability,
with double-digit returns on equity as well as default rates below 2%, are encouraging
aspects.
Sylvie Golay, Ursula Oser / Credit Suisse
Microfinance as an attractive
business model
The microfinance industry provides a wide range of financial services
to microenterprises. Microenterprises are small businesses in urban
or rural areas that are generally family owned and operated. They are
active in the trade, service and production sectors, mainly in the socalled
informal economy. It is estimated that there are about 500
million microentrepreneurs in the world, with average microcredit of
around USD 500. These estimates further indicate that today only
10% of these microenterprises have access to reliable financial services.
Microfinance is actually a high-growth industry, fueled not only
by the size of its target market, but also by its profitability. The market
is witnessing growth rates of 20% to 40%, with extensive diversity in
structures and frameworks across the world. Concurrently, microfinance
is maturing into a more transparent and regulated industry. In
recent years, 250–500 commercially viable institutions, serving an
estimated 50 million microentrepreneurs, have emerged from this very
fragmented market place. They increasingly receive attention from
regulators, auditors and ratings agencies. In many countries – e.g.,
Bolivia, Brazil, Peru and El Salvador – new types of financial licenses
that are tailor-made for deposit-taking microfinance institutions have
been introduced.
Different types of risks
Loan portfolio quality is one factor determining a microfinance institution’s
specific risk since it is the basis for future cash flow in the
absence of formal guarantees. Fostering a close relationship and
mutual trust between loan officers and their clients is thus key for any
microfinance institution. Leading institutions provide timely information
on their loan portfolios. They report repayment rates of 98% for
properly managed loans, which compares quite favorably to many
traditional commercial bank portfolios. The payment behavior of microentrepreneurs
is clearly superior to that of US credit card holders, for
example (see Figure 1). Microfinance institutions are very solvent
because credit risk is spread over thousands of microcredit borrowers
who mostly have only their business as resource for financial survival.
Importantly, rapid growth has not come at the expense of portfolio
quality given the huge still-unserved client pool. Systematic risk is
mitigated by the low correlation with political and economic conditions
because the informal sector, by its very nature, is less directly linked
to the formal economy.
Institutional investors have standard practices for credit appraisal,
which includes rating of investments. Microfinance ratings >