Can a CAMEL Help Quench Clients' Thirst for Microfinance?

> Posted by Michelle Romeu
CAMEL Assessments are a diagnostic management tool developed in the late 1970s for use by banks. In 1993, ACCION adapted this tool to microfinance and has used it to gauge the financial health of MFIs ever since. I recently spoke with Deborah Drake, program manager of the CFI’s Investing in Inclusive Finance initiative, who traveled to New Mexico in July 2010 to conduct assessments using the ACCION CAMEL.
Center for Financial Inclusion: Why does the CAMEL matter for MFIs?
Deborah Drake: The name “CAMEL” is an anagram, with each letter standing for one of the five principal areas of evaluation: Capital adequacy, Asset quality, Management, Earnings, and Liquidity. These are the five keys to future financial success of MFIs. The assessment allows the analysts to identify the strengths and weaknesses of the institution both at the present moment, and in light of future growth. Instead of simply telling an institution what it’s doing wrong, the CAMEL team provides valuable feedback on how to improve so that we can help the institution get to where it needs to go. It’s important to know that the  ACCION CAMEL assessment is meant for MFIs themselves, to assist them in making institutional improvements.  There is no public rating.
CFI: What’s the difference between an ACCION CAMEL assessment conducted in a developed country like the US and one carried out in a developing country?
DD: To date, many MFIs in developing countries – and most of the big ones – have become self-sufficient, i.e., able to cover their operating and financial costs through interest rates and fees. In the US and Europe, self-sufficiency has not been possible due to the nature of developed economies – with higher costs and abundant legal restrictions. It’s difficult to use the traditional ACCION CAMEL to assess these institutions because they don’t have net earnings. We use a much shorter evaluation, not digging so deeply into the numbers, but using the qualitative and quantitative criteria that these institutions need to maintain strong performance.
CFI: What’s the process of conducting a CAMEL?
DD: A full-blown CAMEL can take up to 10 days in the field, but assessments carried out in the US take considerably less time, usually three days in the field.  At ACCION New Mexico we spent most of our time at the office meeting with management and staff as well as reviewing documents such as credit manuals and financial statements.  We were also able to observe meetings of the Audit and Finance Committee and Governance Committee.  Talking to board members provides a very useful perspective on the institution.
CFI: What struck you the most about the assessments you conducted in New Mexico?
DD: The challenges of reaching scale in a region of vast distances and small clusters of populations strike me each time I go to ACCION New Mexico Colorado Arizona. Their team’s dedication and commitment to reaching this underserved market is inspiring.
CFI: What’s the bottom line for the clients of MFIs?
DD: The CAMEL facilitates strengthening the organization so that it can grow and meet the expanding and diverse needs of its clients. It emphasizes reliability. Clients need assurance that the institution will be able to go through good and bad times while still being there for them. It also emphasizes efficiency. If an organization becomes more efficient, it should be able to offer better services at lower, more competitive interest rates.
Flickr credit: stevebrownd50