CMEF Releases Report on Growth in Commercial Microfinance

> Posted by Center Staff
The Council of Microfinance Equity Funds (CMEF) is proud to issue its latest paper, “Growth in Commercial Microfinance: 2005-2008.”
This work by Preetesh Kantak illustrates the significant changes in the commercial microfinance industry over the past four years. Traditionally, growth studies, such as MicroRate’s annual microfinance investment vehicles (MIVs) survey, have focused on growth in the assets of MIVs. This growth has been phenomenal, and of course strongly influences the MFIs in which they invest. The “Growth in Commercial Microfinance” series, of which this is the third publication, dissects and clarifies growth in the MFIs themselves – the actual investment opportunity-set. With this study, CMEF gauges the opportunities available to investors in MFIs.
The first study of this series, published in 2004, focused on the transformation process of NGOs and start-up MFIs into regulated, for-profit entities. A large part of this effort was the enumeration of guiding corporate governance principles and the impact that this new business model had on the sustainability of the institutions and industry. The second study, published in 2006, examined industry growth in the preceding two years, and explored the distribution of MFIs, borrowers and depositors by region.
In this latest installment, the author first analyzes the internal, “organic” growth of MFIs presented in the 2006 study. The report explores the increasing and more pervasive efforts at financial intermediation and how the growth of saving products have matched, if not exceeded, the growth of loan products.
By analyzing changes in the distribution of loan sizes on a regional and aggregate basis, Kantak also looks into an interesting phenomenon occurring in the distribution of loan sizes within larger and smaller MFIs. He then constructs his own risk management metric to better visualize the tradeoff between high losses on loans and proper risk management provisions. Overall, even with the explosive growth that characterized the sector through 2008, it seems as though MFIs improved their commitment to low-income borrowers and their investors.
Through a breakdown of the Dupont Formula, the author further illustrates the rapid maturing of the industry. MFIs have shown improvement in return on equity, profit margin, and the use of leverage between 2005 and 2008. This increased maturity, however, has also led to some increased concentration, as evidenced by the paper’s Herfindahl analysis.
Finally, the report presents an updated composition of ownership of characteristic commercial MFIs. The composition of ownership is an important determinant of an MFI’s mission and direction, as well as the effectiveness of corporate governance.
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