The Centre for the Study of Financial Innovation’s (CSFI) latest Microfinance Banana Skins report, Facing Reality, charts the risk perceptions of more than 300 practitioners and close observers of the microfinance scene in 70 countries. Two-thirds ranked overindebtedness as their top concern – a persistent issue given that it was also the top concern in the Banana Skins 2012 Survey.
The survey also reveals strong concern about the ability of microfinance providers to meet the strategic challenges facing the industry in areas such as client management, new products and technological change.
Although the extent to which micro-borrowers face repayment difficulties is not known, many respondents said the problem was growing and that it posed both a financial and a reputational risk to the industry.
Respondents’ comments showed that overindebtedness is seen as a symptom of deeper weaknesses in the industry, for example in micro-lenders’ governance and management, internal controls, and awareness of clients’ financial needs and capacities. Seven of the top 10 risks identified by the survey relate to the ability of microfinance institutions (MFIs) to manage a sound and growing business.
One of the main drivers of overindebtedness is seen to be competition (No. 3) which is alleged to be driving down lending and ethical standards in the micro-loan business. Although the risk of political interference in the industry is easing (down from No. 5 to No. 7), reflecting the cooling of controversy about the industry in countries such as India, respondents warned that it could rebound.
The other major area of concern flagged by the survey lies in strategic planning. With strategic risk at a high No. 6 position, respondents said that insufficient thought was being given by the industry to its future at a time when major changes were taking place in its market, through new entrants, technological innovation and calls for new products.
Many potential risk areas such as client relationships, products and technology management were seen as having little urgency, particularly by the industry itself. The Banana Skins report says this suggests that these risks are being underestimated “which is itself a risk”. It adds that these are among the realities “which need to be faced” if the industry is to get to grips with its future.
Microfinance Banana Skins 2014 was prepared by CSFI, an independent London think tank, and was funded by the Citi Foundation and the Center for Financial Inclusion at Accion. The 80-page report provides a commentary on each of the 19 risks that are identified in the survey, and breaks down responses by type and region, providing detailed views of the concerns by geography and different classes of respondent.