This study is the second update of the original 2004 CMEF study, Characteristics of Equity Investment in Microfinance and seeks to illustrate the changes in growth, expansion and maturity of the commercial microfinance industry between 2005 and 2008. The study quantifies the explosive organic growth, particularly in Asia, in terms of equity, assets, number of borrowers and depositors in the industry.
This study further highlights structural changes in the industry. First, there is a general trend of mean reversion of leverage. That is, as the industry matures, higher levered regions are deleveraging versus lower levered regions. Second, there is evidence that greater financial intermediation is taking place. Microfinance institutions (MFIs), especially in the African region, are clearly using deposits as a way to fund their loans. Third, using the Herfindahl equation, we were able to see concentration effects, particular in high growth regions such as India and Africa. This has clear impacts on competition and ultimately on the interest rates charged. Fourth, we developed an alternative risk ratio to better illustrate the effectiveness with which MFIs are managing their portfolio risk. We see that although Africa has traditionally had the highest PAR-30 ratios, African MFIs are managing their risk prudently from a historical perspective. Asia fares much worse with this kind of metric. Fifth, we do a simple Dupont breakdown of return on equity (ROE) in order to ascertain the main drivers of profitability between 2005 and 2008. Profit margin determined the greatest percentage of variability in return on equity between MFIs. This dependence has clear implications in terms of what type of investor will succeed in the MFI industry. Finally, we present an update on the ownership structure of characteristic MFIs. We see evidence of acceleration in transformations, an increased willingness of local capital to fund MFIs, and a continued effort by NGOs to divest their original holdings.