Here is a recap of the April 11th SVMN meeting, featuring Damian von Stauffenberg of MicroRate:
A is for Alpha
Performance ratings implemented by MicroRate focus on how good of a job an MFI is doing at lending to the poor. Credit ratings by traditional rating agencies focus on the likelihood of default. A MicroRate rating include 5 subratings: operations, portfolio quality, management and organization, governance and strategic position and financial position. Of these, financial performance subratings receiving the strongest weighting.
MFIs are shaped by growth. In Latin America growth rates of 40% are typical and rates of 130% are not unheard of. Such fast growth requires capital. The need for capital among the 40 top Latin American MFIs alone is $5.3 billion, 80% of which will come from local sources (mainly commercial loans).
With such fast growth, investors must ask “do the clothes still fit?” Typical trouble spots to look for an MFI dealing with rapid growth include: consistent methodology, delegation of authority, financial controls, governance, organization and staffing, financial structure (particularly equity).
In an earlier donor-driven period (the Jurassic Age of microfinance) there was concern regarding whether growth would create “mission creep” (i.e. serving better off clients rather than the poor). This has failed to materialize because microfinance has not proven to be well adapted to the needs of better off small entrepreneurs who are price sensitive and have less flexibility (and therefore more risk) than microentrepreneurs.
Three important trends in microfinance are increasing competition (which will drive down interest rates, increase efficiency and increase the number and quality of available products), commercial capital replacing donor capital and NGOs converting to financial intermediaries.
Bumps in the road for MFIs will include over indebtedness of borrowers, overreaching by MFIs, populist politics and economic downturns. For funders, bumps in the road will include over supply of capital (and crowding out of commercial capital by donor capital), lack of transparency (especially regarding risk, performance and benchmarks) and lack of capacity among MFIs.
[summary provided by SVMN member John Berry (thanks John!)]
Microrate presentation (204K ppt)
meeting podcast (coming soon)