March 16, 2008

Watch Your Step: Banana Skins, 2008

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Just out is the most comprehensive risk survey for the microfinance industry to date, Banana Skins, 2008. With a title that refers literally to the classic slippery threat of a strewn banana peel, the report outlines barriers to the industry’s development. It is publicly available through the Microfinance Information Exchange (MIX) and was published by the Centre for the Study of Financial Innovation (CSFI), Citi Foundation and the Consultative Group to Assist the Poor (CGAP).
Microfinance has rapidly attracted investors, claiming at least $4 billion in foreign capital investment in 2006, and this rapid growth has at times strained within confining business models and regulatory frameworks. When asked what she saw as the industry’s principal risk, Elizabeth Littlefield, chief executive officer of CGAP, replied, “high and unrealistic expectations for long-term returns.” She also added a concern for excess investor liquidity and difficulty in discerning mainstream investors from those with a social motivation. This viewpoint was tallied in with those of roughly 300 other respondents in the survey, which has made for a relatively comprehensive analysis of the industry’s status.
Banana Skins has keyed in on MFIs that hold more than $5 million in assets and has included the survey responses of practitioners, investors, analysts, regulators, aid officials, academics, accountants, lawyers and consultants around the world. Regionally, North America was most represented with 29% of the respondents, followed by Europe with 24%, Latin America with 19%, and Asia, Africa, the Far East and the Middle East with less than 10% each. How did they answer?
Among 29 listed risks, participants selected poor management as the most threatening. Many responses specifically noted that philanthropic culture has underemphasized the importance of efficient management skills. This suggests that the blending of business and social missions have tended to blur the focus of MFIs. Second in ranking was corporate governance, which includes low quality personnel, lack of experience, cronyism and lack of transparency. Appropriate regulation came in third. Regulatory structures are meant to constructively bind us together, but they can clearly inhibit growth as well.
Unsurprisingly, responses varied between different groups. Among practitioners, for instance, competition was considered the greatest risk, while investors highlighted poor management, and analysts emphasized corporate governance. Variations such as these are invaluable in understanding realities of the microfinance industry and will hopefully motivate necessary change. Banana Skins is showing us that the successful development of microfinance will depend upon the appropriate evolution of management and regulatory frameworks. With careful planning and adjustment, the development of microfinance can be tuned and secured.