Growth and Vulnerabilities in Microfinance

Feb 2010
Washington D.C., United States, February, 24 2010 - This Focus Note distills lessons from four microfinance markets: Nicaragua, Morocco, Bosnia and Herzegovina (BiH), and Pakistan. These countries have all experienced a microfinance repayment crisis after a period of high growth and are important microfinance markets in their respective regions.

In all four cases, CGAP compiled case studies combining data analysis with wide-ranging interviews with microfinance institution (MFI) managers, investors, and industry analysts. These case studies do not indicate that the global economic recession is a primary cause of the repayment crises, though it was among the various contextual factors affecting borrowers’ repayment capacity. Instead, the case studies reveal that three vulnerabilities within the microfinance industry lie at the core of the problems:

1. Concentrated market competition and multiple borrowing.
2. Overstretched MFI systems and controls.
3. Erosion of MFI lending discipline.

This Focus Note begins by briefly telling the story of recent growth in the four countries leading into the credit delinquency crises. The second section describes the key contextual factors that affected the severity and spread of the crises. The third section breaks down the three internal industry vulnerabilities that lie at the heart of the problems. This is followed by a discussion on how market infrastructure and tools can help to mitigate some of the dangers. The note concludes by placing these experiences within the broader context of the global microfinance story and makes recommendations to strengthen the industry.

Source : CGAP

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