Post on 11-Jan-2017
The impact of the economic
and financial crisis on MFIs
Msc. Thesis Corporate Finance
University of Groningen
Sascha Huijsman
Outline
1. Introduction of study
2. Background: previous studies
3. Impact of the current crisis on MFIs a) Survey results
b) Financials
4. Conclusions
1. Introduction research
Research objective To investigate the impact of the crisis on the financial performance of MFIs and to
analyze which MFIs are affected.
Research question: How are MFIs’ and their main financial performance drivers affected?
1. How does the impact differ across regions? 2. How does the impact differ across MFIs?
Methodology Literature research Surveys Analysis of financials: fixed effects regressions
Sample
Surveys: MFIs SNS Institutional Microfinance Fund & Triple Jump MFIs 84 MFIs
Financials: MFIs SNS Institutional Microfinance Fund 64 MFIs
• Muhammed Yunus (August 2008) :“Crisis has not hit microfinance system yet; in the middle of all the bad news, microfinance still works”
• Bill Clinton (October 2008): “Investors should consider the poor of developing nations as viable investment alternatives to today‟s volatile markets.”
2. Background (1): Why some expected
microfinance to be resilient to the crisis
1. MFIs do not have „toxic assets‟ on their balance sheet
2. Clients active in informal economy/subsistence activities
3. Lending techniques: high incentives & close monitoring
4. Favorable maturity mismatch (L>A) due to long term-commited funding and assets with short maturities
Evidence from the past:
1. Case studies: microfinance in times of crisis (Bolivia, South East Asia)
2. Previous literature:
Walter & Krauss (2008): MFIs have no exposure to international capital markets.
Gonzalez (2007): Microfinance portfolios have high resilience to economic shocks.
•November 2008: Concerns expressed about observed and expected effects of the crisis on MFIs (CGAP virtual conference) •May 2009: Microrate downgrades ratings of many MFIs (D. von Stauffenberg)
However…..
2. Background (2): Why today’s microfinance
could be affected?
1. Crisis hits funders (of all types)
2. Microfinance today more integrated in international financial markets
3. Developing countries (and the poor) more integrated in global economy (FDI, Trade, Remittances)
4. MFIs increasingly divert from microfinance fundamentals (larger loans, non-productive loans)
5. Concurrent events pre-existing to economic crisis: e.g. food and fuel crisis.
6. Tremendous growth MFIs past years- quantity above quality?
Financial crisis
MFI’s liability side 1. Less funding available 2. Higher cost of funding 3. Refinancing problems
Economic crisis
Economies Developing countries
Economies Developed countries
FDI Trade
Aid
1. Unemplo
yment 2. Demand prod-ucts
MFI’s Asset side 1. Clients‟ capacity to
repay 2. Demand for
productive loans
MFI Growth
MFI Profitability
Financial systems
developed countries
Financial systems
developing countries
Int‟l fu
nd
ing
Do
mest. fu
nd
ing
Donors
2. Background (3): Impact of the current crisis on MFIs
Exchange rates
3a. The impact of the current crisis: survey results more than 90% feels the effects
• 11 out of 84 MFIs have problems to find funding in order to roll over part
of their liabilities
Most urgent concerns raised by media:
Refinancing problems
All: Non-deposit taking MFIs
Highly dependent on foreign or domestic commercial funding
0%
10%
20%
30%
40%
50%
60%
70%
80%
Less access tofunding
Higher cost offunding
Lowerrepayment rates
Higher FX losses
84 respondents 46 SIMF MFIs 38 Non-SIMF MFIs
3a. The impact of the current crisis: survey
results (2) Reasons for lower repayment rates
0,0%
10,0%
20,0%
30,0%
40,0%
50,0%
60,0%
70,0%
80,0%
3a. The impact of the current crisis: survey
results
response of MFIs to the crisis
• Group loans • Smaller loan sizes • Productive loans • Portfolio quality above growth
MFIs refocus
on:
Are MFIs returning to
their original
principles?
49,2% of respondents lowered portfolio growth targets by: an average of 21%, a median of 15%, and range 2%-80%
High net interest margin
High interest rates charged to clients
Impact crisis
(survey)
1. Higher financial expenses
2. Unable to pass these on to clients
Excellent asset quality
High incentives to repay
Lending techniques
Impact crisis
(survey)
1. Incentives enhanced
2. Repayment ability reduced
3. Overindebtedness
High growth outlook
Extremely high growth of loan
portfolio
Impact
Crisis
(survey)
1. Lower demand
2. Less financial resources to
support growth
3. Stronger focus portfolio quality
High operational costs
Already high due to small transaction size and intense
monitoring
Impact crisis
(survey)
1. More personnel needed for
monitoring and to recover loan losses
2. Improvement of internal systems
3a. Impact of the current crisis: Survey results (4) What happens to profitability?
3b. The impact of the crisis on MFIs: fixed effect regressions monthly financial data
Column1Portfolio at
risk <30 days
Portfolio at Risk
+ Restructured
& Refinanced
Return on
Assets
Operational
Self-
Sufficiency
Loan
Portfolio
Growth
Average
Loan Size
Breakpoint nov-08 jan-09 okt-08 jan-09 sep-08 dec-08
Eastern Europe
And Russia0.038 0.028 -0.036 -0.456 -0.035 -0.017
Caucasus and
Central Asia0.011 0.013 -0.036 -0.456 -0.035 -0.017
Central America
and the Carribean0.010 0.014 -0.036 -0.114 -0.035 0.013
South America 0.009 0.002 -0.007 -0.053 -0.035 -0.017
South- and South-
East Asia0.008 0.005 -0.036 -0.456 -0.060 -0.017
Constants 0.028 0.021 0,043 1.283 0.050 0,0121
3b. The impact of the crisis on MFIs: fixed effect regressions monthly financial data
Column1 PAR ROAOperational
Selfsufficiency
MFIs with a high %
female clients-0,0295 0,608
MFIs with a high % of
clients in de agri
sector
0,044
MFIs offering a high %
of individual loans0,023
MFIs offering other
services-0,009
MFIs with a high %
savings/liabilities-0,0295
Conclusions
Clear impact on MFIs
Impact so far highest on:
Eastern Europe and Russia, Caucasus and Central Asia, Central America,
• Some evidence that MFIs least affected have a high %:
• Female clients
• Clients in agri sector
• Clients in grouplending/villagebanking
• And MFIs offering other services and offering savings
Impact of the crisis on individual MFIs: necessarily bad?
Halt to tremendous growth
Problem of overindebted clients becomes more transparant
Signs that MFIs refocus of on original principles
• Limitations
• Suggestions further research:
• How will the impact of the crisis on MFIs further develop during 2009
• Which MFIs will come out of the crisis least affected
Appendix 1
Latin America *decline in commodity prices •Weaker external demand •*tighter financial conditions
Africa & the Middle-East *decline in commodity prices
Eastern and Central Asia *capital flow reversal *commodity prices down
Emerging Asia *weaker external demand *cut back on investments
Appendix 1
Appendix 2
-6,0
-4,0
-2,0
0,0
2,0
4,0
6,0
8,0
10,0
12,0
Annual change GDP
2007
2008
2009
2010