11

State of the Microfinance “Industry”:Outreach, Poverty, and Profitability

Adrian Gonzalez (MIX/CGAP) Richard Rosenberg (CGAP)

Access to Finance: Building Inclusive Financial Systems Conference

World Bank, May 30th 2006

State of the Microfinance “Industry”:Outreach, Poverty, and Profitability

Adrian Gonzalez (MIX/CGAP) Richard Rosenberg (CGAP)

Access to Finance: Building Inclusive Financial Systems Conference

World Bank, May 30th 2006

22

Sources of DataSources of Data

1. Microbanking Bulletin (MBB) adjusted, confidential

346 MFIs, 19 mill. borrowers in 2004

2. MIX Market (MM) unadjusted, public

(www.mixmarket.org)

671 MFIs, 22 mill. borrowers in 2004

33

Sources (cont’d)Sources (cont’d)

3. Microcredit Summit (MCS) Mostly confidential

Only # borrowers, # “poorest”, and OSSall self-reported

2153 MFIs, 90 mill. borrowers in 2004

Total without double counting:

~2600 MFIs, 94.5 mill. borrowers

44

Database coverageDatabase coverageCombined database includes

most “usual suspects” – so-called MFIs that use microcredit modelsdeveloped in the last 30 yrs

But database doesn’t includemany other “double-bottom-line” lenderswho serve some poor clients

--gov’t ag / development banks --savings & loan cooperatives --rural banks

Little data on savings services

55

Borrowers concentrated in AsiaBorrowers concentrated in Asia

EAP: East Asia & Pacific, SS Africa: Sub-Saharan Africa, LAC: Latin America & Caribbean,EECA: Eastern Europe & Central Asia, MENA; Middle East & North Africa

1156

21

67

02

04

06

08

0P

erc

enta

ge

of

Bo

rro

we

rs b

y R

egio

n

MENAEECALACSS AfricaEAPS AsiaSource: Combined MBB, MCS & MM

% of Total Borrowers by Region in 2004Total: 94 Million Borrowers

66

NGOs serve only a quarter of borrowers

NGOs serve only a quarter of borrowers

29%30%

24%

17%

Source: Combined MBB, MCS & MM

% of Total Borrowers by Type of Instituion in 2004Total: 94 Million Borrowers

Self-Help Groups Government

Licensed NGOs

77

No. of borrowers grows 12% / yr1999-2004

No. of borrowers grows 12% / yr1999-2004

Source: Combined MIX & MCS data

18% 17%

14%

8%

11%

8%

12%

0%

3%

6%

9%

12%

15%

18%

1999 2000 2001 2002 2003 2004 Average

88

Penetration rates by region:% of total population with loans in 2003-

2004

Penetration rates by region:% of total population with loans in 2003-

2004

2

1

1

1

1

0

0 .5 1 1.5 2 2.5

% total population with loans in 2003-2004

S Asia

EAP

LAC

SS Africa

MENA

EECA

Source: Combined MIX & MCS data

99

Penetration rates by countryPenetration rates by country

18

7

6

5

4

2

0

0

0 5 10 15 20% total population with loans in 2003-2004

Bangladesh

El Salvador

Nicaragua

Bolivia

B & H

Morocco

Egypt

Russia

Selected Countries

Source: Combined MIX & MCS data

1010

A Few MFIs Serve the Majority of Borrowersin a country

A Few MFIs Serve the Majority of Borrowersin a country

2003-2004

95

94

92

89

86

81

74

65

53

32

0 20 40 60 80 100Median Market Share (percentages)

10

9

8

7

6

'' 5 MFIs

'' 4 MFIs

Largest 3 MFIs

Largest 2 MFIs

Largest MFI

Source: Combined MIX & MCS data

1111

9

75

91

25

0

20

40

60

80

100

MFIs Borrowers

%

Worldwide concentration: MFIs & Borrowers

Worldwide concentration: MFIs & Borrowers

2003-2004

1,425smaller MFIs

145larger MFIs

%

%

%

%

Source: Combined MIX & MCS data

1212

How Profitable is Microfinance?How Profitable is Microfinance?

12

60

61

44

0 40 80

Gov.

NGOs

Licensed

Total

% of total clients served by sustainable MFIs

(private)

(state banks)

Source: Combined MIX & MCS data

1313

Profitability of NGO Microfinance Improving

Profitability of NGO Microfinance Improving

6453 56 58

0

20

40

60

80

2001 2002 2003 2004

% o

f N

GO

bo

rro

wer

s se

rved

p

rofi

tab

ly

Source: Combined MIX & MCS data

1414

MFIs reporting to MBB are More Profitable than Regular Commercial Banks

MFIs reporting to MBB are More Profitable than Regular Commercial Banks

Sources: -MBBs 9-12, and public ratings from Rating Fund for MFIs -BANKSCOPE for Commercial Banks in the MFIs’ countries

Average ROA=1.5(1799 Com. Banks)

Average ROA=2.8(344 MFIs)

01

23

4W

eig

the

d R

OA

Average 2001-2004

1515

Profitable MFIs grow fasterProfitable MFIs grow faster

16

2

010

20W

eigh

ted

Ave

rage

Gro

wth

Rat

e

Profitable Not ProfitableWeighted by number of borrowers

Annual Growth Rate in # Borrowers (weighted average)All MFIs and Regions

Source: Combined MIX & MCS data

1616

Half of Profitable MFIs Broke Evenwithin 3 Years of Start-up

Half of Profitable MFIs Broke Evenwithin 3 Years of Start-up

Source: MIX Market & MBBs 10-12

Fewer than 1/3 took more than 6 years

0-3 yrs

4-6 yrs

> 6 yrs

49%

19%

32%

1717

Some correlation between absolute loan size and depth of outreach

Some correlation between absolute loan size and depth of outreach

Pseudo R2 = 11.8%

Source: Pool Logit with all MM MFIs, all regions

% loans50-60∆=10 11%

(of median)

25% percentile30% percentile

010

2030

4050

6070

8090

100

% o

f po

or b

orro

wer

s

0 10 20 30 40 50 60 70 80 90 100

% loans below $300

Observed % Trend

% poor52-59∆: 79%

(of median)

1818

Do Smaller Loans Lower Profits?Not much, apparently.

Do Smaller Loans Lower Profits?Not much, apparently.

ROA vs. Loan size/GNI Per Capita

Source: MBBs 10-12 & MIX MARKET

E.g.,

Raising loans from 40% (median) to 50% of per capita income

Raises ROA only from –1.62% to –1.55 %

And the correlation is very weak

-50

050

0 100 200 300 400 500

Loan Size as % of GNI percapitaROA Trend

ROA = -1.9 + 0.007 * Loan Size, R2 = 0.5%

RO

A

1919

Does higher % of “poorest” borrowers hurt profits?

Not much, apparently.

Does higher % of “poorest” borrowers hurt profits?

Not much, apparently.

OSS vs. Proportion of Poorest Borrowers by MFI

Source: MCS 2001-2004

E.g.,

Raising % of poorest borrowers from 80% (median) to 90%

Lowers cost recovery from 69.5% to 68%

And the correlation is very weak

OS

S0

5010

015

020

0

0 20 40 60 80 100

Proportion of Poorest Clients

Self-Reported OSS Trend

OSS = 81.5 - 0.15 * Poorest, R2 = 1.2%OSS

2020

Regression results: efficiency Regression results: efficiency

Operating expense ratio: (admin cost / portfolio)

Scale (# borrowers) lowers costs early,

but not beyond 5,000-10,000 borrowers.

Bigger loan size lowers operating expense ratio

but not much.

For-profits tend to be more efficientthan not-for-profits

2121

Regression results: profitabilityRegression results: profitability

Not-for-profits tend to be more profitable than for-profits (?!)

Interest rates & spreads drive profitabilitymore than costs or productivity do.

Scale (# borrowers or asset size)doesn’t help profitability much.

Learning effect (age)doesn’t help profitability much.

2222

Main themes (1)Main themes (1)

Governments continue to be major, though unprofitable, microloan providers.

Microfinance is profitable and stable enough to move into the mainstream financial system.

NGOs/non-profits serve only ¼ of the clients, but probably have a viable long-term

role…..

2323

Main Themes (2)Main Themes (2)

Don’t expect scale to make an MFI profitable

if it hasn’t gotten there in the first few years.

Serving poor customers need not hurt financial viability.