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Overview
Microfinance institutions in Asia continue to dominate the global market, building on rapid growth and massive scale to capture a disproportionate share of microfinance clients worldwide. Overall, the region remains heavily credit-oriented, with savings often taking the form of compulsory deposits collected as a requirement for membership or access to loans. The picture may soon change as increasingly more countries begin to open the door to voluntary savings mobilization, allowing institutions that meet certain criteria to provide this much needed service and potentially draw even more clients into the folds of microfinance. Many institutions, however, have yet to achieve the financial soundness and operational strength necessary to convince regulators of their ability to manage client savings. Leverage ratios are among the highest in the world, leaving institutions with rather tight equity bases to cover eventual losses. In the absence of a massive infusion of fresh equity capital, institutions will have to shore up their thin profit margins and build up their retained earnings. For some, the challenge will be to reduce costs, while for others the only option may be to raise prices.
Outreach and Scale
Asian microfinance stands unrivaled in scale. Institutions in the region have traditionally employed stepped, group-lending models that have proven to be a successful blueprint for rapid expansion of outreach. Asian MFIs easily master the standard suite of products that are typical of group lending and are able to more quickly roll out services than their counterparts in other regions, exceeding global productivity levels by 12 percent to reach 125 borrowers each. Building on this high staff productivity, Asian MFIs operating in densely populated areas attain colossal scale, with a handful serving several million clients each. With its concentration of large MFIs, Asian microfinance captures a disproportionate share of global clients. In 2006, Asian MFIs served over 35 million borrowers with USD 6.97 billion in loans, reaching two thirds of global borrowers while representing just one third of institutions sampled. A similar picture emerges on the savings front; with over 47 million depositors, Asian MFIs served three-fourths of voluntary savers at microfinance institutions worldwide.
Despite the stunning scale and growth of Asian micro– finance, and the remarkable depth of outreach attained by MFIs in the region, many potential microfinance clients continue to lack access to basic financial services. Data from 2,207 institutions across the globe suggests that MFIs in Asia have been more successful than their peers in bridging the gap between supply and demand of microfinance services, though penetration rates vary considerably across the region. Bangladeshi MFIs led the charge against exclusion, reaching 35 percent of the poor within the country. The Indian sector, however, trailed far behind, despite its concentration of large-scale institutions and high representation within the sample. The 288 Indian MFIs surveyed reached only three percent of potential demand, suggesting that growth will have to accelerate even further if MFIs are to truly break down the barriers to financial services. A number of other sectors barely registered on the map (Afghanistan, China), while others stood at intermediate levels. MFIs in Sri Lanka and Vietnam served one-fourth of the poor in those countries, while Cambodian and Indonesian institutions reached one-tenth of their potential clientele. Asian microfinance has certainly made tremendous achievements over the past, but much work remains ahead, both in scaling up of outreach and diversification of products and services.
Sources of Funding
Faced with legal limitations on deposit mobilization across the region, the typical Asian MFI sourced just one percent of its assets from savings. Historically modest profit margins combined with increased competition for donations and the preponderance of NGOs in the sector have moreover curtailed the expansion of the equity base, which at 17 percent, was the lowest among all regions. More so than its counterparts, the typical Asian MFI has therefore had to turn to borrowings to finance much of its portfolio. For every dollar in capital, Asian MFIs raised four dollars in debt, surpassing runners-up in Latin America that raised less than three. These borrowings were largely sourced at market rates, so that three fourths of the MFI’s portfolio was financed by commercial sources.
Financial Performance
Profitable institutions are generally more adept at breaking down the barriers to financial services, and the Asian region is no exception. Sustainable institutions across the region typically reach more than three times as many borrowers as their loss-making peers and experience stronger growth. The majority of Asian MFIs within the sample have crossed the profitability threshold, and others are close behind. Many, however, suffer heavy losses, and with the full set of MFIs earning a median 0.1 percent return on assets, the region faces the challenge of consolidating profits and solidifying its position. Globally, institutions in Latin America and Eastern Europe/Central Asia were the only ones that enjoyed healthy profit margins at year-end 2006. Despite incurring higher costs and running less efficient operations, these MFIs invested a greater portion of assets in their lending activities while charging more for their loans than their Asian peers, thereby boosting their revenue streams. Across Asia, some markets followed a similar high cost/high revenue pattern while others reinforced the low cost/low revenue curve that characterizes the region, with varying degrees of success.
Please note that the above is on MBB data for South Asia and East Asia, while MIFA also incorporates Central Asia, Pakistan, and Afghanistan, which are not part of the above MBB data set. For additional information see entire Asia Benchmarking Report from the MIX. |
