Growth and Vulnerabilities in Microfinance

This Focus Note discusses recent repayment crises affecting growing microfinance markets in Nicaragua, Morocco, Bosnia and Herzegovina (BiH), and Pakistan. The case studies show that external forces, such as macroeconomic conditions, local politics and events, and contagion, can affect the spread of a delinquency crisis. However, these contextual factors were not the primary causes of the repayment crises. Instead vulnerabilities, such as lending concentration and multiple borrowing, overstretched MFI capacity, and a loss of MFI credit discipline, prevalent within these growing microfinance markets were at the heart of the problem.

The note recommends that MFI managers, investors and policy makers should focus on sustainable growth. To do this:

• MFIs should balance growth objectives with improvement in the quality of client services, and ensure long-term sustainability of client relationships;
• Widespread development and use of credit information bureaus should take place to improve credit risk management and manage multiple borrowing;
• Financial access mapping should be undertaken to identify underserved as well as saturated markets.