Is Microfinance Growing too Fast?

This paper quantifies the level at which growth appears to overstretch MFI resources and portfolio quality begins to decline for any higher growth level. It also examines whether growth strategy has a significant effect on portfolio quality.

The deterioration of MFI portfolios in certain countries has been attributed to uncontrolled growth in the sector. The current analysis is based on observations from 821 MFIs in 91 countries reporting data for 2000-2008 MIX Market. The paper distinguishes between local growth, which is growth in the number of borrowers per branch, versus expansive growth, which is growth in the number of branches per MFI, and tries to measure how much is too much for each case. The study reveals that:

• High growth rates and portfolio quality are barely related, except in extreme situations;
• In terms of deterioration of portfolio quality, MFIs have more room to grow expansively than to grow locally.

Finally, country context, including high levels of penetration rates and high aggregate country growth levels in number of microfinance borrowers, is also associated with deterioration of portfolio quality.