Is Microfinance Growing Too Fast?

Abstract

The aggregate number of borrowers served by microfinance institutions (MFIs) reporting to MIX Market grew 21 percent per year on average in the 2003-2008 period, while the loan portfolio grew 34 percent per year on average in the same period. For many microfinance practitioners and analysts, this level of growth is a reason for celebration, as it points towards microfinance’s success in increasing access to financial services for poor and low-income households and businesses.During 2008, the global economy experienced a financial crisis and slowdown. Evidence from past years has shown that even though microcredit arrears do rise in periods of economic slowdown, delayed payments do not translate into significant portfolio losses on average. Results on portfolio quality of MFIs for 2008 confirm these findings, although some high-growth markets, like Morocco and Bosnia and Herzegovina, experienced a rise in delinquency during 2008. Consequently, concerns about the impact of high growth on portfolio quality of MFIs have been raised recently.This paper quantifies the point at which the level of growth appears to overstretch MFI resources and at which portfolio quality begins to decline for any higher growth level. This issue is important in order for microfinance institutions to understand the trade-offs between growth and portfolio quality. One additional question explored is whether the growth strategy has a significant effect on portfolio quality. In particular, this paper distinguishes between local growth (growth in the number of borrowers per branch) versus expansive growth (growth in the number of branches per MFI) and tries to measure how much is too much for each case, and whether differences in the growth path chosen by MFIs matter. Finally, the analysis concludes with a review of the market context in which MFIs are building their borrower bases and the extent to which that context impacts portfolio quality.Data Brief No. 5 is based on analysis of data from 821 MFIs that reported to MIX on the period from 2000 to 2008.