Benchmarking Latin American Microfinance

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1 Benchmarking Latin American Microfinance A report from the Microfinance Information exchange Contents Data and Scales of Comparison... 2 Scale and Outreach... 3 Institutional Structure... 4 Profitability & Sustainability... 5 Revenue... 6 Expense... 7 Efficiency & Productivity... 8 Portfolio Quality... 9 Conclusion Latin America is home to some of the most experienced, diverse and developed microfinance institutions (MFIs) in the world. But how does the performance of Latin American microfinance compare to other regions today? This report answers the question by comparing performance indicators for Latin American MFIs against MFIs worldwide. The goal is not to identify regional leader institutions or create performance targets. 1 On the contrary, the objective is to develop a snapshot of Latin American MFI performance through examining a broad spectrum of institutional types. Summary At the global level, Latin American MFIs have more assets, leverage more equity and attract more commercial investment than MFIs in other regions. They also reach fewer clients and achieve marginal returns. Some characteristics of a more commercial market may already be visible in the aggregate. Latin American loan portfolios are increasingly funded through commercial financing (especially through savings) and operating expenses are decreasing as many, but not all, MFIs become more efficient. Perhaps the higher portfolio at risk signals the emergence of a more competitive market in a small number of countries. 1 Helpful resources regarding performance leaders and targets in Latin America include Von Stauffenberg's "Las Mayores y Mejores Microfinancieras" in MicroEmpresa Américas, 2002; and Jansson and Taborga's "The Latin American Microfinance Industry: How does it Measure Up", Inter-American Development Bank,

2 Benchmarking Latin American Microfinance Data and Scales of Comparison Microfinance literature is rich with the stories of individual microentrepreneurs and case studies of the institutions that provide them small scale financial services. However, there are fewer tools to measure the performance and development of the industry. The MicroBanking Bulletin (MBB), now housed at the Microfinance Information exchange (MIX), benchmarks the performance of microfinance institutions through the bi-annual dissemination of the MicroBanking Bulletin publication and customized benchmarking services for individual MFIs. The data for this report comprises institutions of all types and sizes. It draws from the MBB 2001 and 2002 dataset of 124 MFIs, almost half of which are from Latin America. To make comparisons of diverse institutions possible, the data is adjusted for inflation, standardized loan loss provisioning, subsidy and in-kind donations. All ratios are calculated from raw data. 2 Comparisons in this analysis are principally made on two scales. The first is a global analysis of performance indicators from Latin America compared to Africa, Asia, Eastern Europe and Central Asia (ECA) and the Middle East and North Africa (MENA). The second level of analysis further divides institutions in every region by the size of the loan portfolio and target market. The resulting sets of institutions with similar characteristics represent the MBB's Peer Group Methodology. There is one special peer group for Latin American credit unions because of their distinct status as member based institutions and cohesion of performance indicators. Peer groups, defined for Latin America below, are critical tools to help analyze the composite performance of a region. In every graph of peer groups, the benchmark for All MFIs, all Financially Self-Sufficient MFIs, all Latin American MFIs, and all Financially Self-Sufficient Latin American MFIs are included for comparative purposes. 2 For more information about the MBB's analytical process, please visit 3 Averages for peer groups are calculated after dropping top and bottom observations. 2

3 Scale and Outreach Benchmarking Latin American Microfinance llllhave achieved greater financial scale than other regions, llllcarry larger average balances per borrower, but llllreach fewer Active Borrowers than Asian and African MFIs Latin America's average Gross Loan Portfolio is almost 75% larger than the average for Asian MFIs, who rank a distant second. Yet, none have reached the breadth of flagship Asian institutions, in terms of number of clients. The large portfolio of Latin American MFIs reaches fewer clients because of large Average Balances per Borrower they maintain in absolute terms. Large loan size is not surprising considering that Gross National Product (GNP) per capita is larger in Latin America, on average, than any other region. Dividing Average Balance per Borrower by GNP per capita helps approximate the size of the loan relative to a rough estimate of income per person. Generally speaking, a lower ratio implies "deeper" outreach. The Average Balance per Borrower as a percentage of GNP per capita for Latin America is similar to the international average. But the aggregate indicator hides an important trend in Latin American microfinance: the diversity of MFIs in terms of mission, size, legal status, or target market creates results that span the spectrum of MFI outreach globally, and even defines its outer limits. The Average Balance per Borrower of the LA Small peer group constitutes merely 9% of the GNP per capita. Many of these institutions focus their services on the poor and operate in rural areas where income levels and loan sizes are often low. The Average Balance per Borrower / GNP per capita for Latin American Credit Unions, on the other hand, is 153.4%. LA Credit Unions, as opposed to other types of MFIs, are member-based institutions created to serve local communities. They do not necessarily target lending at any individual type of borrower. The depth of outreach indicator for all other peer groups falls between these two extremes. 3

4 Benchmarking Latin American Microfinance Institutional Structure llllare more leveraged than MFIs in other regions llllaccess more commercial financing llllmobilize greater savings volume but, llllreach fewer savers than Asian and African MFIs Latin American MFIs are more successful at leveraging their equity and accessing commercial capital than MFIs in other regions. Debt accounts for 2.7 times the equity of the average Latin American MFI - a result significantly larger than the next closest averages of 2.0 for African MFIs and 1.6 for Asian MFIs. Latin American MFIs also outpace all other regions in terms of attracting commercial funds. In total, commercially priced liabilities represent over 70% of the average Latin American Gross Loan Portfolio compared to an average of 44.1% for all MFIs. The increasingly commercial nature of Latin American microfinance is enabled by regulatory environments in many countries that allow a larger group of Latin American MFIs to mobilize and intermediate almost double the volume of savings of MFIs in other regions. Commercial microfinance represents a trend for the region, but not for all institutions. Few smaller Latin American MFIs, especially non governmental organizations, access commercial funding. Only the smaller and younger institutions in the ECA peer group receive more debt at subsidized rates. In addition to difficulties in accessing debt, smaller institutions often do not have the sufficient capital requirements to overcome the regulatory hurdle of transformation into savings mobilizers. Exceptions are the LA Credit Unions that were originally designed to serve the savings needs of local communities. 4

5 Profitability & Sustainability Benchmarking Latin American Microfinance llllare more commercial but less profitable as a group than all regions except Africa llllbarely reach Financial Self-Sufficiency llllrepresent some of the most and least profitable MFIs across all regions Adjustments for inflation, loan loss provisioning, subsidies and in-kind donations create a basis for comparability of returns and sustainability in an industry where diverse accounting policies, inflation and subsidy can distort performance. Before adjustments, Latin American and African MFIs, on average, recover 110% of their expenses, less than the global average of 115%. After adjustments, the Financial Self-Sufficiency (a measure of cost recovery) of the average Latin American institution is 102%, similar to MFIs from Africa and MENA. The effect of adjustment on peer groups is visible as the spread between OSS and FSS in the graph below. The Adjusted Return on Assets (AROA) 4 of LA Small Broad and LA Small Low End are some of the lowest of all MBB peer groups worldwide. As a group, they are younger than the average Latin American institution, less efficient and work in less competitive markets. In contrast, LA Large has the second highest Adjusted Return on Assets and the highest Adjusted Return on Equity of all peer groups. Larger institutions tend to also be older and more profitable in every region. 4 Adjusted Return on Assets: an indicator of profitability and efficient use of assets 5

6 Benchmarking Latin American Microfinance Revenue llllearn more revenue as a percentage of total assets than all other regions llllhave some of the highest yields on the portfolio, yet llllretain less of their revenues than all regions except Africa Latin American MFIs earn more revenue but keep less of it than regions with positive returns. The Adjusted Financial Revenue Ratios 5 of ECA, and especially Asia, are lower than Latin America; although, the former regions are more profitable. Institutions in ECA and Asia appear to charge clients less and still achieve profitability, implying that the low returns in Latin America result from high cost structures. The revenue ratios for the region are principally due to higher Real Yields on the Gross Loan Portfolio. 6 LA Credit Unions and LA Small Low End again represent the extreme points for all peer groups worldwide. To some extent, the small loan sizes and geographical isolation of many borrowers of LA Small Low End MFIs increase the operating expenses to be covered through a higher portfolio yield. Another perspective holds that, LA Small Low End institutions often provide credit to individuals and groups with limited access to financial services, in markets where only moneylenders and informal finance exist. Credit unions, in contrast, have the lowest yields because of lower cost structures and inexpensive sources of capital (explained below). It is important to note that neither peer group reaches Financial Self-Sufficiency. Only LA Large and LA Medium - peer groups with Real Yields on the Gross Loan Portfolio consistent with international averages - achieve Financial Self-Sufficiency > 100%. 5 Adjusted Financial Revenue Ratio: measures how much revenue an institution receives from financial services as a percentage of Total Assets 6 Real Yield on the Gross Loan Portfolio: an inflation-adjusted metric showing the annual revenue generated from loans as a percentage of the Gross Loan Portfolio 6

7 Expense Benchmarking Latin American Microfinance llllpay the highest total expenses as percentage of total assets of all regions except Africa llllpay the highest average cost for financing as percentage of total assets llllachieve mixed operational expense ratios Latin American institutions are more costly to run, on average, because of the high cost of financing coupled with widely varying operational expense ratios. The high cost of financing for all Latin peer groups is not surprising; Latin American institutions, on average, are more likely to access larger amounts of debt at commercial rates than other regions. The average Operating Expense Ratio 7 for Latin America is higher than Asia, where personnel is generally less expensive. Conversely, the average Operating Expense Ratio for Latin America is lower than in Africa, where personnel costs are generally high. The LA Credit Unions peer group has the lowest Operating Expense Ratios of all MBB peer groups. Expenses of credit unions are kept low because of proximate relationships with clients, limited branch infrastructure, and lower salaries for locally based personnel in rural areas. 8 However, the real yields of Credit Unions are often so low that they do not achieve financially self-sufficiency after adjusting for inflation. Smaller MFIs in Latin America have some of the highest Adjusted Operating Expense Ratios of all peer groups globally. They often worked in non-competitive and geographically fragmented markets where the high rates that clients pay for access can reduce the institutional emphasis on cost control. In between the bookends of expense ratios is the LA Large Peer group. It has the second highest Adjusted Financial Expense Ratio of all peer groups because the group members access more commercial sources of funding (savings and debt), on average. LA Large's Adjusted Operational Expense Ratio is below the average for all MFIs, helping this peer group to be the most profitable in Latin America and the second most profitable of all MBB peer groups worldwide. 7 Operating Expense Ratio: measuring personnel and administrative expenses as a percentage of Total AssetsLoan Portfolio 8 For more information about Credit Union expenses, see Jennifer McDonald's "Credit Unions: Efficient and Profitable Financial Intermediaries" in MicroBanking Bulletin No. 4 February,

8 Benchmarking Latin American Microfinance Efficiency & Productivity llllserve borrowers more efficiently than all regions except Asia llllemploy the most productive loan officers of all regions except Africa, but llllhave fewer front line staff than all MFIs worldwide Latin American MFIs appear efficient when operational expenses are divided by the loan portfolio. Asia is the only region that appears more efficient because Asian institutions benefit from higher population densities and lower wages. Among other factors, these structural differences of Asian countries help compensate for potential inefficiencies resulting from smaller Average Loan Balances of institutions. The impressive productivity of Latin American loan officers is diminished at the institutional level, where productivity is consistent with the average for all MBB participants. Loan officers account for merely 41% of all Latin American MFI staff compared to an average of 48.3% for all MFIs worldwide. The smaller percentage of front line staff is evidenced by the large spread between the two productivity ratios below, a trend especially visible for LA Medium. Latin American loan officers, on average, are second in productivity only to African loan officers. Although one may expect productivity ratios to favor MFIs granting many small loans, there appears to be no relationship between average loan size and loan officer productivity in Latin American microfinance. The impressive productivity of the LA Medium peer group is higher than all peer groups except Asia Small Broad. 8

9 Portfolio Quality Benchmarking Latin American Microfinance llllhave the highest portfolio at risk llllincur the highest loan loss provisioning expenses because the Gross Loan Portfolio accounts for such a large percentage of total assets The average Portfolio at Risk (PAR) > 30 days 9 for Latin America is almost twice as high as any other region. Latin American PAR > 90 drops to 2.0% - still the largest of all the regions and 0.7% more than the average for Asia and Africa. The Gross Loan Portfolio accounts for such a large majority of the assets of Latin American MFIs, that provisioning expenses become even larger as a percentage of total assets. High portfolio at risk also increases the risk profile of Latin American MFIs to funding sources. Delinquency also increases Operational Expenses when loan officers and other staff enforce repayment. However, the effect of PAR on Operational Expenses is not captured by the MBB. Every Latin American peer group has a PAR > 30 days that is higher than the average for all MFIs. However, portfolio at risk can affect institutions of all sizes, types and target market. Although portfolio at risk varies greatly on an institutional level, the LA Medium peer group has been more successful at containing delinquency than other Latin American peer groups. Consequently, the peer group's Adjusted Loan Loss Provision Expense ratio is similar to the average for all MFIs. 9 Portfolio at Risk: measurement of the entire outstanding balance of loans with payments over a specified number of days late divided by the Gross Loan Portfolio 9

10 Conclusion While there are some clear regional trends, the performance of Latin American MFIs is more diverse than in any other region. In Latin America there is a true multiplicity of institutional types, sizes, missions, and performance levels. Although there are examples of smaller Latin American institutions that are very profitable, there seems to be a positive relationship, in the aggregate, between size (breadth and loan volume) and Financial Self-Sufficiency. Classifying the MFIs into peer group proves to be a useful methodology in isolating different types of institutions and creating relevant benchmarks across different categories of analysis. The Latin American microfinance market is older, more developed and more diverse than other regions yet there remain large geographical inequalities of access to financial services at the national and regional scales. A minority of markets is already competitive although increasing access through expanding the client base is still a principal challenge of Latin American microfinance. Nowhere is this truer than in larger countries, secondary cities and rural areas. Jared Miller Analyst Microfinance Information exchange August 2003 The Microfinance Information exchange (MIX) is a non-profit organization that works to support the growth and development of a healthy microfinance sector. The MIX s mission is to help build the microfinance market infrastructure by offering data sourcing, benchmarking and monitoring tools, as well as specialized information services. The MIX is supported by the Consultative Group to Assist the Poor (CGAP), Citigroup Foundation, Deutsche Bank Americas Foundation, Open Society Institute, Rockdale Foundation and others. To learn more about the MIX, please visit the website at The Microfinance Information exchange 1919 Pennsylvania Avenue, NW Suite 760 Washington, DC Tel: Fax: