Benchmarking Latin American Microfinance.pdf

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            Latin American Microfinance
                                                                                                     A report from the
                                                                                   Microfinance Information eXchange

                            Contents                                                        Latin America is home to some of
                                                                                   the most experienced, diverse and
    Data and Scales of Comparison......................... 2                       developed microfinance institutions
             _______                                                               (MFIs) in the world.        But how does
    Scale and Outreach............................................ 3
             _______                                                               the performance of Latin American
    Institutional Structure.......................................... 4            microfinance compare to other regions
                                                                                   today? This report answers the question
    Profitability & Sustainability................................. 5              by comparing performance indicators for
                                                                                   Latin American MFIs against MFIs
    Revenue.............................................................. 6
          _______                                                                  worldwide. The goal is not to identify
    Expense.............................................................. 7        regional leader institutions or create
                                                                                   performance targets.1 On the contrary,
    Efficiency & Productivity...................................... 8              the objective is to develop a snapshot of
                                                                                   Latin American MFI performance through
    Portfolio Quality................................................... 9
            _______                                                                examining a broad spectrum of
    Conclusion......................................................... 10         institutional types.

            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.

   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, 2000.

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

    For more information about the MBB's analytical process, please visit
    Averages for peer groups are calculated after dropping top and bottom observations.

                                                                                            A report from the Microfinance Information eXchange
                                                                           Benchmarking Latin American Microfinance

Scale and Outreach
Latin American MFIs:
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.

 Peer Group Comparison

         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.

A report from the Microfinance Information eXchange
Benchmarking Latin American Microfinance

Institutional Structure
Latin American MFIs:
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.

 Peer Group Comparison

           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.

                                                                        A report from the Microfinance Information eXchange
                                                                                            Benchmarking Latin American Microfinance

Profitability & Sustainability
Latin American MFIs:
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.

 Peer Group Comparison

          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 insti-
 tution, 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.

     Adjusted Return on Assets: an indicator of profitability and efficient use of assets

A report from the Microfinance Information eXchange
Benchmarking Latin American Microfinance

Latin American MFIs:
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

       Latin American MFIs earn more revenue but
keep less of it than regions with positive returns. The
Adjusted Financial Revenue Ratios5 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.

 Peer Group Comparison

         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%.

   Adjusted Financial Revenue Ratio: measures how much revenue an institution receives from financial services as a percentage of Total Assets
   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

                                                                                                A report from the Microfinance Information eXchange
                                                                                              Benchmarking Latin American Microfinance

Latin American MFIs:
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 Ratio7 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.

 Peer Group Comparison
          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
  Operating Expense Ratio: measuring personnel and administrative expenses as a percentage of Total AssetsLoan Portfolio
  For more information about Credit Union expenses, see Jennifer McDonald's "Credit Unions: Efficient and Profitable Financial Intermediaries" in
 MicroBanking Bulletin No. 4 February, 2000

A report from the Microfinance Information eXchange
Benchmarking Latin American Microfinance

Efficiency & Productivity
Latin American MFIs:
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.

 Peer Group Comparison

         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.

                                                                        A report from the Microfinance Information eXchange
                                                                                                Benchmarking Latin American Microfinance

Portfolio Quality
Latin American MFIs:
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 days9
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.

 Peer Group Comparison

        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.

  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

A report from the Microfinance Information eXchange
             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
                                                                             Microfinance Information eXchange
                                                                                                   August 2003

                        The Microfinance Information eXchange (MIX) is a non-profit
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                        healthy microfinance sector. The MIX’s mission is to help build the
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