Dr. Kendall Mau's MICROFINANCE TRAVELS

News from Tegucigalpa, Honduras

Our General Manager, Orbelina Valeriano, writes that they are now back in the office after 2 days.  Things are peaceful except right around the Brazilian Embassy.  There is a shortage of food, long lines for gasoline, and banks are open only 2 hours per day, also with very long lines.  Students are heading back to school.  It'll take a week or so to get back to a normal schedule.  We'll be completing an assessment by the end of the month of where our business stands.

Where Have All the Borrowers Gone?

For the last decade, the industry has been touting the need for micro-loans for the more than 1 billion + unbanked potential customers.  It seems like an unlimited amount of potential loan customers to be had.  Well, the big surprise is that many micro-credit and micro-finance organizations are now struggling to find enough new and repeat credit worthy customers to continue the phenomenal growth pattern of the last decade.  In Central and Latin America where Prisma operates, we're starting to see this happen.

There may be oodles of new customers to tap, but unfortunately they don't happen to live and work where you operate.  Each MFI hits the wall in natural growth at different times and then has to fight and scrap for every additional loan.  The game changes completely when you have to now hunt for loan customers.  Some may hit the wall in 10 years, others in 15 years.

When I co-managed a medium size credit union ($50.0M in assets) in the 1990s, it had stopped growing 2 years before I arrived.  Every new loan was a triumph and like many other sister organizations, only about 1/3 of our members had need of loans.  I would go to association meetings and meet CEOs of other credit unions who bragged about the high growth, revenue, and loan volume that they were experiencing.  I'd gnash my teeth wondering how I got stuck with an organization that had zero growth only to meet those same CEOs several years later struggling with declining loan volume and clueless as to how to respond.   It's easy to be a highly successful MFI executive during the natural up-growth cycle.  Now comes the hard times. 

Without increasing loan revenue, how are you going to pay the staff, dividends to savers, and high interest rates to outside investors?  Several reactions seem to follow:

1.  Management starts imposing unrealistic loan growth projections on branches of 10% to 15%.

2.  Underwriting standards are relaxed to maintain volume levels as branches try to meet projections, leading to higher future delinquencies and defaults.

3.  Larger loan amounts are granted exposing the organization to larger loses from any single borrower.

4.  Horizontal mergers and acquisitions start to take place as growth is sought in the fastest ways possible.