I received an e-mail from Orbelina, GM of Prisma Honduras, this morning. An article had appeared in the local Honduran newspaper covering the woes of the largest MFI in Central America. The company lost about $26.0M for the fiscal year ending June 30, 2010. Hard to even contemplate that an MFI established to help small entrepreneurs could get that far off base. Very few MFIs have even a tenth of that amount in assets.
After the auditors analyzed the loan portfolio and the high delinquency rate, they established an assessment of $32.5M in new capital to bring the MFI's financials up to par. This amount was in addition to the $10.0M in new money that had been assessed 6 months before. At this point, no one knows if the investors will meet this demand or choose instead of walk away.
It got me thinking again. Why do we need such big MFIs? The usual reasons: 1) the larger you are the better chances that you won't fail; 2) you can attract more private money with a big and going operation; 3) you can reach more people with better services and products; 4) the MFI will be converted to bank status and become regulated for the safety of all concerned; and 5) it's great for the egos of the board and general managers - size does matter.
On the other hand, it's hard to achieve the above: 1) in unstable political climates; 2) low population density countries where you have to pursue regional growth strategies to keep growing; 3) unforeseen world recessions; 4) regulations that force you to cut expenses to the bone forcing the MFI to let go of small loans under $500 and go after larger loans; 5) international investors seeking annual ROEs of 20% to30%: and 6) larger loans, larger write-offs when they go bad. I'm sure there are a lot more pros and cons. Please add to the list.
It ties in with advatage #3, but size also helps to lower the process costs by raising efficiency.
Posted by: Dave T | June 25, 2010 at 09:29 AM
Dave, I've seen several large US credit unions benefit from "economy of scale" after mergers. I have yet to see it in Central America. I'm familiar with 3 large MFIs which never achieved better efficiency and lower processing costs. KPM
Posted by: Kendall Mau | June 28, 2010 at 07:45 PM