I just got back from a month in France. Still suffering from a bit of jet lag, I spoke at Sean Foote's Microfinance Seminar at the Haas School of Business, University California, Berkeley. It's a wonder I didn't fall asleep while talking.
At any rate, I gave a rundown on the operating environment in Central America where Prisma Microfinance has operations in Honduras and Nicaragua. The last 2 years have been very hard on the microfinance industry. Our icons, the 2 largest MFIs in Honduras and Nicaragua ran into trouble. The former was put up for sale while the later was liquidated. They both followed the Tier 1 model of fast and big growth with lots of foreign loan capital debt. Too big to fail - where have we heard that before? You need to be the biggest to be strong and survive. The recession and some not so great strategic decisions by the board and management proved otherwise. In addition, the largest German MFI just sold off its $75.0M small loan portfolio in El Salvador to a local MFI - what's up with this? Too hard to continue serving the poor?
What we saw:
- Extremely high overhead costs. Over 30% of total assets when a 10% or under amount is recommended by CAMEL.
- High amounts of agriculture loans (almost 40% of total loan portfolio) with low liquidity to support the lack of inward cash flows during the life of the loans as full repayment would come only after the harvest season and sale of the product.....and you don't even know if they will be delinquent by the time the end of the loan period occurs. You may have been asleep at the wheel for 18 months!!!
- High delinquency reaching almost 40% of the loan portfolio. These are non-productive loans as no income is derived from them when the borrowers are not paying.
- Pushing loans in the > $2000 range. Moving upscale and leaving behind the small borrowers in the under $500-range.
- Low population countries needing cross boarder strategies to accomplish aggressive growth strategies. Not enough good customers/borrowers. So far no large MFI has been able to do successful cross boarder expansion. There is only one Credit Union from El Salvador which is taking a slow, cautious approach in Honduras on the Pacific coast. Just because you all speak Spanish doesn't mean that it will be easy to do cross-boarder growth. There are lots of cultural and political differences that exist which cause obstacles and conflicts.
- Weak management and board. How could the board let the situation get so out of hand that the largest MFI in Nicaragua had to be liquidated? Were they asleep, getting the wrong financial information, or just not up to par about asking the right questions?
- Political unrest. A coup in Honduras, the socialists in Nicaragua. Not easy environments in which to operate.
As a small but profitable MFI, Prisma looks to the future and wonders if pursuing the Tier 1 strategy the best way to go in a low population arena. An alternative would be for a company to create several small, but very profitable MFIs and join them together in a privately owned network. Less need for high-powered financially sophisticated management on the ground and continue to serve your very poor and poor clients needing loans of < $500. Playing the high financial sophistication game with offshore holding and shell companies may just be a little too much for MFIs designed to exclusively serve the very poor.