Microfinance and the Role of Policies and Procedures in Saturated Markets and During Periods of Fast Growth

 This article "Microfinance and the Role of Policies and Procedures in Saturated Markets and During Periods of Fast Growth"   evaluates the role that governance, management information systems (MIS), risk management procedures, and lending methodologies play in different scenarios, with emphasis on their interaction with external factors like market saturation levels and MFI growth rates.  We use consistent measures for procedures and policies, based on data from almost 200 ratings of 130 microfinance institutions by Planet Rating using the GIRAFE methodology. 

The study shows that Financial Services Management (A) is the most important determinant of portfolio quality, under all growth scenarios and saturation levels.  This is not surprising, as the main components of this category involve credit procedures and policies that are used to select potential borrowers, assess repayment capacity and follow-up on issued loans.  Governance (G) and Risk Management (R) are the next most important sets of metrics, depending on the proxy used for credit risk (e.g. either portfolio at risk over 30 days, write-off ratio or total credit risk) and the scenario under consideration. 

One of the most important findings of this research is the validation of the predictive power of Planet Rating’s GIRAFE scores to forecast credit risk 12 months in advance.  As the microfinance industry searches for early warning indicators for credit risk and over-indebtedness, this research suggest that MFIs with lower scores or recent downgrades in their grades are more prone to credit risk problems, and overindebtedness, than MFIs with better grades, in most scenarios.

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