Visibility / Profitability: Microfinance Institutions

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1. Myth: Microfinance institutions cannot be profitable.

Fact: Some microfinance institutions are more profitable than commercial banks.

Today there are 150-200 microfinance institutions worldwide that are financially self-sufficient. These institutions represent a loan portfolio of approximately $3.5 billion, and are growing at a rate of 20-30% annually. Profit margins on these portfolios are as high as 21.8% in Asia-already the largest market in the world-and as low as 12.1% in the more mature Latin American market.

According to the MicroBanking Bulletin, the top microfinance institutions enjoy an average return-on-equity of 14.1%. This figure compares favorably with the commercial sector. A number of recent studies, which compare the returns earned by the top commercial banks with those of the top microfinance institutions in various regions, found that the top microfinance institutions in many cases outperform their commercial counterparts. MicroRate, a microfinance rating agency, found that 12 out of the 29 microfinance institutions they rated in Latin America, were consistently more profitable than Citigroup. As the accompanying figure shows, the most profitable microfinance institution had a return-on-equity of 42.9%, compared to Citigroup's 19.7%.

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2. Myth: Default and late payments occur with frequency.

Fact: Although the repayment rates vary among regions and institutions, the worldwide average hovers around 98% on-time repayment-- much higher than the commercial banking industry's average.

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3. Myth: Microfinance is highly subject to macroeconomic shocks.

Fact: Microfinance performance is not highly correlated with overall emerging market economies.  During recessions, the microfinance sector outperforms other banking sectors, as was the case in Bolivia between 1998 and 2001.

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