Rapid microfinance growth brings risks -Fitch

from the Guardian

By Peter Apps

LONDON - Rapid growth in the booming microfinance sector is exposing it to greater risks, ratings agency Fitch warned on Thursday, saying this raised new management issues as access to banking for the world's poorest expands.

The microfinance sector had a total asset size of more than $34 billion at the end of 2006, Fitch said, and continued to grow fast. With the world's poorest showing good repayment rates on tiny loans, it has been seen as largely diversified from global or even national economic and market trends.

It has also been much less affected by the global credit crunch, which has hit access to loans in developed economies.

Rapid growth was putting pressure on internal control systems, management quality and corporate governance, Fitch said. Its transition from a charitable non-profit sector to a genuine business with increased access to commercial funding also brought risks, the ratings agency said.

"As microfinance institutions transform and their clients become more integrated into the mainstream financial sector, convergence occurs between microfinance and mainstream banking," said Fitch financial institutions group managing director Mark Young.

"In Fitch's view, this convergence could reduce their resilience to the broader economy. The microfinance sector's success could bring some of the greatest risks it has yet to face."

In December, the Microcredit Summit Campaign said microcredit -- tiny loans to help the very poor with their businesses -- reached 133 million people by the end of 2006, 92 million of them earning less than a dollar a day.

On the assumption that each recipient was probably supporting four other people -- almost invariably family -- that would mean more than half a billion people worldwide were benefiting.

That compared to just 13 million recipients a decade ago, when the poorest were simply dismissed as unbankable.

Bangladeshi microcredit pioneer Muhammad Yunus, credited with being behind some of the first micro loans, won the Nobel peace prize in 2006.

Fitch said it was publishing the new criteria for assessing the creditworthiness of microfinance institutions, paying particular attention to operation and credit risk management, corporate governance, funding and liquidity, capitalisation and likelihood of support from stakeholders.