Over the past five years, the microcredit sector has experienced unprecedented growth. The number of borrowers served by microfinance institutions (MFIs) has increased threefold to reach 120 million clients, according to MIX estimates as of December 2009—and by other estimates the number may be as high 190 million (Microcredit Summit Campaign 2011). In large markets, such as Mexico and South Africa, commercial banks and consumer lending companies have expanded their activities to include microfinance for low-income households.
Unfortunately, the growth of microcredit is not always sustainable. Some iconic markets, such as India and Bosnia–Herzegovina, are experiencing large-scale credit crises, and they are not alone. The portfolio at risk (PAR) of MFIs worldwide has increased steadily over the past three years, according to the Symbiotics SYM50 index. This is an alarming trend for an industry that has been heralded for its outstanding asset quality.
The deterioration in the quality of MFI loan portfolios can be attributed to several factors. Some fast growing MFIs have outgrown their risk management systems and controls. These weaknesses have often been exacerbated by high staff turnover, leading to a further erosion of credit discipline. Rapid growth has also been focused in narrow geographies, which in turn affected borrower repayment incentives and behaviors.
In some microfinance markets, the entrance of banks and consumer lenders hastened unhealthy competition among different base-of-the-pyramid lenders. The risk of over-indebtedness among borrowers rose markedly in several countries, such as Peru and Morocco.