Taking the Good from the Bad in Microfinance: Lessons Learned from Failed Experiences in Latin America
This paper analyzes examples of MFI failure in order to understand and document errors in microfinance that will offer lessons for the future. Many of the institutions analyzed faced more than one cause of failure, but sought to identify the main cause.
The study is based on interviews with experts and their opinion about what could be considered a failed experience. It identifies six types of common causes of failure in MFIs, namely, methodological flaws in credit technology, systematic fraud, uncontrolled growth, loss of focus, design flaws and government intervention. Lessons include:
- One recipe does not work for every institution;
- Macroeconomic crisis does not necessarily cause bankruptcy;
- Factors such as asset composition and integrated risk management strongly the affect asset quality of MFIs;
- Abundant and easy access to funding may have negative implications;
- Bad governance and regulation, and exposure to political risks strongly affect the industry.
The study highlights the need to understand that microfinance is a financial business. The way in which crises are handled by an MFI’s Board of Directors and management team ultimately determines whether or not an institution will overcome that challenge.
