Microfinance and the Role of Policies and Procedures in Saturated Markets and During Periods of Fast Growth
The present study is an evaluation of the role that internal MFI policies and procedures such as lending methodologies, governance, management information systems (MIS), and risk management play in different market scenarios. It emphasizes their interaction with external factors like market saturation levels and MFI growth rates.
In this study, GIRAFE scores were used to measure policies and procedures. This method included categories like governance and decision making (G), information and systems (I), risk management (R), credit methodologies (A), funding (F) and efficiency (E). Findings include:
- Relationship between portfolio quality and policies are more critical in low penetration than in moderate penetration markets;
- Focus on cautious evaluation of client repayment capacity, strong governance systems, internal controls and audits, and quality information remains key in all instances especially during periods of contraction;
- MFIs operating in regions where penetration rates are high should include additional management systems to efficiently mitigate the risks related to market saturation.
The study concludes that donors, investors, regulators, and industry analysts may need to be more cautious as well, as we understand better the new dynamics of the sector. This analysis also validates the predictive power of Planet Ratings GIRAFE scores for credit risk 12 months in advance.