Championship League

Microenterprise Americas and the MIX report on Latin America's 80 Leading MFIs.

With average Adjusted Return on Assets over 4% and an average Outstanding Loan Balance of less than 1,000 USD, Latin America's 80 leading microfinance institutions are lending small amounts while achieving record profitability. Emerging leaders in almost every category of performance and improved performance of historical participants are the main stories this year. As a group the leading 80 MFIs—representing the pioneers and younger vanguard—shattered multiple performance records.

MicroEnterprise Americas and the MIX (Microfinance Information eXchange), publisher of the MicroBanking Bulletin, bring readers the lists and analysis of Latin America's largest and most profitable microfinance institutions for the second year in a row. The performance of these diverse institutions is measured using standardized analysis and ratios in seven categories: scale, growth, depth of outreach, savings, efficiency, asset quality and profitability. This year's data is from December 31, 2004, representing the latest in information that could be tested against data approved by auditors and superintendencies.

Every year MIX and Microenterprise Americas publish more data on the performance of microfinance institutions. The combined portfolio of the new and repeat participants topped 4 billion dollars, divided among an impressive 4.13 million loans.

The MFIs are a diverse group—commercial banks, finance companies, non-governmental organizations (NGOs), service companies and credit unions—representing the increasing complexity of the markets they work in and the choices of their clients.

Scale

Most Latin American MFIs maintain fewer than 100,000 outstanding loans, but a number of leaders takeoff after passing the 100,000 loan threshold. The microfinance giants are led by the Mexican institutions Caja Popular Mexicana and Compartamos. Caja Popular Mexicana appears on the lists for the first time this year. It has not always been considered a microfinance powerhouse. However, its Average Outstanding Balance of merely 1,000 dollars in the Latin American country with the highest Gross National Income per capita, means that this MFI is certainly working with the smaller end of the market.

Multiple regulated Peruvian MFIs also hold dominant positions in terms of scale. Many of them achieve leadership positions despite a geographical focus outside of the immense Lima market.

Regulatory status is not necessarily the deciding factor in achieving scale, as the record-breaking Women's World Banking affiliates from Colombia demonstrate. Their achievement is doubly impressive considering the financial hurdles faced by unregulated MFIs that do not capture deposits.

Growth

With more than 10 MFIs increasing their number of borrowers by over 50% over last year and a third of the participating MFIs growing at over 30%, the years of brisk growth look likely to continue.

Growth can be measured in relative or absolute terms. Relative-growth ratios favor institutions that start with a smaller base. Few of the largest institutions grew quickly as a percentage of previous year results. Large institutions, in contrast, almost always grow more quickly in absolute terms and 2004 was no different. The growth in loans of PRODEM FFP was remarkable by any measure. PRODEM's expansion was primarily due to the introduction of the "Relámpago" loan product, averaging merely USD 150.

The participating MFIs added over 600,000 loans and a billion dollars to the Gross Loan Portfolio in 2004. Although not all registered top 10 relative growth rates, more than 10 large MFIs increased their loan portfolios by more than 10 million dollars—an amount larger than the Gross Loan Portfolios of the smallest third of participating MFIs.

Depth of Outreach

Did village banks retain their leading edge in terms of depth of outreach? This year's results suggest just that.

The indicator of Average Loan Balance as a percentage of the Gross National Product (GNP) per capita shows just how much a loan balance is compared to average income of an individual. Lower ratios suggest deeper outreach. FINCA Mexico and Compartamos lead the field with a few Peruvian village banking MFIs close behind. Country-level income also seems to play an important role in determining outreach; small loans appear even smaller in countries with higher GNP per capita. With Average Loan Balances representing single percentage points of Gross National Income per capita, the outreach of these MFIs is undisputed.

Notably, some of the larger MFIs are also represented. Compartamos leads depth of outreach for large MFIs but other giants are not far behind, just outside of the top 10.

Savings

As a group the Peruvian institutions dominate the microsavings market, taking half of the top positions. The Peruvian regulatory environment allowed municipal savings banks—Cajas Municipales—to capture small deposits well before many MFIs in other countries considered transformation into deposit-taking institutions. As the first to market in many regions of Peru, the Peruvian Cajas Municpales steadily increased their deposits over the years.

The gross amount of Voluntary Savings and the relationship of savings to the Gross Loan Portfolio explain just how well an institution captures deposits in the dollar terms and how successfully it intermediates deposits into loans, respectively. Caja Popular Mexicana is the clear scale leader with over 700 million dollars on deposit, averaging less than 1,000 dollars per account. As a group, the top 10 institutions account for more than 80% of the savings mobilized by the analyzed institutions.

The deposit to loan ratio also shows an interesting trend—institutions are beginning to capture more deposits than they are loaning out. Where the product is right, microsavings proves more popular than microlending.

Efficiency

This year's lists have some surprising new information on who leads Latin America in terms of efficiency, and just how efficient Latin American MFIs can become.

|sidebar| Beyond the Numbers Even the quick organic growth of this year's leaders will leave millions of potential clients underserved for years.

The Operating Expense / Average Gross Portfolio ratio shows how much the operation of an MFI costs per average dollar in the portfolio. Larger loans, however, can make an MFI appear more efficient when it is simply lending larger sums. Consequently, MFIs with Average Loan Balances above and below 500 dollars are presented separately to highlight the efficiency leaders at the small end of the loan spectrum.

Ecuadorian cooperative Jardín Azuayo and Nicaraguan NGO PRODESA define new boundaries for efficiency both regionally and globally. With Operating Expense/Average Gross Portfolio ratios in the single digits, these MFIs lead an increasingly efficient group and push back the global efficiency frontier. Jardín Azuayo can attribute much of its efficiency to its immensely productive staff. PRODESA, on the other hand, has one of the most productive asset allocations—its Gross Loan Portfolio accounts for 94% of its Total Assets.

The efficiency of the Women's World Banking institutions in Colombia, especially from Cali and Popayán is notable. WWB-Popayán would merit a spot in the lists of MFIs with balances over 500—an impressive achievement considering WWB-Popayán's Average Loan Balance of less than 350 dollars.

Asset Quality

Village banking MFIs retain the lead spots in this year's lists but with increased competition from individual lenders.

Portfolio at Risk over 30 days is a measure of the outstanding balance of loans past due. Considering that the Gross Loan Portfolio represents, on average, over 80% of Total Assets for the MFIs analyzed, maintaining low Portfolio at Risk is paramount in the health of the sector.

Other MFIs are not far behind in terms of portfolio quality. Almost half report Portfolio at Risk over 30 days of 2% or lower, the envy of the rest of the financial sector.

Profitability

The renowned industry leader, Compartamos, and a new addition, FINCA-Mexico, top the list of profitable MFIs. Yet they are only two of a number of Latin American MFIs with Adjusted Returns on Assets (AROA) in the double digits. While many NGOs take top AROA spots, the regulated MFIs register the highest Adjusted Returns on Equity (AROE). Indeed, a third of the participants register AROE of 20% or more.

Both AROA along with Adjusted Return on Equity (AROE) are adjusted for inflation, subsidized liabilities and insufficient provisioning for bad debt. The adjustments normally make an MFI's figures appear lower, but allow for comparisons across countries.

Although Compartamos is larger than most MFIs will ever become, many of the most profitable MFIs are small or medium size. Indeed, numerous profitability leaders are not regulated. As a group, profitability leaders come from all parts of Latin America. Over ten different countries are represented in the top 20, giving no country a clear majority.

Conclusion

As these lists expand, the landscape of microfinance supply becomes only clearer: Leading regional MFIs are more efficient and more profitable than before. Yet many have outgrown their original markets. Whether they expand into untapped markets or compete on each other's turf, the next few years will not be easy.

Political instability, inflation and client overindebtedness present other vulnerabilities for even the best MFIs. The results of 2005, available in next year's Microenterprise Americas, will demonstrate which MFIs are best responding to the current challenges.

Microfinance Information eXchange and Microenterprise Americas thank all of the participants for their active cooperation.

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Methodological Note: All data is presented in USD at 12/31/2004. The analysis is consistent with analytical processes of the MIX's MicroBanking Bulletin. All data must be of sufficient quality and detail to stand up to critical scrutiny. Financial data must be provided along with third-party documents verifying the accounts. All data are reclassified to a standard financial statement presentation and then adjusted using MicroBanking Bulletin methodology. Only loan and portfolio information from the first list remain unadjusted. Microfinance programs and institutions within larger entities must also provide reliable allocations of income statement items to be eligible for the subsidiary top 10 lists, as in the case of BanDesarrollo. Otherwise, MFIs that cannot be completely analyzed are only eligible for the lists based on volume and are listed with an asterisk (*).

Following the methodology of the MicroBanking Bulletin, the analysis uses a definition of microfinance based on the average size of a financial product relative to the average national product per person (GNP per capita), with a ceiling for average balances equivalent to $US3,000. This classification does not generally distinguish between the destination or use of the loan, due to the fungible nature of money and the impossibility of rigorously identifying microenterprise credit for all institutions.

Notable exceptions from this list have likely been excluded because they could not or would not provide or substantiate information within the allotted time frame.

For more information on the definitions and methods used, go to www.iadb.org/msm and www.mixmbb.org.