RESEARCH REPORT
TAKING THE GOOD FROM THE BAD IN MICROFINANCE:
LESSONS LEARNED FROM FAILED EXPERIENCES IN LATIN AMERICA
Executive Summary
Successful microfinance institutions (MFIs) have been widely studied to understand the reasons that drove them into the market and to extract good practices that are useful for the rest of the industry. However, the institutions that could be considered failed experiences have received very little attention. A detailed analysis of these experiences constitutes an invaluable source of lessons to continue expanding the breadth of practical knowledge in microfinance.
Based on interviews with experts and their opinion about what could be considered a failed experience, six types of common causes of failure in MFIs have been identified: (i) methodological flaws in credit technology, (ii) systematic fraud, (iii) uncontrolled growth, (iv) loss of focus, (v) design flaws in the conception of the institution itself, and (vi) a suffocating level of government intervention. Many of the institutions that were analyzed faced more than one cause of failure simultaneously, yet each case sought to identify the main cause that led to a poor situation.
Based on a deep analysis of 10 cases that exemplify each one of these causes, valuable and varied lessons have been extracted. The wide range of lessons includes, but is not limited to, the following:
• 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
• The role of investors and regulation is critical
• Bad governance and regulation, and exposure to political risks strongly affect the industry
The most important lesson from this study, as obvious as it may seem, is the need to understand that microfinance continues to be a financial business. In short, crises do not cause failures, but rather 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.
