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How to assess the real strength of a microfinance institution?

Posted on | August 22, 2009 | No Comments

David MacDougall, Director of Risk Management, BlueOrchard

David MacDougall, Director of Risk Management, BlueOrchard

Microfinance Focus, Aug. 22, 2009: There have been startling losses in microfinance institutions that have wandered too far from their original microfinance mission due to fierce competition or of profit-minded management, writes David MacDougall, Director of Risk Management at Swiss microfinance fund manager BlueOrchard.

Servicing traditional microfinance clients is expensive because loan sizes are small and the number of people required to service clients. But it was caried out with a goal and motivation. When competition deters the MFI from charging higher interest rates and absorb losses more frequently, it leads to higher loses, explained MacDougall in an article written for the August issue of Microfinance Focus magazine.

“I’ll admit that I have my own spreadsheet full of ratios; however, I principally use them to gauge trends. Often the levels they indicate have limited meaning, and analysts must understand when they do and when they don’t. A key consideration is whether the institution is mission-driven, rather than profit-driven. Many MFIs are non-profits or at least not profit-maximizers. They often charge just enough to cover their expenses and build the portfolio,” he wrote.

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