Xavier Reille

All Eyes on Asset Quality: Microfinance Global Valuation Survey 2010

The past year held many challenges for microfinance: not since the Asian crisis of the late 1990s has the sector faced a more difficult economic environment. Yet despite these conditions, most micro-finance institutions (MFIs) proved to be up to the challenge. Beginning in January 2009, MFI portfolio delinquency levels began to deteriorate rapidly, with loans past due over 30 days (portfolio at risk [PAR30]) jumping from a median of 2.2 percent to 4.7 percent during the first five months of 2009, while profitability dropped from a median return on equity (ROE) of nearly 18 percent at year-end 2008 to 6 percent by May 2009. However, since June 2009 delinquency has moderated and profitability levels have come back to stabilize at 4 percent for PAR30 and 10 percent for ROE, respectively. Most MFIs continue to maintain solid reserve and capitalization levels, with equity ratios unchanged from the 18-20 percent range established over the past two years. This occasional paper aims to shed new light on equity valuation trends in microfinance, which must necessarily begin with a detailed examination of how MFIs have coped during the recent economic crisis. Accordingly, the first part of the paper is devoted to MFI asset quality and its impact on microfinance profitability. Next, the authors examine trends in valuation benchmarks for microfinance private equity transactions and analyze the key drivers behind these valuations. This section also delves into the recent growth in transaction volume and valuation multiples in India, which had a particularly active market in 2009. Finally, the authors seek to place the microfinance equity market within the context of the broader equity market, using comparisons with publicly listed low-income financial Institutions (LIFIs) in developing countries.