What Does the Data Tell Us?
We have looked at the correlation between loan size and portfolio yield on several occasions and noticed that the shape of the curve closely follows that of loan size and operating expenses. For several markets, these country graphs suggest that a number of MFIs are making yields above the market average in a given loan-size category. Are these MFIs also more profitable than MFIs with yields closer to the market curve? We would expect operating expenses to be higher in rural areas. Do MFIs serving rural areas have higher yields than those operating in urban areas so as to cover these higher cost? Are they less profitable in terms of ROE? And are MFIs less profitable in those markets with relatively higher operating expenses as compared to other markets? Let’s look at three relatively large microfinance sectors in different regions: Russia, Mexico and India.
This graph shows the relationship between loan size, real portfolio yield and ROE for 34 sustainable MFIs in Russia reporting to the MIX. Here we are looking at those MFIs with an average loan balance of less than US$ 6,000. The curve represents the market average for the Russian market and shows how interest rates respond to changes in loan sizes. We see pretty high ROEs – as represented by the size of the bubbles – in the Russian market, even after excluding outliners with even larger ROEs from the analysis. Those MFIs with yields above the market average also appear to be very profitable in terms of ROE. As for MFIs primarily operating in rural areas, the analysis suggests that there are some with yields above the market average, especially for average loan balances smaller than US$ 1,000. However we also see a number of MFIs focusing on rural areas that are below the market average in terms of yield. We find both MFIs primarily serving rural and urban areas with a range of different yields, while the graph suggests that the most profitable MFIs are primarily operating in urban areas. We can also observe that those MFIs in Russia reporting to the MIX appear to have less of a gender focus than MFIs in Mexico and India (as we’ll see below). None of the MFIs we see in the analysis for Russia has an 80% or above share of female clients. I therefore highlighted those MFIs whose women borrowers make up more than 70% of clients.
The next graph is based on data for 25 sustainable MFIs in Mexico and the market curve is shaped by all these institutions. In the graph, however, we are only looking at the 19 sustainable MFIs with an average loan balance of less than $US 400, as I zoomed in to take a closer look at these data points. Looking at the Mexican market, we observe relatively high profitability in terms of ROE. Some of these profitable MFIs exhibit yields above the market average. Interestingly, we also see some relatively profitable MFIs with yields below the market average. Note that the y-axis shows a broader range of yields than in the graph for Russia and India. Yields, in general, are higher in Mexico and we also observe a higher curve for the market average. We see that most MFIs in the Mexican market have relatively small average loan sizes, as compared to other markets, such as Russia. Several Mexican MFIs reporting to the MIX do not indicate whether they are focusing on urban or rural areas, so in this analysis I distinguished between regulated and unregulated institutions. We see that the regulated MFIs are located above the market average curve (yield), while unregulated MFIs are both above, below and on the market curve. Among the most profitable MFIs (ROE) are both regulated and unregulated institutions as well as both MFIs with a strong gender-focus and those with a less than 80% share of women clients.
Similarly, the graph above shows 45 sustainable MFIs in India with an average loan balance not exceeding $US 170. We see that most MFIs in India have even smaller average loan balances, mostly ranging from US$ 50 to US$ 150. The graph shows high ROEs for both MFIs making yields very close to or even below the market average, as well as for those with yields slightly above the market curve. We can also observe that the range of yields is relatively narrow in the Indian market, as compared to the Russian and Mexican market. In terms of yield, most MFIs are very close to the market curve. At the same time, the analysis suggests a relatively broad range of ROEs. Interestingly, those MFIs primarily serving rural areas exhibit higher ROEs than those with a larger number of borrowers in urban areas. However, the most profitable MFIs in terms of ROE have yields that are pretty close to the market average, which suggests their profitability does not result from above market prices. MFIs in India also appear to have a strong gender-focus. For almost all MFIs reporting to the MIX with an average loan balance below $US 170, female clients make up over 80% of all borrowers.
How about operating expenses? And how is the impact of consumer protection policies, particularly pricing transparency, reflected in these analyses? Next week we’ll continue interpreting these graphs and we’ll be looking at the impact of operating expenses and consumer protection standards. Stay tuned.