How It Works
FAQ
This section lists all the questions that are frequently asked by internet users. Click on one of the subjects below to go directly to the answers.
What is an online micro-credit platform?
Why set up an account with Micro World?
How do I set up a Micro World account?
How do I lend money to a project?
How do I lend money to a project with a Micro World Pass?
How does MicroWorld select its MFI partners in the countries concerned?
What is the PlaNIS GIPSIE rating?
Does Micro World choose the micro-entrepreneurs and the projects?
Does my money really go to the borrower I selected?
What is the procedure for repayment of loans?
Why lend at 0% instead of simply donating funds?
Does the micro-entrepreneur pay interest?
What is an average loan for a micro entrepreneur?
What is microfinance?
Microfinance first started in Bangladesh at the start of the 1970s. It is an effective means of fighting poverty and offering basic financial services to poor populations who are excluded from traditional banking systems. Typical services offered include loans, savings accounts, money-transfers, and insurance. In just a few decades, micro-finance has become a tremendous economic tool for creating jobs and wealth, as well as a social and political ferment enabling the most poverty stricken to create activities which generate income. In 2006, over 80 million people in the world had access to micro-finance services, assisted by over 10 000 Microfinance Institutions (cooperatives, NGOs, micro-finance banks) or commercial banks. There are still an estimated 500 million people with projects pending funding. For further information, please see the section concerning PlaNet Finance.
What is microcredit?
The principle of microcredit is to offer small loans to entrepreneurs and artisans who do not have access to traditional bank loans. With these micro-loans, they are able to execute micro-projects, thus providing employment and assisting local economic development. Micro-credit is developing mainly in emerging countries. Micro-credit is one of the services offered by microfinance institutions. To learn more, please see the section on microcredit.
What is an online micro-credit platform?
Online peer-to-peer (P2P) micro-credit is a new development in microfinance. With P2P microfinance, internet users can select micro-entrepreneurs’ projects from all over the world and finance them directly by lending money via an internet platform. Internet users can then track the progress of their projects on line right up until total repayment has been made. On line micro-credit platforms provide new sources of financing to microfinance institutions, enabling them to support new projects, and also allow new types of lenders (internet users) to take concrete action in the struggle against poverty. MicroWorld is the new online micro-credit platform aimed at individuals, companies and foundations.
Why set up a MicroWorld account?
When you create an account with MicroWorld, you become a member of the MicroWorld community. This is an essential step before you can lend to micro-entrepreneurs and participate in events organised by the community. Once you have set up an account, you can follow your loans on line, create groups of lenders who share the same interests and associate your friends with your projects to encourage them to become lenders themselves and alert them to the issues you feel strongly about.
How do I set up a MicroWorld account?
Go to the Home page of the site and click on “Log In” at the top right of the page. Then, in the “Not a member yet?” section, fill in the required fields and click on “Create a new account”.
The information you will be asked to provide is a valid e-mail address, a user name or screen name, which will be visible on the site, and a password.
A confirmation e-mail will be sent confirming your registration with a link to click on to activate your account. Before you can make your first loan you are also required to complete your profile and provide the following information: name, first name, address, date of birth.
How do I lend money to a project?
Choosing a project
In the main menu at the top of the page, click on “Projects”. This will take you to the Projects page, where all the projects available on MicroWorld, pending funding or repayment, are displayed. They are classified by country, activity, status (pending funding or repayment) and beneficiary. You can use the filters on the left hand side of the page to select a specific project or click on one of the countries on the map in the centre of the page to go directly to all the projects available in that country. Next select your project and click on the “Add to my selection” button below the project description. You can select several projects by clicking on them one at a time. If you want to find out more about a project or a borrower, click on the borrower’s photo to go directly to their project page. There you will find information about the related country and its economic context, the borrower and the terms of the loan. On this page, you can also select the amount you wish to lend (minimum 20€), then click on the “Lend” button to add the loan to your basket.
Confirming your loans
To view the loans you have chosen, click on “My selection” in the top right hand corner of any page on the site. From here you can review your chosen projects and change the amounts you wish to lend by clicking on “Recalculate”. This will update the total amount you are financing.
Confirm your loans by clicking on “Finalize my investment”.
You can then either use the funds available in your MicroWorld account to finance these projects or transfer money into your account with a bank card or via a PayPal account. NB: Funding is accepted in multiples of 20€. You can therefore invest 20, 40, 60, 80 etc euros, with a minimum requirement of 20€.
How can I lend money to a project with a MicroWorld Pass?
If a member so wishes, he may suggest to another member or any other person, on condition that this person becomes a member first, that he participate, in part or in full, in the funding of a project of his choosing on the site. This is called sponsoring.
In this way, the Sponsor may make the sum of his choice available to the Sponsoree via his MICROWORLD account or send him a “MicroWorld Pass" so that he can invest in one or several projects in his name.
With a MicroWorld Pass a Sponsor can send a Sponsoree, by means of an alphanumeric code composed of 10 characters, multiples of 20€ totalling a maximum of 1000.
The Sponsoree then has 3 months from the date of issue to activate his MicroWorld Pass by entering the alphanumeric code on the “My Selection” page in order to finance one or several projects. After this date, the code will be automatically cancelled.
Once the MicroWorld Pass has been activated, the Sponsoree then has three (3) months to use the total sum made available and finance one or several projects. At the end of this period, the sum which has not been used by the Sponsoree will be debited from his account and re-credited to his Sponsor’s account.
NB: The sum made available by the Sponsor does not constitute a donation made by the Sponsor to the Sponsoree. Hence when the project expires, the sum made available by the Sponsor will be automatically re-credited to him, the Sponsoree having no rights of any kind to this sum.
How do I track my loans?
In the main menu at the top of the page, click on the “My MicroWorld” section to view the history of your loan portfolio and the balance remaining in your MicroWorld account. On this page, you can also view your personal profile, investment profile and keep in contact with the MicroWold community.
Once a project has been funded, the MicroWorld website allows you to follow its developments on a monthly basis. Our local partners are regularly in touch with the entrepreneurs during the loan period, and receive regular repayments from them. MicroWorld receives monthly updates on the repayment status of each loan, and displays this information on for lenders to see.
The green dots mean that the entrepreneur’s repayments are on-time and up-to-date for a given month. The most recent dot indicates the current status of the entrepreneur. Therefore, even in the case of repayment delays in previous months (marked with a red dot), a green dot in the latest month indicates that the entrepreneur is now up-to-date on their loan repayment.
How do I withdraw my money?
Click on “My MicroWorld” in the main menu and then click on “My Investments”. Depending on the balance in your account you may withdraw money from your MicroWorld account and transfer it to a PayPal account previously set up in your name. To do this, enter the e-mail address of your PayPal account, choose the amount you wish to be reimbursed (which must be less or equal to the balance available on your account) and click on “Register Repayment” to validate.
When the loans you have made reach the end of their term, MicroWorld credits your MyMicroWorld account with the amount repaid. You can lend these funds again, or request to withdraw part or all of your balance.
For security reasons, the transfer will arrive in your PayPal account within 15 days, to prevent MicroWorld from requiring your bank details. You simply need to specify the e-mail address associated with the PayPal account on which you wish to receive the funds. If you do not have a PayPal account, you can create one for free, and then withdraw the money from your PayPal account to your bank account.
NB: Funds used for financing a project may not be withdrawn before the loan maturity date of the project.
How does MicroWorld select its MFI partners in the countries concerned?
MicroWorld works with PlaNIS, a subsidiary of the PlaNet Finance Group which specialises in financing MFIs. All the MFIs we have pre-selected are rigorously examined to ensure they are financially sound and that the social character of their missions is appropriate. An investment and risk board is responsible for carrying out due diligence checks and an operational audit before validating or not a maximum sum of outstanding loans for the MFI. For more information, see “Selection of MFIs.
What is the PlaNIS GIPSIE rating?
PlaNIS is an investment subsidiary of PlaNet Finance. One of their tasks is to provide comprehensive reports for investment funds planning to invest in microfinance. They conduct audits on the MFIs, in which their partners wish to invest and perform comprehensive risk analyses to help investors to make their decisions.
They follow a strict method of assessment known as GIPSIE, analysing the following factors: Governance, Information System, Portfolio Risk Management, Sustainability, Internal and external controls and the political and economic Environment.
PlaNIS conducts an audit on each of our partners. We determine our financial and institutional assessment based on their report and the GIPSIE rating they have attributed to our partner.
A rating below 2.5 corresponds to a significant short term risk, a rating between 2.5 and 3.9 corresponds to a medium term risk and a rating above 4 means that the risk is minimal.
Does MicroWorld choose the micro-entrepreneurs and the projects?
The various micro-entrepreneurs and their projects are selected by our local investment partners, the Micro Finance Institutions (MFIs). These MFIs are all highly-reputed and firmly established with a wealth of experience in the field of micro-credit. They have the expertise and resources required to assess entrepreneurs’ potential projects and the adequate infrastructures to support, training and accompany micro-entrepreneurs. It is the MFIs, in agreement with MicroWorld, who select the projects to be published and offered on the site.
Does my money really go to the borrower I selected?
Unlike humanitarian donations, solidarity loans guarantee lenders that 100% of the sum loaned will be paid to the selected micro-entrepreneur. However, since the procedure for financing a project and transferring funds can be quite lengthy, it is possible in some cases that the MFI will advance financing for the project from its own funds, so that the micro-entrepreneur doesn’t have to wait. When the MFI receives the funds sent by the MicroWorld lenders, it is then in a position to free up the funds it had advanced and reinvest them in a new project. This refinancing technique is common practice in on line micro-credit. This procedure is in fact similar to making a purchase on a credit card – when you purchase goods, the credit card company advances the money to the retailer on the understanding that it will recuperate the amount from your account at the end of the month if you use the deferred debit system. Here, the MFI advances the loan to the borrower and the advance is then reimbursed to the MFI via the MicroWorld lenders.
What is the procedure for repayment?
The micro-entrepreneur repays his loan according to a precise schedule established with the MFI. When all the repayments have been completed, the MFI transfers the funds to MicroWorld who then makes the amount in question available to the lenders. The transfer of the funds from the MFI to MicroWorld is made in one single payment to limit the number of money transfers and to guarantee the MFI partner a minimum level of stability with regard to its outstanding liabilities.
Why lend at 0% instead of simply donating?
In order to fight against poverty and help local economies to develop, MicroWorld offers to finance entrepreneurs’ projects with interest free loans. This gesture of solidarity is very different from a donation because it is based on a concept of economic sustainability rather than emergency humanitarian aid.
Furthermore, 100% of the sums lent go to helping the micro-entrepreneurs and not to financing MicroWorld’s operating expenses. These sums are then paid back to the lender once the loan has been repaid.
However, for the moment, for economic reasons and legislation we cannot organise the payment of interest on loans. We are looking into this subject but we believe that bringing support by financing projects with interest free loans is a unique opportunity today.
Does the micro-entrepreneur pay interest?
Yes, micro-entrepreneurs pay interest on the sums borrowed from MFIs. One of the principal objectives of micro-financing is to create a model of sustainable development. In this way, the assistance provided to populations traditionally excluded from financial services can take place in a context where all the participants in the chain benefit in some way and can cover their costs and envisage developing their activity on a long term basis.
The MFIs therefore bear the significant operating and refinancing costs which have to be covered, resulting in interest rates which are often equivalent to 3% per month rather than per year! This may seem very high when compared to the rates charged by banks in developed countries, but this comparison is misleading because the economic context is very different, even if, as in all sectors, there are cases of abuse which must be tackled. To find out more, go to the chapter devoted this subject: Microcredit interest rates. There is also a special dossier on.
What is an average loan for a micro entrepreneur?
The amount of a microfinance loan can vary depending on the region. In India, for example, an average loan would be around 120 euros, whereas in Eastern Europe it would be more like 1,800 euros (Source: MixMarket 2009).
Are there any risks involved?
As for any loan, there is a risk of non repayment of which the lender must be aware when deciding on the amount to loan. However, with MicroWorld, in the case of non repayment by the micro-entrepreneur, the MFI partner takes the place of the borrower for the reimbursement of the sums in question. That is why the contract validated when the loan is made is drawn up between the lender and the MFI. There then remains the risk of bankruptcy on the part of the MFI. In order to limit this risk, MicroWorld has created meticulous procedures and established strict criteria for entering into a relationship with an MFI and relies on the expertise of PlaNet Finance’s investment specialist, PlaNIS.
With PLaNIS, detailed financial and operational audits are conducted on all MFI partners before they are accepted.
We then regularly monitor the financial soundness of our partners to anticipate risk. However, is it important to note that our MFI partners are located in countries where the economic and political environment is often fragile or where the risks may be significant. To read more on the subject, see “Risk Management”.
How does MicroWorld cover its operating costs?
MicroWorld receives a commission of around 5% from its microfinance institution (MFI) partners in exchange for publishing its projects on the site. This cost for the MFI remains lower than the normal cost of financing, which means it can access capital at an improved rate.
MicroWorld is also remunerated by its corporate partners for the organisation of space provided and for visibility on the site.
Finally, MicroWorld is also supported by the private investors who have made a commitment to financing its activity until it reaches breakeven.
Why isn’t MicroWorld an NGO? What is a social business?
A social business works toward creating social advantages rather than maximazing profits and unlike, an NGO, it is a financially, viable business. Shareholders accept that they will not be remunerated in the traditional manner in order to increase the range and impact of the social business' actions.
By developing a genuine economic model, two worlds which would traditionally be in opposition are brought together:
- associations and NGOs which are financed by grants and donations
- business structures which enable a sustainable economic model to develop without making co-development their core objective.
By adopting this philosophy, we are able to envisage developing our activity without having to deduct a part of the loans made via the site to finance it. Furthermore, MicroWorld investors have chosen to go even further by making PlaNet Finance the major economic beneficiary of the project.
At MicroWorld we strive to be as transparent as possible about the way we operate. This, we believe, is the least we can do in return for the generous 0% loans from our members. This section will describe our processes surrounding the selection of microfinance institutions, our due diligence and decision-making, and our ongoing reviews. It will also describe the loan process from start to finish. We hope you find it interesting.
Microfinance Institution (MFI) Selection
Our partner microfinance institutions (MFIs) are an integral part of our operations. They are responsible for vetting potential borrowers, for posting loans onto the MicroWorld website, for disbursing the money, and for collecting repayments. For this reason, we take the selection of MFIs very seriously.
Quality, not quantity
Rather than partner with a large number of MFIs, our aim is to form long-term relationships with only a select few of the best MFIs. We have limited ourselves to a maximum of one MFI partner per country, and we choose partners that are solid and successful MFIs with a strong social mission. We hope that our relationship can grow with both our organisations, to the mutual benefit of both parties.
There are several stages to the MFI selection process:
1. MFI pre-selection
Before the selection process can begin, it is necessary to reduce the 10,000 or so MFIs in existence to a manageable number. This is done with the assistance of PlaNIS (PlaNet Finance’s specialised microfinance funding arm), and is based on publicly available data, using a two-part scoring method:
a. Country scoring – 8 criteria including risk of war, currency exchange barriers, corruption, poverty, and inequality. The sources of this data include the World Bank, Transparency International, and The Economist Microscope Index.
b. MFI scoring – 5 criteria: social performance, transparency, financial performance, qualitative factors, and country score.
Each of these criteria is weighted, with the greatest weight being given to the social performance of MFIs. MFIs can also be excluded for a number of reasons, such as size (too large or small), or high-risk indicators. The final result is list of the top 100 potential MicroWorld partners.
2. PlaNIS refined list
From the top 100 MFIs, PlaNIS extracts a smaller number of recommended MFIs based on its knowledge, experience, and contacts. For each new partnership, PlaNIS must propose 5 suitable MFIs from which the potential partner will be chosen.
3. Investment and Risk Committee
The investment and risk committeeselects potential partners from the shortlist provided by PlaNIS. At this initial stage, they are required to give the go-ahead before due diligence can be carried out.
4. Due Diligence
The objective of the due diligence process is to evaluate the risks existing in an MFI in order to make an informed investment proposal. The process, therefore, is mandatory for each MFI with which MicroWorld considers signing a partnership agreement. Due diligence is one of the key areas where MicroWorld is able to leverage the resources and expertise of PlaNet Finance, and in this case the particular analysis experience of PlaNIS, who conduct on-site due diligence on the MFI once given approval by the investment committee.
The process is as follows:
a. Preparation – 2 to 4 weeks before the on-site due diligence, PlaNIS requests data from the MFI, which it then analyses to identify potential high-risk areas.
b. On-site due diligence – PlaNIS spends several days at the MFI conducting interviews and investigating all pre-identified topics plus any additional issues identified by the investment and risk committee. It uses a set book of procedures to analyse risk areas.
c. Investment memorandum – Following the on-site due diligence, PlaNIS produce an investment memorandum that summarises their findings, putting them in context, and gives details of the many different areas covered by their analysis. These include the history of the MFI, regulatory context, competition, governance and management, financial risk, audit quality, portfolio quality, and procedure risk. PlaNIS also provides recommendations on funding limits and other technical aspects of the partnership.
5. Operational Audit
During the on-site due diligence, members of MicroWorld’s operations team also visit the MFI with the purpose of conducting an operational audit. This involves analysis and evaluation of the operational processes of the MFI, with a view to determining the optimum method of integrating MicroWorld’s processes. Many variables are taken into consideration, such as the most suitable branches to work with, the best products for the MicroWorld website, the volume of loans to publish each month, and procedures for data collection.
6. Investment Decision
The Investment and Risk Committee meet to review the outcomes of the due diligence exercise and the operational audit. Based on the documents and presentations, they decide whether to approve or reject an MFI, and if approved, the funding conditions for the MFI.
7. Investment Policy Monitoring
The Investment and Risk Committee revisit the investment policy, if not more regularly, and sometimes at random, to confirm that the judgements are still sound and applicable. MicroWorld also re-confirms that all of its conditions are still applicable.
MFI Integration
Once an MFI has been selected and contracts agreed between MicroWorld and the MFI, the operations department are responsible for making it possible for the MFI to post loans on the website. A member of the operations department visits the MFI for an extended period in order to conduct detailed training of the MFI team. Back at MicroWorld headquarters, the operations team begin setting up the MFI on the internal MicroWorld systems, ready to post their loans.
MicroWorld believes in minimising its impact on the MFIs, therefore it tries to be as flexible as possible when implementing its processes at the MFI.
The MicroWorld Correspondent
MicroWorld ensures that its procedures are performed to the highest standard by asking each MFI to employ a local agent, otherwise known as a MicroWorld correspondent, who will be responsible for all MicroWorld loan postings for that MFI. MicroWorld covers the cost of the local agent’s salary, the cost of his/her computer, and mobile camera-phones for the loan officers, in order to reduce the cost burden on the MFI.
The MicroWorld correspondent uses their local knowledge and experience to conduct any necessary training of loan officers, to act as an intermediary between the MFI and MicroWorld, to post engaging loans on the website, and to perform regular audit checks on behalf of MicroWorld. They also write articles about their country and the MFI, which can give MicroWorld members a deep and unique insight into microfinance in the field. These articles can be found in the From The Field section of the website.
Mariela - the MicroWorld Correspondent for Fundesurco in Peru
The Loan Process
Once an MFI has been selected and integrated with MicroWorld, it is ready to start posting loans on the website. To minimise impact on the MFI, MicroWorld is committed to remaining flexible and able to adapt its processes to suit the MFI. For this reason, actual processes may vary from MFI to MFI.
1. Loan application
A prospective borrower applies for a loan with one of our partner MFIs. The person may already be a client of the MFI who is applying for a new loan, or may be applying for their first loan.
2. Application evaluation
A loan officer, employed by the MFI, visits the client to assess their application. This will involve an assessment of the client’s wealth, character, business plan, and credit history. The loan officer explains to the client about MicroWorld and asks if they would like to be a MicroWorld borrower. If they agree, in addition to normal requirements, the loan officer will ask some additional questions for the website, and take a photograph of the client using their mobile phone.
3. Loan approval
Back at the branch, the loan officer submits the loan application to the branch manager. Small loans can be approved by another loan officer, or sometimes the branch manager. Larger loans must be approved by head office. At the same time as submitting the application, the loan officer uploads the client photo, and a photo of their application form, to the MicroWorld system.
4. Disbursal and Loan Posting on the MicroWorld Website
If the loan is approved, the loan is disbursed to the client within 48 hours. The process is fast to enable to MFI to remain competitive amongst rival MFIs. Once the loan has been approved, the MicroWorld correspondent uses the information sent by the loan officer to create a loan profile in the MicroWorld system. This can then be published on the website, ready to be funded.
5. Funding
Once on the loan is live on the website, it can be funded by MicroWorld members. Although the loan has been pre-disbursed, a contractual agreement is entered between the lender and the MFI that their money will be used to backfill the account of the borrower. The loan will remain on the site for a limited period which will vary between MFIs. If a loan reaches expiry before it has been fully funded, MicroWorld will send the amount that has been raised to the MFI.
6. Fund transfer
To reduce transaction costs, payments between the MFI and MicroWorld take place monthly on a net billing system, meaning that the net of loans less loan repayments will be transferred between the two parties.
7. Repayment
The loan officer visits the client on a regular basis, weekly or monthly, to collect repayments. Once the loan is completely repaid, the full amount will be transferred back to MicroWorld and will show in the lenders' MicroWorld accounts.
The Investment And Risk Committee
The primary responsiblity of the Investment And Risk Committee is to choose MFI partners for MicroWorld, and to decide on a maximum outstanding balance for each MFI partner. The committee also approves MicroWorld’s risk and audit policies.
The committee consists of six members:
• Alexandre Allard (President of Allard Group, representing shareholders)
• Emmanuelle Javoy (General Director of Planet Rating, an MFI rating agency)
• Minh-Huy Lai(Associate Director of Degree Programs of HEC Exeducative Education and former General Manager of SPBD, a Samoa-based MFI)
• David Langlois, Vice-President of Committee (General Director of MicroWorld)
• Anne-Sophie Perrachon, President of Committee (Operations and Risk Director of MicroWorld)
• Arnaud Ventura (Vice-President of PlaNet Finance Group)
Awareness of the risks that exist within the microcredit industry is an important first step towards planning for and mitigating them. This section will outline the three main risks that face MicroWorld lenders: entrepreneur risk, microfinance institution risk, and country risk; and discuss what steps MicroWorld have taken to mitigate the risk, and what MicroWorld lenders can do to reduce their exposure further.
Risk of Entrepreneur Default
Entrepreneurs may default on their loans for a number of reasons, ranging from personal or business problems, to political or environmental reasons. Most microfinance borrowers are unable to provide collateral for their loans, removing one of the main tools used by traditional financial institutions for mitigating credit risk.
Our partner microfinance institutions (MFIs) are experienced in providing credit to their communities, and conduct thorough assessments before approving any loan. These assessments will generally look at the prospective client’s character, business, their level of poverty, and their environment, as well as utilising the local community knowledge of the loan officers.
Often MFIs prefer to structure their loans in the form of solidarity groups; sometimes simply for moral support, and other times a more formal group that agrees to guarantee the group payments in case one of the members defaults.
In general, the default rate in microfinance has historically been low, but past performance is not a reliable predictor of future trends. The global recession has undoubtedly affected micro-entrepreneurs to some extent, making it even more important that MFIs maintain rigorous processes for credit assessments.
What does it mean for MicroWorld members?
MicroWorld members are protected from entrepreneur default. We believe that it would be unfair to ask lenders on our website to take on the risk of an entrepreneur defaulting without access to information that would allow lenders to assess the risk fully.
Therefore we have an agreement with our partner MFIs, who have the experience and opportunity to do credit risk assessments on each client, that they will cover the cost of any borrower defaults that may occur.
Microfinance Institution Risk
MicroWorld partners with microfinance institutions (MFIs) in the countries we operate in. These partner organisations are responsible for assessing loan applications, disbursing loans to borrowers, posting loans on the MicroWorld website, and collecting repayments. They have the experience, expertise, and local knowledge necessary to perform this role to the highest standards.
However, as with all businesses, MFIs are exposed to many different risks, some of which could affect their ability to pay their liabilities to funders such as MicroWorld lenders. These include:
· Bankruptcy – this could be caused by poor operational control, poor risk management, or external issues such as changes to the political or environmental context, or fluctuations in the financial markets.
· Fraud – as with all businesses involving large amounts of money, fraud is a constant risk.
· Portfolio risk – if a large number of borrowers default, for example as a result of a drought, the MFI may find itself unable to pay its debt obligations.
What does it mean for MicroWorld members?
MicroWorld takes great care in its selection of MFIs, and is dedicated to partnering only with strong and well-established institutions (for more information about how we choose our partners, see *How We Operate – insert link*). We have the following risk management processes in place to reduce the risk of MFI defaults:
· Each MFI is subject to a thorough due diligence investigation, operational audit, and investment committee before it is accepted. We only consider MFIs that have been recommended by PlaNIS, PlaNet Finance’s investment arm.
· MFIs are reviewed on an ongoing basis to ensure that they remain within our criteria. Any relevant changes to their situation are assessed by MicroWorld.
· The MicroWorld operations department and MicroWorld local correspondent carry out regular checks and reconciliations to combat fraud and system errors.
Despite these measures, it is impossible to eliminate all risk. The possibility of one of our partner MFIs being unable to pay MicroWorld lenders back exists. Therefore we recommend that our members spread their loans across different MFIs and regions to reduce their risk of losing their loan portfolio.
Country Risk
As well as being aware of the entrepreneur and MFI risks, it is also important to understand the macro risks, which can affect an entire country, or in the case of the recent financial crisis, most of the world. Microfinance is a dynamic industry with interconnections to many other industries, as well as environmental and political exposures. The nature of the industry means it is often conducted in countries with histories of instability of some kind. Potential risks include:
· Political risk – the government of the country may change laws or regulations related to microfinance, or decide to stop funds leaving the country. This has happened on several occasions in the past.
· Economic risk – high inflation or the devaluation of the local currency may cause the MFI difficulty in meeting their financial obligations if they are from foreign sources.
· Natural disasters – Events such as the South Asian Tsunami in 2005 or the floods in Pakistan in 2010 can have enormous effects on the microfinance industry, as they often affect the poorest people the worst.
What does it mean for MicroWorld members?
MicroWorld and PlaNIS evaluate country risk as part of their due diligence process, and will not accept MFIs from countries where the risk is deemed to be too high. The macro situation is monitored on a regular basis for signs of risk increases. Our partner MFIs have agreed to take on the foreign currency risk, as they are experienced in managing this.
In general, however, country risk is one of the least controllable risks. MicroWorld lenders are advised to diversify their loan portfolio across different countries and regions to reduce their exposure to any single country or region.
