Credit risk constitutes a major threat for the global microfinance industry, which reflects the fast growing problem of over indebtedness among millions of microfinance customers, according to Microfinance Banana Skins 2011 survey.

This is the third survey of the global microfinance industry by the Centre for the Study of Financial Innovation, a non-profit think-tank, established in 1993 to look at future developments in the international financial field – particularly from the point of view of practitioners. Citi and Consultative Group to Assist the Poor funded the survey.

The survey was conducted in November and December 2010, and is based on 533 responses from 86 countries and multinational institutions. Its focus is on microfinance institutions (MFIs) with more than $5 million in assets, which are profitable and capable of commercial growth. These number about 600, according to estimates from Microfinance Information Exchange (MIX).

One of the key findings of the study was that credit risk constituted the biggest threat to the industry, which is marred by criticism in recent times. Although this result is unchanged from the previous survey in 2009, the reasons behind it have shifted sharply.

The earlier result largely explained the difficulties facing borrowers during the economic crisis, but the reasons have multiplied now. According to the survey, there is still economic stress, but also growing evidence of competitive pressures in the microfinance market, of poor credit management by MFIs, of greater cynicism among borrowers and of increasing interference in the credit process by political forces.

The credit risk is seen to reflect the fast growing problem of over indebtedness among millions of microfinance customers, who have accumulated larger debts than they will ever be able to repay, often as a result of pressure from business hungry MFIs.