The perils of uncontrolled growth

by Xavier Reille : Monday, January 11, 2010

There’s lots of talk about the delinquency crisis in Nicaragua, Bosnia, and Morocco these days. But what is really happening in these countries? What is the origin of these crises and what are the lessons learned for the industry? I’ve been looking at the situation in Morocco.

Microcredit in Morocco has enjoyed one of the most extraordinary growths seen in the microfinance industry. In just four years, from 2003 to 2007, MFI loan portfolio multiplied 11 times and client outreach by four, according to MIX. This exuberant growth was driven by four leading MFIs. These institutions scored remarkably well on all microfinance performance metrics, including scale, depth of outreach, asset quality, and profitability. These impressive results did not go unnoticed, and Al-Amana and Zakoura were awarded several international prizes.

In 2007 some signs of stress—notably loan delinquency and a significant increase in the number of multiple loans clients took on—started to emerge.  A sharp rise in nonperforming loans took place in 2008 and affected all MFIs. PAR 30 increased significantly to 5 percent in December 2008 and reached an alarming level of 10 percent in June 2009. Write-offs also increased dramatically with a negative impact on MFI profitability and solvency. In May 2009, Zakoura, one of the Moroccan flagship institutions, reported a PAR 30 of over 30 percent and decided to merge with another MFI, Fondation des Banques Populaires

The causes of the delinquency crisis are well known and can be summarized in two words: unsustainable growth. The Morocco microfinance sector wasn’t a casualty of the global financial crisis: this was primarily a crisis of the MFIs themselves. Unprecedented growth had overstretched MFI capacity, translating into lenient credit policies, obsolete management information systems (MIS), lack of internal controls, and substandard governance. Multiple lending to the same clients was also an aggravating factor.

Moroccan MFIs are putting in place aggressive turn-around plans, and a recovery is expected for 2010. A new and more mature microfinance sector is emerging with a well functioning credit bureau and improved risk management systems.

But what’s at the root of these problems? Why are MFIs in Morocco and elsewhere being pushed to grow beyond their institutional capacity? Are the funders or the MFI managers to blame? Have we become obsessed with outreach, at the cost of quality and long term sustainability?

Comments: Comments and trackbacks are open.

19 Comments RSS 2.0

  1. January 13th, 2010 at 12:54 pm, Salahuddin A Khan ()

    The crisi in Morocco is obvious. Any organization and specially lending institutions must fall prey to this situation whenevr they try to grow too fast. I believe not only the management, but all patrons/regulating body/watchdogs should also blamed. Besides, the bodies who declared the awards for these institutions should also be cautioned as instead of warning, they were encouraged to go cragy without looking back to capacity building. We also need to look at the measures of performance indicators so that in future such bad incidents do not take place so easily.

  • January 14th, 2010 at 8:10 pm, Sabelo Mamba ()

    The Morocco situation certainly demands that:

    1. The microfinance practitioners watchdogs must get their heads together and device sets of scientific monitoring tools for MFIs. Such tools must be able to be universally cuscaded to MFIs world over. The argument that we can’t have a “one size fit all” tools is irelevant in this regard. We need responsible and robust business minded microfinance practitioner’s in 2010 and beyond. We are tired of the grant and donation mentality dominating microfinance in the world.

    2. Extensive research work has got to be done by many microfinance research organization around the cornerstones or metrcs of microfinance worldover. MFIs must have a scientific understanding of the need to balance OUTREACH, LOAN QUALITY with PROFITABILITY, EFFICIENCY and SUSTAINABILITY. This thing of racing for outreach numbers and the cooked loan quality measurements must stop so that financial sustainability could superceed outreach impact, loan quality. One needs to also understand that these concepts are all interlinked.

  • January 15th, 2010 at 11:27 am, Reille ()

    Thanks Salahuddin, You are making two important points. I agree that the MIX and the European platform awards have given a sense of comfort to Moroccan MFIs that have fuelled the hyper growth . At the same time, it’s fair to say that it was difficult to detect Zakoura problems through its performance metrics reported to the MIX, its financial audit reports and even its rating reports.
    That leads me to your second point. Microfinance performance metrics failed to detect early on the looming delinquency crisis in Morocco and to provide funders and MFI managers with early warning signals. So the question is : Do we have the right metrics to assess risks and financial performance? We should certainly pay more attention to market risks such as the effect of competition, and multiple lending. And we should also have a sharper analysis on credit risk with more reliable information on portfolio quality and quality of lending methodology.

  • January 17th, 2010 at 4:23 pm, Charles Ruys ()

    It seems to be a little stupid to include award winning into the responsibility for too much growth in a sector in a country. The award was a consequence and not a reason.
    May be more important to understand that every country will have its own growth path towards mature MFI development. I think a proactive installation of a credit bureau by authorities is crucial to keep development within acceptable lines under all circumstances and cultures. I think a more technical theoritical example guideline from CGAP may help in this, but I know it is always a sensative issue.

  • January 18th, 2010 at 6:10 am, V.Rengarajan ()

    Three points I wish to share on the above global phenomenon in MF industry
    1. The root cause of the problem is that under Micro finance banner mere delivery of micro credit alone without capacity building at client level and other MF components viz., micro insurance and micro savings . We are leaning lessons and producing literature but hardly take remedial action. The funder/donor need to look at this point seriously while funding to MFI.
    2. The activities such as multiple lending to same clients, awarding and incentives system to MFI need to be eschewed
    3 The sustainability need to be sustained at three level. a) benefit sustainability b)institutional sustainability and c) financial sustainability.( more detail refer to my response to Richard on his posting ‘how sustainable is micro finance really? “in this blog) All the above three level sustainability are functionally interlinked .The emphasis is on sustainable benefit at clients level is to be ensured first for prompt income generation and repayment as it would avoid NPA and facilitate other two sustainability
    .

  • January 19th, 2010 at 11:12 am, Normand Arsenault ()

    To endeavour to scale-up microfinance institutions without adequate and appropriate information systems is an invitation to disaster. Is it possible that the huge investments in MFIs’ information technology in Morocco have failed in delivering a business capability?

    Success of MIS projects relies on improving how work gets done. Unfortunately, in many MIS projects, the focus is mainly on implementing the technology. Business processes, people and information management are neglected and not addressed properly. In the end, the new technology is installed, the IT department cheers, but employees and managers continue to work manually struggling with paper and Excel based systems. MFIs end-up with systems that 1) do not fit into their operations, 2) have practically little usefulness for management and 3) represent a high risk if volume of business operations is increased significantly.

    Perhaps the start of the solution would lie in recognizing that an MIS involves more than just technology and software, and requires more than just the contribution of IT experts. Activities dealing with business processes, human capital, and information management should represent an important part of the total effort in a MIS project. The use of business analysts could simplify a lot the work of IT experts and facilitate their communications with MFIs’ management. How can we influence MIS projects sponsors to revise their strategy to include the work of consultants in business processes, business requirements management and internal control systems?

    Finally, is it possible that to endeavour to scale-up microfinance organizations with mobile banking, without adequate core MIS systems is another recipe for disaster? Are the fund providers aware of the risks involved? However, the good news is that it is never too late to improve an MIS system in trouble. MIS systems sponsors only need to contract business analysts to carry out appropriate needs assessments that include descriptions of information and work flow and definitions of business requirements.

  • January 21st, 2010 at 3:05 pm, The perils of uncontrolled growth | Headlines Today ()

    [...] original here: The perils of uncontrolled growth Share and [...]

  • January 22nd, 2010 at 6:22 pm, Duston Richards ()

    Rapid loan portfolio growth , whether it be done by greed or mismanagement, always leads to catastrophy, whether it be domestic banking in a developed country or microfinance in an underdeveloped economy. I believe: 1) look at the motives of the people driving the unsustainable growth, and 2) examine the lack of true “risk management” to find the answers as to why this happens over and over and over again. Risk Management is not something you buy, or label, or write into a supposed “policy”. It is a Business Culture; starts at the top, and is understood and practiced by all who have ownership in the process. Until MFI’s understand credit risk as it truly is, and not some glossy front page article somewhere on a website, they are doomed to repeat the same pattern as the clowns on Wall Street….the sad part is though, the people they are hurting cannot bear the burden. Regulators, investors and senior managers should understand, live by, and believe in prudent growth for the benefit of the client, not for the short term gain of fame or the fancy financial statement.

  • January 23rd, 2010 at 8:37 pm, L.Veeraraghavan ()

    1. There is a huge supply gap in credit for poor between formal regulated credit institutions operating on the lower band of interest rates and traditional informal native money lenders operating at the higher bands of interest rate structure and the emerging micro finance sector tries to fill this gap. Structural adjustments in all the three groups are bound to take place in terms of products, delivery mechanisms and client patterns. when any player from any of the three groups acts over aggressively to enter into the domains of other groups with rapid changes in key parameters of outreach, product pricing, delivery mechanisms and sustainability ratios would necessarily have to face the systemic shocks.

    2. The norms applied to formal credit institutions are applied to Micro finance sector which will put undue pressure on MFIs to aim for rapid growth rates in outreach and portfolio at the cost of quality. One parameter the 2%PAR is unsustainable. Formal credit institutions are operating with low exposure to high risk loans like nonproductive short term consumption loans. Most of the loans of Money lenders operating on the other end are mostly high risk nonproductive long term and short term consumption loans. A huge expectation is on the Micro finance sector from many quarters – Donors, Development Institutions, Investors and Government to handle many issues simultaneously, to meet the expectations of the huge credit starved poor, monetizing their suboptimal livelihood activities and to meet the stringent financial norms of investors. The other two players do not have all the three responsibilities. Tolerance to PAR rate of upto 5% will allow the sector to grow in a stable environment. The higher par rate is the price which the country should bargain for to reach credit to the unreached. Both financial and non-financial benefits in the long term is worthy of this price. If the private investors are unwilling the Governments should take more active role.

  • January 24th, 2010 at 12:24 pm, The perils of uncontrolled growth | Drakz News Station ()

    [...] more: The perils of uncontrolled growth Share and [...]

  • January 25th, 2010 at 7:41 am, Normand Arsenault ()

    Working on improving internal controls only will not be enough. The problem is more about inadequate and inappropriate information systems making management control very difficult.

  • January 25th, 2010 at 3:16 pm, xavier Reille ()

    I would like to go back to one of Normand’s excellent questions. Why Donors (USAID, GTZ, and now MCC) huge investments in Moroccan MFI MIS did not pay off? Most small and medium MFIs in Morocco still have weak MIS and the large ones such as Alamana or FBP have paid for their IT infrastructure with their own nickels. Donors were right to identify MIS as a problem but projects implementation failed. Do we know why? Was the projects badly designed? What can we learn from these experiences?

  • January 31st, 2010 at 6:30 am, Pierre Pezziardi ()

    With the few information I have, I confirm Normand’s analysis : Donors are the only ones /wanting/ the MIS in this kind of story. It is pushed by these external forces, not pulled and expected by the staff as a productivity tool for their day to day operations. So in the end the “pushed MIS”, after a “successful implementation project”, ends up in a corner as a reporting tool for Donors, while Excel and ad hoc tools remain the standards in the field.
    We should definitely understand that MIS are more about /change management/ than about technology.
    Last, the best known solution about change, is to go incremental, with continuous improvement methods rather than silver bullet approaches that we see in all donors-backed RFPs (the MIS should …. solve /all/ our problems). Hope it helps.

  • February 2nd, 2010 at 10:13 am, Lauren Braniff ()

    Picking up on Normand and Xavier’s points about MIS…I’m not familiar with the particular cases in Morocco, but I would guess that there are a few factors to explain why large IT investments haven’t paid off.

    - As Normand pointed out, MIS is too often treated as a “technology” initiative, without sufficient input, guidance, and ongoing involvement by the operations team. Without a clear understanding of the business requirements of an information system, the resulting system is not likely to meet the needs of the institution. This requires extensive planning and preparation which is often neglected in the rush for results.

    - Implementation of a new MIS does involve substantial work, but it doesn’t stop once the system is up and running. Constant tweaking and oversight is required to ensure management is getting accurate information in a format which enables them to understand the business and make important decisions.

    - MFIs often opt to develop their own solution rather than purchase something from a vendor. A custom built solution can be easier to conform to the particular processes and ways of doing business for each MFI, rather than the MFI conforming to a particular solution. The upfront costs may also appear to be less expensive than the high upfront license cost of off-the-shelf solutions. However, custom built solutions can be just as expensive or more expensive over time depending on the scope and complexity of the solution. And it may delay the MFI from streamlining their processes to optimize efficiency and ensure adequate internal controls and oversight.

    Do any of these points ring true in the case of Morocco?

  • February 9th, 2010 at 2:13 pm, xavier Reille ()

    Lauren, The three factors outlined in your posting did play an important role in Morocco.

    Small and medium MFIs wanted to have customized solutions tailored made to their business processes. They thought they were unique and deserved a unique MIS system , this is the famous unique terminal problem that my colleague Andrew Mainhart was already highlighting 15 years ago in his publication Managemenent Information System for MFIs.

    At the same time, Donors are looking for economy of scale and global IT solution that are more cost effective. The USAID and KfW project (i believe) each selected one off the shelve software to be rolled out on all participating MFIs. And in each case, the implementation failed by lack of support and lack of MFI ownership,

    Finally, support is critical, software vendor after sale services were not up to the task. It’s costly and challenging to implement relatively rigid off the shelves software in small MFIs. The Donor probably didn’t budget enough funds for implementation, training and technical support.

    But the largest Maroccan MFI, Alamana managed to succesfully implement a rather sophisticated MIS. It was a strategic priority for the organization and Alamana didn’t go cheap. They invested more than USD 1.5 million from their own pocket. They spent a lot of time in negotiation with software vendors and carefully looked at project planning and implementation. In just over a year, Alamana sucessully implemented Evolan a application for consummer lenders offered by SOPRA.

    But I may be missing other factors…It would be interesting to get the views from a Donor funding MIS

  • February 10th, 2010 at 10:43 am, Grameen Bank, Which Pioneered Loans For the Poor, Has Hit a Repayment Snag | David Roodman's Microfinance Open Book Blog ()

    [...] crisis in Bangladesh, akin to recent ones in Bosnia, Morocco, Pakistan, and parts of India, would tarnish the image of microcredit worldwide, perhaps [...]

  • March 24th, 2010 at 5:29 pm, To avoid crises, microfinance needs good information systems | Microfinance Africa ()

    [...] the recent reports on portfolio crises emerging in several markets. A recent CGAP publication and blog post identified weak systems as a key vulnerability in the microfinance sector and leading cause of the [...]

  • April 11th, 2010 at 12:26 pm, soman ()

    I am from India and in India this is also the case – there is very fast growth in the sector and RBI and regulatory bodies are worried about the same story. If you ask what is the reason, it is because money is given to all and sundry and not only to people with intention to use the money for a productive purpose.

  • August 14th, 2010 at 2:23 pm, Evolution of Microfinance « Microfinance Hub ()

    [...] controls to match high growth rate in products, clients, markets and employees (read more about the dangers of reckless growth and about a possible solution through information [...]

    • Leave a Reply