The dark side of competition: credit risk and market penetration
by Xavier Reille: Thursday, February 25, 2010
At an investors’ conference two years’ ago, microfinance* was presented as a promising untapped market at the bottom of the pyramid with a market penetration of only 1% and a funding gap of USD 250 billion.
The recent delinquency crises affecting Bosnia and Herzegovina (BiH), Morocco, Pakistan and Nicaragua described in our new Focus Note “Growth and Vulnerabilities” paint a different picture. Too many–not too few–microcredits seem to be the problem in these markets.
And according to recent research from CGAP, the top six countries by market penetration have all experienced some kind of delinquency crisis including four of them, Mongolia, Montenegro, BiH, and Nicaragua, in 2009.
| Rank |
Country |
Borrower accounts/Population |
Date delinquency problems/Source |
|
1 |
Bangladesh |
21% |
1996, delinquency concentrated in some regions ( I. Matin) |
|
2 |
Mongolia |
13% |
Some delinquency reported in 2009 (Planis/Planet Finance) |
|
3 |
Montenegro |
13% |
Sept 2009, PAR30> = 15% (Central Bank) |
|
4 |
BiH |
11% |
June 2009 PAR >30 = 7% (CGAP) |
|
5 |
Nicaragua |
10% |
June 2009 PAR>30 = 12% (CGAP) |
|
6 |
Peru |
9% |
December 1998, PAR 30> = 10% (MIX data) |
High market penetration and its associate companion multiple borrowing (clients borrowing from more than two institutions at once) seem to bring new market dynamics. Customers can take on too much credit and fall into debt traps. They can also decide to default from one MFI by choice or sheer necessity, while preserving access to credit from another MFI. Incentives to repay are altered, and credit risk increases.
Intrigued by these results, I asked Adrian Gonzalez at the MIX to find out how much loan delinquency is determined by market penetration. Adrian found no correlation between high penetration of microcredit services and non performing loans on the 2008 datasets.
So we don’t have data to back up the link (although, the 2009 numbers, when available, might present a different story). But at the minimum, we need to be aware of the quickly developing phenomena of multiple borrowing and its impact on clients. And it’s probably time to ask a few questions about market developments in microfinance.
Is there a market penetration threshold when new market dynamics and client behaviors start to appear and translate into a delinquency crisis? Are these delinquency crises the necessary wake-up call for MFIs to start adopting more responsible lending policies, agree to establish a credit bureau, share credit information, and improve risk management? And what about the Bangladesh mystery, how can MFIs maintain such good repayment rates in the country that has by far the highest penetration rates in the world and no credit bureau in place?
*Deutsche Bank research, microfinance an emerging market opportunity, 2007, Raimar Dieckmann.
5 Comments
February 26th, 2010 at 2:26 pm, Delinquency risk to be a major issue? | ThinkChange India ()
[...] Microfinance Blog posted a short piece on the risk of delinquency in microfinance that occurs when people take on too much [...]
February 26th, 2010 at 4:16 pm, Fehmeen ()
Interesting post. I think a lack of governance is a main reason for these delinquency levels. MFIs often compete for customers and in order to push up their revenues, they overlook the basic principle of ‘one client’. This greed harms MFIs eventually. Some sort of a technology-backed credit bureau would solve this.
The borrower gets the blame as well. He/she may not have the necessary skills to carry out the planned venture, or to manage the business skillfully. Here, MFIs should partner with clients and offer the required support to help sustain/grow the client’s business.
A study about group-lending revealed that women have better repayment rates because they are more likely to bend under peer pressure, lest their family’s reputation is tarnished. This may explain Bangladesh’s high repayment rates because Grameen Bank lends to groups only. This is a little alarming because MFIs usually say women are more responsible and astute business owners than men.
March 1st, 2010 at 10:25 am, Meeting of the Minds? Researchers, Microfinance Leaders at CGD | David Roodman's Microfinance Open Book Blog ()
[...] that two big stories buffeted microfinance in 2009. The second was about microcredit bubbles. (See also.) I wondered aloud whether this meeting was fighting the last war. If yet another study emerges [...]
March 2nd, 2010 at 6:40 am, B S Suran ()
True, I agree with the earlier post that lack of governance is one of the key reasons for build up of higher delinquency levels in mFIs, this is partly due to the unhealthy competition between mFIs to pouch for prepared clients, rather than new ones…..many poor are still left out.
While the study does not cover mFIs in India, the story would not be much different. While there are stray cases of evergreening which a few mFIs practice to keep their books looking good. Group lending as mentioned could have been one reason for the relatively better position. But all the group lending cannot be clubbed in the same bucket – JLGs and SHGs show varying degree of cohesiveness …My field interaction with mFI clients did reveal one thing when I asked the diffrence between JLG and SHGs….which they replied “ one is group for a loan and the other is loan to a group” …. Something to ponder, for mFIs which carpet bomb with micorloans!! The mFIs do compete to push up their revenues, and in the process overlook the basic principle of trust building and client education. This process is also lacking in the new fast track , piggy backed (partnership) models, including BC model being prescribed to broaden quicker outreach.
Cheers
Suran
August 4th, 2010 at 9:45 am, Creating a Credit Bureau for People Without CreditDevelop Economies | Develop Economies ()
[...] this is a big problem. Multiple lending may have led to a delinquency crisis in Nicaragua, Bosnia and Herzegovina, [...]
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