Archive for: microfinance in Morocco

During the recent virtual conference on responsible finance several participants called on investors to reflect more on their growth expectations and insisted on proper assessments of governance, growth capacity of microfinance institutions, and debt saturation levels in the market. I agree. In my view, lending responsibly implies sticking to some of the basic principles of risk analysis and finance without letting competition for the best investment opportunities or fastest disbursements come in the way.

An overabundance of capital can trigger irresponsible actions or undue risk-taking on the part of investee companies. The experiences of countries like Morocco highlighted in a recent CGAP Focus Note tell the story. Investors were overeager to place funds in MFIs, which in turn grew too aggressively and were no longer able to manage their lending operations (i.e., they were less careful in the way that they placed loans). Disbursement pressure among investors comes from a large overhang of unplaced money sitting at microfinance investment funds. Beth Rhyne commented at the virtual conference that “this creates great pressure for investors to put money into MFIs that may not need it (or as much of it) or simply cannot manage it sustainably.” This does not mean that there is no need for investments in microfinance anymore. Rather, that investment funds are able to tap into new microfinance markets and investors are willing to take more risk to do so, as Blue Orchard commented in a recent post on this blog .

But the responsibility of investors goes beyond realistic growth expectations and accurate analysis. One other dimension that got attention in CGAP’s virtual conference, and rightly so, is the return expectations from investors.

Gil Lacson, of Womens World Banking, asked what a “reasonable” financial return would be for an investor, or an “acceptable” level of profit for the microfinance institution,  given that the customers of microfinance are the poor and disadvantaged. This brings us to the realm of business ethics in microfinance: how much money should an investor and the MFI make?; what is obscene (or too much) and what is appropriate?; and who should pass that moral judgment?

Should others follow the example of the founder of India’s Equitas Microfinance institution that abides by a policy that voluntarily limits its annual Return on Equity? And if so, is Equitas’ voluntary limit of 25% a reasonable one?

As an example of how investors are addressing this question, KfW looks for a “risk constellation”, by examining the correlation of high average return on equity, high interest rates, high level (also in absolute terms) of nonperforming loans/losses, and a low level of loan loss reserves. KfW’s checklist  for its investment officers suggests that a constellation with a return on equity greater than 25%, a portfolio at risk (30 days) greater than 10%, interest rates greater than 40%, and insignificant levels of loss reserves (occurring together) gives a first hint of irresponsible lending practices.

We are only at the beginning of this debate. The responsibilities and expectations of microfinance investors and managers are coming under increased scrutiny.  What metrics to use to measure responsible investment and, more important, how to determine what standards are acceptable, will be key questions to address in the coming months. Watch this space.

Once a year, CGAP’s membership and governance body, the Council of Governors, meets to set CGAP’s broad policies and strategic directions, provide inputs to our annual workplan and budget, and debrief one another on the latest trends in financial inclusion. That meeting is underway this week in Nairobi, Kenya. In addition to a special focus on microfinance in Africa and branchless banking, we’re hearing the latest thinking around responsible finance.

Earlier this week, New York Times columnist Tom Friedman suggested that the increasing interconnectedness of the economic, financial and environmental crises points to the need for new perspectives on ethics:

…in a world where our demand for Chinese-made sneakers produces pollution that melts South America’s glaciers, in a world where Greek tax-evasion can weaken the euro, threaten the stability of Spanish banks and tank the Dow, our values and ethical systems eventually have to be harmonized as much as our markets. To put it differently, as it becomes harder to shield yourself from the other guy’s irresponsibility, both he and you had better become more responsible.

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I discovered a new microfinance giant.  The newly created Postal Bank of Morocco is the largest microfinance provider in the country: it offers payments and transfer and saving services to 4.5 million low-income clients and boasts 90% of the domestic transfer market thanks to its flagship product the “mandat poste”.
 
It has ambitious goals for financial inclusion.  Its business plan aims at bringing 2.5 million more clients into the financial system over the next five years.  This is more than twice the current outreach of all the MFIs in Morocco. So, can it succeed?
 
The Postal Bank is a subsidiary of the country’s postal network and was granted a full banking license in late 2009. It has a unique network of 1800 branches spread out among all Moroccan districts including the most remote ones. It has a very low cost structure with access to cheap deposit funding and affordable staff resources. Remarkably, it has talented senior managers all coming from commercial banks.  The bank plans to offer credit services soon, but management admits they lack the expertise in credit underwriting, so they will partner with experienced credit companies. The bank will first launch a consumption credit product with SOFAC, a leading consumer lender. They are also contemplating  offering housing loans and microenterprise loans through partnerships with MFIs.
 
Obviously the new Postal Bank also has its challenges. The quality of service at the branches is poor and the staff lacks training and good incentives. The MIS is obsolete and as much as 30% of the reported accounts are dormant.
 
Yet the Postal Bank of Morocco has an exciting new vision for financial inclusion, a first class management in place, a bank license, and a unique delivery platform for financial services. This shows the great potential for countries to leverage their postal networks to advance financial inclusion.

Bienvenues les  Banques Postales!

In a recent post David Roodman questions the role of funders and particularly lenders in the microcredit delinquency crises in Bosnia, Morocco, Pakistan, and Nicaragua. The exuberant growth seen in these four countries was indeed fuelled by lenders eager to place capital.  A Bosnian MFI manager was blunt: “Some funders started lending to second and even third tier MFIs.  They just dumped the money; they did not look at the market at all.” Why did these lenders take such risks?

Microfinance investors, asset managers, and maybe rating agencies have tended to underestimate MFI risk for a long time.  But maybe regulatory issues form part of the problem?

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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.

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