Archive for: microfinance in Morocco

It’s inevitable that a review of the year would highlight the dramatic turn of events in the Indian state of Andhra Pradesh, as well as other fundamental issues about the provision of financial services for the poor that emerged in such stark light in 2010.

Early in the year CGAP released new research that raised concerns about the pace of growth in some markets and the degree to which that could strain MFI systems. By the end of the year, the unfortunate turn of events in South Asia took center stage.

In between, we saw the breathtaking SKS IPO, and much debate about different approaches to delivering services, high interest rates, and the various facets of commercial microfinance.

It wasn’t all controversial or bad news. Financial Access 2010 showed that access to financial services had continued to grow in 2009, despite the financial crisis. The G20 took up the cause of financial inclusion, and in June endorsed “Nine Principles for Innovative Financial Inclusion” at the Toronto Summit. And the Basel Committee–the Vatican of global banking– issued its first guidance on microfinance in August. All signs of progress.

Here is a quick recap from 2010′s most popular and most discussed posts. We hope the CGAP Microfinance Blog provided some context, and perspectives that went beyond what you were hearing in the news. The issues raised last year remain imminent, and the conversation flows into 2011. As new issues emerge, we hope the CGAP Microfinance Blog will continue to offer new ideas, data, and informed opinion, and we hope you’ll offer your views by commenting on the issues at hand.

• The Perils of Uncontrolled Growth by Xavier Reille – “The Morocco microfinance sector wasn’t a casualty of the global financial crisis: this was primarily a crisis of the MFIs themselves.”
• How to Tell Good MFIs from Bad MFIs by Richard Rosenberg – Rich points out how there is no black and white formula to separate the two.
• Perplexed about Over-indebtedness, part 2 by Richard Rosenberg – “What do we mean when we use that term?  This question, like most others about over-indebtedness, gets annoyingly complicated.”
• The Next Decade of Microfinance by Alexia Latortue – “Advancing financial access isn’t just about expanding access from a sheer numbers perspective—though that’s critical—it’s also about the quality of that access.”
• 6 Questions for SKS by Stephen Rasmussen – The post kicked off the blog series on SKS, shortly after the largest MFI in India launched its IPO. Steve asks whether SKS will be passing on the gains from the capital markets to their millions of clients in India.
• Is SKS any Different from Wal-Mart and does it matter if it isn’t? By Malcolm Harper – “Now microfinance is a mainstream business, it’s been “Wal-Martised,” whether we like it or not, Compartamos and now SKS have shown the way, and soon many more will follow. The clock cannot be put back.”
• Who’s the Culprit? Accessing Finance in Andhra Pradesh by Justin Oliver – The Andhra Pradesh crisis has been a critical turning point for microfinance in India and the globe. Justin’s post, which kicked off the series on this topic, was the most read and most discussed post of the year.
• Crisis by Invitation by N.Srinivasan – “More than 15 years of hard work has gone into the (microfinance) sector. For the mindless actions of a few with a profit motive, a large number of customers are set to lose linkages to institutions that had helped them over the years.”
• Andhra Pradesh Crisis or Opportunity by Parmesh Shah – The post argues for creating a pro-poor ecosystem which includes a diverse range of financial products and services that meet needs related to health, food, education, and livelihoods.
• Will the Indian SHG Movement Withstand the Competition offered by MFIs? By CS Reddy – Reddy’s post offers an analysis of why the SHG movement is such a critical way to include the poorest people in India.

Which did you like the best?

–Jeanette Thomas  and Shweta S. Banerjee

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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