European Microfinance Week 2015

PRESENTATIONS

Moderator Bob SUMMERS of Micro­Capital opened this session exploring how MFIs can grow in a sustainable
manner and introduced the speakers.

Isabelle GUÉRIN presented her research project on microcredit crises. She mentioned that microcredit crises are not behind us, stressing the need to identify the causes of crises and design preventive measures. The research had a practical outcome: a microcredit crises prevention dashboard providing a list of factors that come into play in the run-up to a crisis. Guérin introduced the three main categories of causes of crises. Crises can originate from the demand-side, supply side and the environment, and impact on three levels: i.e. the client, MFI and country. She modelled this in a graph in order to highlight the multiple interrelations between causes. As a key research outcome, Guérin noted that a crisis can happen at the clients’ level without immediately affecting the MFI or country level. The most salient features of crises are excessive concentration and political pressure at the country level, competition and development speed at the MFI level, while at the client level a crisis can emerge when the offer does not match client needs or potential. 

Guérin noted that crises result from unsustainable growth. This can be observed at different levels. Sustainability should be understood from a financial, sociocultural (i.e. what is the acceptability and legitimacy of MFIs or microfinance) and a political (i.e. what are the power relationships between the various stakeholders) perspective. Returning to the dashboard and its factors she explained that interacting factors at each level, means that only a systemic analysis can help to understand crises. The graph can represent all sorts of crises. Guérin concluded by providing examples of microcredit crises in Tamil Nadu, India and the Dominican Republic. 

Daniel ROZAS introduced the MIMOSA dashboard by asking the audience if they would drive without a dashboard. Without a dashboard you do not know your metrics and have less control over your vehicle. MIMOSA (Microfinance Index of Market Outreach and Saturation) is a tool to better understand microfinance markets. It shows how much credit a market is able to absorb and how much credit is already in the market. It bases market capacity on the Human Development Index (HDI), population density and credit bureau quality. The index can show if a market is saturated or underserved. The Global Findex is used to show how many people have taken up a loan from an MFI in the last months, which is useable as a variable for MIMOSA because of its accurate method, but it is not perfect. Global Findex data is complemented by data from specific countries, MIMOSA field and MFI surveys. It helps to understand what the gap is between the demand and the supply side in the market. By connecting demand and supply, you will be able to make a better estimation of the market penetration and multiple borrowing.

Rozas continued with the example of Cambodia: Is it really the 2nd most penetrated market, as the Global Findex implies? According to MIMOSA, this is incorrect as the data shows there is roughly a 10 percent gap between supply and demand figures. And while the MIMOSA field survey shows that approximately 10 percent of lenders are not officially registered, these are small and cannot account for the difference. It appears the Khmer wording of the Findex survey is at fault, having captured a substantial number of informal loans as formal lending. Cambodia is still saturated, but far less than implied by Findex. By applying the data in MIMOSA in combination with the expected growth path of a region or country, Rozas mentioned that you can also estimate the market penetration in the future which he explained with the example of Bolivia.

Summers then discussed sustainable growth with the investors in the panel. Tanmay CHETAN mentioned that goals for growth are sometimes too ambitious, overheating the market as a result. Chetan would like to see a more equal relationship between MFIs and clients in a well-regulated environment where clients have control and choice. Clients have to be able to make better informed decisions on what is actually necessary to improve their livelihoods. If not, chances of a crisis at the client level will be much higher, leading to ripple effects. Chetan mentioned that you should also check what happened in case of non-repayment. In most cases this is a result of health related incidents and loss of livelihood, both of which can be mitigated somewhat through insurance. Only a small percentage is not willing to pay. 

According to Klaus TISCHHAUSER it is a big success that we now talk about oversupply instead of how to kick-start growth. We should not get into depressed mode, but remember that finance is always prone to crises. Finance is extremely important for development, but we know that growth has advantages and disadvantages. Therefore, we should aim for controlled growth while knowing that most is out of our control. We should not expect to steer away from crises, but make sure that we can cope with crisis situations. According to Tischhauser, investors should make sure that their organisational structure does not promote overheating. His institution, for example, discourages bonus systems and does not punish staff for not investing if they fear an overheated market. Managing growth thus requires good planning, the right tools and sound risk management are key.

Summers then introduced the topic of regulation. Chetan mentioned that a lack of regulation can lead to a crisis due to a lack of accountability, as was the case in India. However, one should also be careful not to introduce overregulation. Chetan gave the example of unregistered NGOs in Cambodia, which charged high fees compared to the MFI. Central bank regulation then mandated the registration of NGOs as MFIs, leading to improved cross lending data. Tischhauser supported Chetan’s message, adding that microfinance has to aim at the client, but most issues are at country level. If you want to develop the sector, market regulation is essential.

The moderator asked the panel how to choose between long- and short-term investments. Tischhauser mentioned that he prefers a longer horizon as growth of value takes a long time. His organisation often works with open-ended equity investments. 

DISCUSSION

Adalbert Winkler of the Frankfurt School of Finance & Management noted that there is one key indicator for a crisis: speed of credit growth. He asked the panel if they caution that their institutions are growing at a high rate. Chetan replied that his partner institutions do not have artificially mandated growth control mechanisms, but are cautious with the speed of lending and focus on internal controls to moderate growth. He also mentioned that in Cambodia in the last 4-5 years credit provided by his institution is increasingly funded by local deposits. Tischhauser stressed that you also have to look into the details. It very much depends on the quality of the MFI, and he warned against new entrants that heat up the market with competitive products. The last question from the audience examined the issue of growth and size of the Moroccan market. Guérin replied that Morocco was a typical case where the demand is overestimated - even though many people are not served. This does not mean that they need microcredit. And beyond Morocco, the overestimation of the demand is one of the reasons for crises in other contexts. Rozas mentioned that Morocco is a very unusual market with a growth of 100 percent in three years. The crisis was due to mismanagement of fraudulent loans.