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29th Midi de l’inclusion financière

Banana Skins : The risks facing the microfinance industry

Micr Microfinanc

• finance Ba

e Banana nana Skins 20 Skins 2014 14

What are the main risks the industry is currently facing and what are those they may be facing in the future?

Today…

• Context of the survey
• Survey methodology
• Short summary of results and themes
• Two key themes: overindebtedness & strategy

Context & background

– Insert chapter Microfinance: An Evolving Industry – Trace shift from poverty-alleviating focus to Financial Inclusion agenda – Commercialisation of providers – Diversification of providers – Crises – from Bosnia and Morocco et al to AP – and beyond? – RCTs and empiricisation of microfinance research – Diversification of financial products available, delivery channels

Context & background

–

Acceptance that microentrepreneurship may be less important than consumption/income smoothing

–

Diversification of financial products available, delivery channels

–

Massive increase in understanding clients’ financial needs

–

Regulatory myopia or overreach

–

SPM initiatives proliferating

–

Technology (PoS, mobile, cloud-based MIS)

Facing reality…

–

Not everyone is an entrepreneur

–

New and different investors – the rise of “impact”, the persistent role of DFIs, growth of local commercial funding in some markets

–

And “looking ahead” – what is microfinance for?

A timeline of microfinance

• Key events in microfinance since 2005 (-ish)
• The five Banana Skins reports have paralleled significant flux in the industry –

milestones, real and reputational crises, initiatives, headlines

Survey Scope

• Suppliers of microfinance services
• Investors, suppliers, regulators, analysts
• All major markets

Response by Geography

North America 22% Western Europe 21% Latin America 16% Africa 15% South Asia 13% Eastern Europe Central Asia 5% Middle East North Africa 4% East Asia Pacific 4%

2014 Risk Rankings

Over- indebtedness 7.5 Credit risk 6.9 6.9 6.7 Governance Strategy 6.7 6.5 Political interference Management 6.5 6.4 Regulation 6.3 Staffing 6.2 Financial capability Product risk 6.2 6.1 Client relationships Macroeconomy 6.1 Technology management 6.0 Income volatility 6.0 5.9 5.8 Funding 5.8 Liquidity

Client capacity Government Interaction with client Finance Institutional structure Effectiveness

• f execution

>55% 50-55% 45-50% 40-45%

% correlated:

Bubble size= risk rating 6.8 Risk management Transparency

• f Objectives

Competition

The Banana Skins index

2 2,5 3 3,5 4 4,5 2008 2009 2011 2012 2014 Score Top risk Average score Management quality Credit risk Overindebtedness

Themes

1. Overindebtedness remains a dominant concern for the industry, and may even be growing. 2. At a critical juncture in its evolution microfinance is paying too little attention to its future.

Overindebtedness, again and again…

• Frank Abate, Fundación Dominicana de Desarrollo

Banana Skins 2014

7,5 6,9 6,9 6,8 6,7 6,7 6,5 6,5 6,4 6,3 6,2 6,2 6,1 6,1 6,0 6,0 5,9 5,8 5,8 Overindebtedness Credit risk Competition Risk management Governance Strategy Political interference Management Regulation Staffing Financial capability Product risk Macro-economic risk Client relationships Technology management Income volatility Transparency of objectives Funding Liquidity

Credit risk 6.9 6.9 Competition Risk management 6.8 6.7 Governance Strategy 6.7 6.5 Political interference Management 6.5 6.4 Regulation 6.3 Staffing 6.2 Financial capability Product risk 6.2 6.1 Client relationships Macroeconomy 6.1 Technology management 6.0 Income volatility 6.0 5.9 5.8 Funding 5.8 Liquidity

Client capacity Government Interaction with client Finance Institutional structure Effectiveness

• f execution

>55% 50-55% 45-50% 40-45%

% correlated:

Bubble size= risk rating Transparency

• f Objectives

Over- indebtedness 7.5

6.9 Competition Risk management 6.8 6.7 Governance Strategy 6.7 6.5 Political interference Management 6.5 6.4 Regulation 6.3 Staffing 6.2 Financial capability Product risk 6.2 6.1 Client relationships Macroeconomy 6.1 Technology management 6.0 Income volatility 6.0 5.9 5.8 Funding 5.8 Liquidity

Client capacity Government Interaction with client Finance Institutional structure Effectiveness

• f execution

>55% 50-55% 45-50% 40-45%

% correlated:

Bubble size= risk rating Transparency

• f Objectives

Over- indebtedness 7.5 Credit risk 6.9

Risk management 6.8 6.7 Governance Strategy 6.7 6.5 Political interference Management 6.5 6.4 Regulation 6.3 Staffing 6.2 Financial capability Product risk 6.2 6.1 Client relationships Macroeconomy 6.1 Technology management 6.0 Income volatility 6.0 5.9 5.8 Funding 5.8 Liquidity

Client capacity Government Interaction with client Finance Institutional structure Effectiveness

• f execution

>55% 50-55% 45-50% 40-45%

% correlated:

Bubble size= risk rating Transparency

• f Objectives

Over- indebtedness 7.5 6.9 Competition Credit risk 6.9

6.7 Governance Strategy 6.7 6.5 Political interference Management 6.5 6.4 Regulation 6.3 Staffing 6.2 Financial capability Product risk 6.2 6.1 Client relationships Macroeconomy 6.1 Technology management 6.0 Income volatility 6.0 5.9 5.8 Funding 5.8 Liquidity

Client capacity Government Interaction with client Finance Institutional structure Effectiveness

• f execution

>55% 50-55% 45-50% 40-45%

% correlated:

Bubble size= risk rating Transparency

• f Objectives

Over- indebtedness 7.5 Risk management 6.8 6.9 Competition Credit risk 6.9

Why overindebtedness?

“Competitive pressures to grow portfolios and institutions have forced some MFIs to go overboard with their lending activities.”

Overindebtedness crisis = a rare, but high impact event

“We’ve had collapses in Morocco, Bosnia, Nicaragua, Pakistan and India. Now there is talk about Peru and Mexico. How many more of these will be need to go through before we learn how to prevent them?”

The 3-year rule: India

Loan Portfolio PAR30 + Writeoff 2002 03 04 05 06 07 08 09 10 11 12

The 3-year rule: Bosnia

Loan Portfolio PAR30 + Writeoff 2002 03 04 05 06 07 08 09 10 11 12

The 3-year rule: US mortgages

Risk of overindebtedness (crisis): not going away.

“In many countries we operate in … we are seeing rising

• verindebtedness among

borrowers.”

Portfolio exposure to multiple borrowers (%)

61 25 10 4 1 2 3 4 5+ Morocco 2008

Portfolio exposure to multiple borrowers (%)

38 27 14 17 5 1 2 3 4 5+ Morocco 2008 Andhra Pradesh 2010

Portfolio exposure to multiple borrowers (%)

19 24 21 15 21 1 2 3 4 5+ Morocco 2008 Andhra Pradesh 2010 Bosnia 2009

Portfolio exposure to multiple borrowers (%)

12 17 18 15 38 1 2 3 4 5+ Morocco 2008 Andhra Pradesh 2010 Bosnia 2009 Mexico 2014

“To address what might be called ‘obsolescence risk’, MFIs need to be clear about their role.”

Facing Strategic Risks

7,5 6,9 6,9 6,8 6,7 6,7 6,5 6,5 6,4 6,3 6,2 6,2 6,1 6,1 6,0 6,0 5,9 5,8 5,8 Overindebtedness Credit risk Competition Risk management Governance Strategy Political interference Management Regulation Staffing Financial capability Product risk Macro-economic risk Client relationships Technology management Income volatility Transparency of objectives Funding Liquidity

Microfinance

Mobile Tech

Downs- caling banks Diverse client needs

Evolving regulation Changing mission

Change is afoot…

Where next? …That’s what Q & A is for.

“I never want to have to look back and fret as to how microfinance ended up in the junk pile of seemingly good ideas that turned out to be bad ones.”