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Banana Skins : The risks facing the microfinance industry 29 th Midi de l’inclusion financière

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

2014 Risk Rankings

Macroeconomy % correlated : Client capacity 6.1 >55% Competition Income 50-55% volatility Over- 45-50% 6.0 indebtedness 6.9 40-45% 7.5 Bubble size= risk rating Interaction Credit with client 6.2 risk 6.9 Financial capability 6.1 Risk Transparency management Product risk of Objectives Client Government relationships 6.2 5.9 6.8 6.5 6.4 Technology management Management Political Regulation interference 6.0 6.5 Strategy 6.7 Finance Effectiveness 6.3 6.7 of execution 5.8 5.8 Staffing Governance Institutional Funding Liquidity structure

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

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

Macroeconomy % correlated : Client capacity 6.1 >55% Competition Income 50-55% volatility Over- 45-50% 6.0 indebtedness 6.9 40-45% 7.5 Bubble size= risk rating Interaction Credit with client 6.2 risk 6.9 Financial capability 6.1 Risk Transparency management Product risk of Objectives Client Government relationships 6.2 5.9 6.8 6.5 6.4 Technology management Management Political Regulation interference 6.0 6.5 Strategy 6.7 Finance Effectiveness 6.3 6.7 of execution 5.8 5.8 Staffing Governance Institutional Funding Liquidity structure

Macroeconomy % correlated : Client capacity 6.1 >55% Competition Income 50-55% volatility Over- 45-50% 6.0 indebtedness 6.9 40-45% 7.5 Bubble size= risk rating Interaction Credit with client 6.2 risk 6.9 Financial capability 6.1 Risk Transparency management Product risk of Objectives Client Government relationships 6.2 5.9 6.8 6.5 6.4 Technology management Management Political Regulation interference 6.0 6.5 Strategy 6.7 Finance Effectiveness 6.3 6.7 of execution 5.8 5.8 Staffing Governance Institutional Funding Liquidity structure

Macroeconomy % correlated : Client capacity 6.1 >55% Competition Income 50-55% volatility Over- 45-50% 6.0 indebtedness 6.9 40-45% 7.5 Bubble size= risk rating Interaction Credit with client 6.2 risk 6.9 Financial capability 6.1 Risk Transparency management Product risk of Objectives Client Government relationships 6.2 5.9 6.8 6.5 6.4 Technology management Management Political Regulation interference 6.0 6.5 Strategy 6.7 Finance Effectiveness 6.3 6.7 of execution 5.8 5.8 Staffing Governance Institutional Funding Liquidity structure

Macroeconomy % correlated : Client capacity 6.1 >55% Competition Income 50-55% volatility Over- 45-50% 6.0 indebtedness 6.9 40-45% 7.5 Bubble size= risk rating Interaction Credit with client 6.2 risk 6.9 Financial capability 6.1 Risk Transparency management Product risk of Objectives Client Government relationships 6.2 5.9 6.8 6.5 6.4 Technology management Management Political Regulation interference 6.0 6.5 Strategy 6.7 Finance Effectiveness 6.3 6.7 of execution 5.8 5.8 Staffing Governance Institutional Funding Liquidity structure

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

“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?” Overindebtedness crisis = a rare, but high impact event

The 3-year rule: India PAR30 + Writeoff Loan Portfolio 2002 03 04 05 06 07 08 09 10 11 12

The 3-year rule: Bosnia PAR30 + Writeoff Loan Portfolio 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 overindebtedness among borrowers.”

Portfolio exposure to multiple borrowers (%) Morocco 2008 61 25 10 4 5+ 4 3 2 1

Portfolio exposure to multiple borrowers (%) Morocco 2008 Andhra Pradesh 2010 38 27 17 14 5 5+ 4 3 2 1

Portfolio exposure to multiple borrowers (%) Morocco 2008 Andhra Pradesh 2010 Bosnia 2009 24 21 21 19 15 5+ 4 3 2 1

Portfolio exposure to multiple borrowers (%) Morocco 2008 Andhra Pradesh 2010 Bosnia 2009 Mexico 2014 38 18 17 15 12 5+ 4 3 2 1

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

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

Change is afoot… Changing mission Downs- caling banks Mobile Tech Microfinance Diverse client needs Evolving regulation

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