What did we Learn from the Moroccan Microcredit Crisis?

Four years after the peak of the Moroccan microcredit crisis in 2009, during which sector-wide credit risk soared to 14% and reached as high as 38% for one leading MFI, CGAP went back and documented the valuable lessons for the global industry. Under the Moroccan Central Bank’s leadership, providers, national associations, and funders had to scramble to correct course, avert contagion, and restore confidence. Their response was fortunately swift, and included measures for both short-term recovery and long-term industry building. In parallel to tightened requirements in terms of provisioning, governance, and credit information reporting, MFIs turned inwards to address delinquency, improve their systems, and make changes in senior management.

A potter forms a pot

As a result, Morocco now has 800,000 active clients representing $540 million outstanding. These figures represent 60% and 75%, respectively, of their 2007 levels. Such portfolio cleaning, along with upgraded systems, methodologies and controls, helped reduce credit risk and multiple borrowing. However, the recovery is still fragile, and overall credit risk was back on an upward trend by 2012, when it reached 9.6%. 

In many markets in the Middle East and North Africa (MENA) the typical microfinance sector is similar to Morocco's in that they are mostly led by credit-only NGOs. For them, the most significant lesson from the Moroccan crisis is that market-wide risk exists: evidence shows that competitive markets lead to multiple lending, and defaults end up spreading as fast as rumors from one client to the next. This risk should be carefully managed by all stakeholders. Reflecting the micro, meso, and macro levels, lessons from Morocco fall into three distinct categories: governance, market infrastructure, and supervision.

The importance of market infrastructure and collective efforts to promote services related to information, research, coordination, advocacy, and capacity building, cannot be sufficiently emphasized.

But perhaps the most important lesson for regulators, policy makers, and their advisors in the MENA region is the need to keep an eye on microcredit players iin order avert crises and their challenging consequences – bankruptcies, economic slowdown, and/or social unrest. Morocco presents an interesting case regarding the role the state can play - even when savings are not at stake or prudential regulation is not required. Given the absence of non-bank supervisory authorities in the MENA region, central banks are the most suitable entities for overseeing the financial sector.

While strengthening the microcredit sector, Bank Al-Maghrib, the Moroccan Central Bank, and the Ministry of Finance worked jointly to advance financial access, leading notably to the establishment of the postal bank and the offering of low-income banking services. They are now playing an active role in promoting broader financial inclusion.

We are now witnessing some positive openings on the legal and regulatory fronts, which could unlock critical bottlenecks in the provision of financial services to low-income people. Morocco is actively working to establish itself as a leader on that front and its upcoming financial sector development strategy deserves to be closely followed in the upcoming years.

--- The author is CGAP's regional representative in the MENA region.