The Perils of Uncontrolled Growth
There’s lots of talk about the delinquency crisis in Nicaragua, Bosnia, and Morocco these days. But what is really happening in these countries? What is the origin of these crises and what are the lessons learned for the industry? I’ve been looking at the situation in Morocco.
Microcredit in Morocco has enjoyed one of the most extraordinary growths seen in the microfinance industry. In just four years, from 2003 to 2007, MFI loan portfolio multiplied 11 times and client outreach by four, according to MIX. This exuberant growth was driven by four leading MFIs. These institutions scored remarkably well on all microfinance performance metrics, including scale, depth of outreach, asset quality, and profitability. These impressive results did not go unnoticed, and Al-Amana and Zakoura were awarded several international prizes.
In 2007 some signs of stress—notably loan delinquency and a significant increase in the number of multiple loans clients took on—started to emerge. A sharp rise in nonperforming loans took place in 2008 and affected all MFIs. PAR 30 increased significantly to 5 percent in December 2008 and reached an alarming level of 10 percent in June 2009. Write-offs also increased dramatically with a negative impact on MFI profitability and solvency. In May 2009, Zakoura, one of the Moroccan flagship institutions, reported a PAR 30 of over 30 percent and decided to merge with another MFI, Fondation des Banques Populaires
The causes of the delinquency crisis are well known and can be summarized in two words: unsustainable growth. The Morocco microfinance sector wasn’t a casualty of the global financial crisis: this was primarily a crisis of the MFIs themselves. Unprecedented growth had overstretched MFI capacity, translating into lenient credit policies, obsolete management information systems (MIS), lack of internal controls, and substandard governance. Multiple lending to the same clients was also an aggravating factor.
Moroccan MFIs are putting in place aggressive turn-around plans, and a recovery is expected for 2010. A new and more mature microfinance sector is emerging with a well functioning credit bureau and improved risk management systems.
But what’s at the root of these problems? Why are MFIs in Morocco and elsewhere being pushed to grow beyond their institutional capacity? Are the funders or the MFI managers to blame? Have we become obsessed with outreach, at the cost of quality and long term sustainability?
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Comments
The crisi in Morocco is
The crisi in Morocco is obvious. Any organization and specially lending institutions must fall prey to this situation whenevr they try to grow too fast. I believe not only the management, but all patrons/regulating body/watchdogs should also blamed. Besides, the bodies who declared the awards for these institutions should also be cautioned as instead of warning, they were encouraged to go cragy without looking back to capacity building. We also need to look at the measures of performance indicators so that in future such bad incidents do not take place so easily.
The Morocco situation
The Morocco situation certainly demands that:
1. The microfinance practitioners watchdogs must get their heads together and device sets of scientific monitoring tools for MFIs. Such tools must be able to be universally cuscaded to MFIs world over. The argument that we can’t have a “one size fit all” tools is irelevant in this regard. We need responsible and robust business minded microfinance practitioner’s in 2010 and beyond. We are tired of the grant and donation mentality dominating microfinance in the world.
2. Extensive research work has got to be done by many microfinance research organization around the cornerstones or metrcs of microfinance worldover. MFIs must have a scientific understanding of the need to balance OUTREACH, LOAN QUALITY with PROFITABILITY, EFFICIENCY and SUSTAINABILITY. This thing of racing for outreach numbers and the cooked loan quality measurements must stop so that financial sustainability could superceed outreach impact, loan quality. One needs to also understand that these concepts are all interlinked.
Thanks Salahuddin, You are
Thanks Salahuddin, You are making two important points. I agree that the MIX and the European platform awards have given a sense of comfort to Moroccan MFIs that have fuelled the hyper growth . At the same time, it’s fair to say that it was difficult to detect Zakoura problems through its performance metrics reported to the MIX, its financial audit reports and even its rating reports.
That leads me to your second point. Microfinance performance metrics failed to detect early on the looming delinquency crisis in Morocco and to provide funders and MFI managers with early warning signals. So the question is : Do we have the right metrics to assess risks and financial performance? We should certainly pay more attention to market risks such as the effect of competition, and multiple lending. And we should also have a sharper analysis on credit risk with more reliable information on portfolio quality and quality of lending methodology.
There is a clear need for
There is a clear need for scientific measurement tools that take account of the complexities brought about exponential growth - uncontrolled growth , in pursuit of awards driven by static measurement of set criteria of measuring growth in respect of outreach depth , scale /size , loan quality, profitability ,efficiency and sustainability . Dynamic hyper growth can not be measured by tools that freeze the organization to take a picture at a given time . Exponential growth denotes rapid chemical reaction in the organization's trading account and balance sheet which need a far much robust assessment model compared to the MIX criteria . There has to be continuous development of scientific and dynamic models that capture the essence of rapid uncontrolled growth
Micro-finance has been
Micro-finance has been distorted by mission drift in pursuit of obscene profits. While the ultimate goal is the ability to augment the six metrics of outreach by Schreiner, in Africa, the governance of these organizations is cocooned in the recurring folly of pursuing the commercial objective while ripping off the poor instead of ameliorating their livelihoods. Clearly, the above scenario shows gross negligence in credit rating and the ubiquitous budding tendency to depend on PAR as a stand alone measure of portfolio quality. PAR in isolation fails when the denominator, which is the loan book, balloons at a rate higher than the numerator. Thus, the actual increase in arrears can be enveloped by such a scenario and consequently the weakening subsequent revelations when the opposite is true.
Multiple loans have actually trebled in recent times, though disguised by the fact that they are from different institutions, yet its the same devil that has seen non-performing loans ballooning into write-offs. This scenario, with the current commercial objective, will continue as long as loans are extended to multiple borrowers with an insatiable thirst for consumption instead of developing financial freedom. Critical is the failed curtailment of mushrooming unregulated MFIs that are continuously distorting the meaning Microfinance. Corporate governance issues, corruption, poor credit rating and gross negligence in financial reporting among other deep underlying issues of our African culture in terms of succession and rewards are eating away the real meaning of MicroFinance.
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