CGAP’s Xavier Reille takes a close look at the origins of the delinquency crisis in Morocco to determine if lessons learned can be applied to similar crises occurring across the industry. This Microfinance Voice is modified from the recently released CGAP Brief.
Few countries have boasted as strong and as vibrant a microfinance sector as Morocco. A recognized microfinance champion with 40% of client outreach in the Arab world, Morocco hosts some of the best performing MFIs in the world. But since 2007, Morocco's microfinance sector has confronted a crisis: exuberant growth at the cost of asset quality, spurring write-offs, and falling returns. The four largest Moroccan MFIs – Zakoura, Al-Amana, Fondation Banques Populaires, and Fondep - account for 90% of client outreach in a heavily concentrated industry. What caused the sector's growth to spin out of control?
The success of the microfinance sector in Morocco until 2007 could not have happened without support from the Moroccan Government. The Microfinance Law of 1999 provided a clear framework for the development of the industry. It also provided financial support through a government fund. The sector had the unique characteristic of commitment from local banks.Commercial banks further created two of the largestMFIs, and funded 85% of the sector’s assets in 2008.The sector also benefited from wide support of theinternational donor community.
Signs of the Crisis
By December 2007, the global credit crisis was in full force, but its' repercussions in Morocco were still hidden by the sector’s astonishing portfolio growth. Delinquency was significant for loans granted in early 2007, but because the bulk of the portfolio had originated in the prior six months, it was not yet in arrears.
Non-performing loans rose significantly from 0.42% in 2003 to 1.9% in 2007. Portfolio-at-risk greater than 30 days (PAR 30) increased significantly to 5% by the end of 2008, reaching an alarming 10% by June 2009. Write-offs also increased dramatically with a negative impact on MFI profitability and solvency. In May 2009, Zakoura, one of Morocco’s flagship MFIs, reported a PAR 30 of over 30% and ultimately merged with Fondation des Banques Populaires, a large MFI backed by a solid state bank.The causes of the crisis are well known and can be summarized in two words: unsustainable growth.
The microfinance sector crisis cannot be blamed on the global financial crisis. In the case of Morocco, unprecedented growth overstretched MFI capacity. This translated into lenient credit policies, obsolete management information systems (MIS), lack of internal controls, and substandard governance.
A 2008 research study by IFC concluded that 40% of loan delinquency in Morocco could be attributed to changes in credit methodology (i.e. shifts to individual lending, increases in loan size, and changes in payment frequencies). Multiple lending to the same clients was another aggravating factor.
The Microfinance Community Responds
The Moroccan microfinance sector responded to the crisis in a swift and timely manner. To restore confidence and avoid contagion effects on loan delinquency, the government organized the merger of Zakoura and Fondation des Banques Populaires. Local commercial banks maintained credit allocations and development finance institutions (DFIs) did not call their loans. At the same time, many MFIs slowed down growth considerably and reduced their balance sheets. MFIs are also instituting aggressive turn-around plans by tightening credit processes, developing teams dedicated solely to loan recovery, and taking judicial action against delinquent borrowers. Institutions are also exchanging credit information regularly to control cross-lending.
As a result, a new and more mature microfinance sector is emerging with a well-functioning credit bureau and improved risk management systems. The share of clients with multiple loans dropped from 39% in October 2008 to 29% in September 2009.
The Government’s Response
The government has further developed a plan in collaboration with Bank Al-Maghrib (BAM) and the Federation of MFIs (FNAM) to consolidate the microfinance sector. The plan's four priorities are to: strengthen MFIs, control multiple lending and prevent over-indebtedness, secure liquidity for the sector going forward, and improve the regulatory framework. These measures are already helping to restore confidence in the sector.
I don't know how transforming will help the Moroccan MFIs? Having more money doesn't mean having different governance and management practices. BAM must take courageous decisions and really help the MFIs, not waiting to see who will dye first.
Also the situation of staff (especially Zakoura staff) is so critical. They were just fired by the new organization. The situation is really getting bad...
Adil Sadoq MEDA Morocco
06 Apr 2010
Lack of good corporate governance in Morocco MFIs
The crisis in Morocco MFIs cannot be said to be related to the global economic crisis but heavily on good corporate governance failures whereby the MFIs boards are supposed to be knowledgeable, experienced and individuals with interest microfinance who are suppose to consistently review loans portfolio on every quarter and give strategic directions to the MFI executive management. We still witness lack of sufficient numbers of non-executive directors on most MFI boards to have a proper dilution of powers and sharing a vision without compromising assets quality. Secondly, I see to the issue of lack of supervisory role from the regulatory authorities i.e. the central bank and governments to continuously review MFI operations on a predetermined intervals. Thirdly, the growth of MFIs were not related in some instance to supporting units such as the internal audit, compliance and information technology's capacities to coup with growth.
Fourthly, in the event that an MFI is 95%-100% funded by the government of development financial Institutions (DFIs) history have taught us that issues of ownership to those entrusted to oversee its operations is compromised. The strength of MFIs in India is a result of greater portion of equity investments in the hands of serious investors who are fully represented on the boards as well as board subcommittees such as risk committee and audit committees.
Lastly, is the lack of information on client through Know Your Client (KYC) business model? Credit/Loans Officers were just focusing on growth and wining clients from competitors without any time to do follow-up clients to clients' businesses and homes to assess if there are any improvements as a result of loan facility granted and to notice any signs that client will face challenge on repayment and recommend for appropriate proactive actions.
Going forward it will be advisable to strengthen MFIs boards, supervisory authorities and designing incentive policies that give a better weight to portfolio quality as opposed to growth. This way I hope will bring sustainable portfolio quality as currently in India.
Master Mushonga Kingdom Bank Limited Zimbabwe
19 Mar 2010
What a tragicomedy
It is tragic and comical the way people ignore the main cause of the problem in Morocco that also caused many current crises as they have in the past, namely Government and Foreign donor funding to push growth of lending for socio-political objectives. All the large (and maybe all full stop) MicroCREDIT Institutions in Morocco are paid by Government and foreign donors. I say paid, not funded. The intention was always to rapidly increase growth of lending and of borrowers. So loan officers, lend and managers, see to it that loan officers lend, that is why we pay you! And managers, take whatever funding you can get, subsidies, loans, equity, subordinated loans, quasi-equity, it really doesn't matter!
Nowhere was there any action on what Government and certainly the foreign donors, in particular USAID and CGAP, with all due respect for a lot of their work, know what so far unbanked people first want from (Micro-) financial services, namely a way, a technology, an institutional partner to whom they can entrust the little money they do have and assist in safe, sound and prudent money management: deposits, transfers, payments, investments and yes, loans. So many studies have given undeniable evidence of the fact that the poor do have money whose expenditure they need to manage over a longer time, otherwise they or their dependents will suffer, seriously.
As no one in Morocco blames these funders, but prefer to focus on lending techniques and lending systems, things will again go wrong, for certain, and the funders will know that.
The term tragicomedy comes to mind, but the poor masses deserve more than concluding with this word I find.
Regards, Peter
peter van dijk Indonesia
28 Feb 2010
Moving Forward.
Much research is not held on the nature of the operations methodologies of Microfinance. I don’t find anything wrong with growth. If the market is there then a business manager would try to maximize his achievement. But we should not forget the followings:
1. Client assessment: Due to lack of credit history we fully depend on the personal capacity of the credit officer. Here comes the ability of the person. Historically MFIs field staffs are of low profile. Hence training them properly is very important. Hence it needs time.
2. Overlapping: It is very bad. An important learning from Microfinance is "you cannot recover money from a poor people through legal action". Another learning is "Poor people usually do not want to be defaulted not because of their honesty but due to chance of being black listed from a easy source of financing". But once he/she becomes overburdened, then we have very little things to do.
3. Internal control: It highly depends on the local context. Over control will slow the growth and make the MFI less client friendly.
4. Filed monitoring: It is very difficult to make an appropriate global checklist. We have to emphasis on local customization and regular revising the checklist and way of implementing it. Hence has to leave it to the people involved on the ground.
If we carefully analyze the above mentioned points, then we have to admit that it need some time to develop a methodology applicable for the country and the specific MFI. Hence the growth of the MFI should come gradually. The growth can be made geometrical once we have adequate number of trained staff within the system. It is not possible to hire new people and deploy in the middle management and get a consistent result. Middle management should be picked from the system itself.
Use of ICT helps field monitoring and also brings transparency. But it is not a substitute of human soft skills, rather it can just be a compliment.
In the present situation if we reduce the fund flow and stop delivering loan abruptly, it might cause further damage. We need to work closely with the clients and help them recover from the crisis. We need to understand it is not a crisis to the MFIs only. It is a crisis for the clients as well.
Asifur Rahman,
Research Follow, Kyushu University, Japan
Asifur Rahman SLRC, Kyushu University, Japan Japan
16 Feb 2010
Importance of regulated shareholder owned MFIs
One of the key learnings, and I hope the focus of BAM and the MCC, is the urgency of transformation for the large MFIs in Morocco that continue to operate as NGOs. Shareholder governance and accountability helps to protect microfinance clients. Proper prudential regulation is also necessary to ensure that internal controls and systems are being maintained. Rather than retreating from transformation, I hope that the Finance Ministry and BAM treat it as more critical than ever.
Heather Henyon Balthazar Capital United Arab Emirates
04 Feb 2010
A lesson to learn
Thanks for the article. As we have gone through the article it was found that only due to concentration on getting big and increase the size of portfolio, some of the MFI's are not following the right objective of microfinance.
Earlier a one article related to multiple lending was posted whose main concern was to show the impact of multiple borrowing on clients. Now we can see the same thing here, MFI's are doing multiple lending without full credit appraisal of client and these is causing the situation of financial crunch for members.
Still MFI's have the time to learn from these kind of crisis and develop a system which will support all the players in the industry across the world
Aniruddh Singh Chouhan Sahayata Microfinance Pvt. Ltd. India
04 Feb 2010
What about committment to mission statements and the nature of the products delivered by the MFIs in Morocco?
I have read with concern the growth, crisis and now the anticipated raising of the microfinance sector in Morocco. I have also liked the analyses put forward by readers in the comments above. While the experts in Morocco are trying to make the situation good and sustainable,I would commend them to consider the issue of product development very seriously. Often, products poorly designed can influence default. In the process of pursuing the MFI sustainability, there are MFIs which tend to pursue only the financial facet of it while leaving the social facet at bay. In the process the "good" clients who have gone through a number of cycles get heavily bindebted until they find it a burden to meet their obligations to the MFI. This is also at the expense of the poor clients who are looked at as uneconomic - the mission drift stories. I hope this was not happening in the Moroccan Microfinance. I hope we will keep getting updates on the trends of the rising Microfinance Industry in Morocco to enable us draw more lessons. Thanks for the article.
Mugisa Jared Trias Uganda Uganda
03 Feb 2010
Rules of Lending
Just to follow-up on Paul Rippey's comment, it seems that the MFIs forgot the 3 rules of banking. Namely, rule No.1, know your client; rule No.2, know your client and rule No.3, refer to rules one and two. As soon as you go for growth and distance yourself from the client and don't know their business and cashflow, you begin to lose control. This is exacerbated by weak MIS systems. It happened with mortgage lending in North America and is about to happen to credit card debt. This mistake applies to both the universal banks and the MF industry.
Graham Perrett
Graham Perrett United States
01 Feb 2010
Multi lending
For your information, to limit multi lending, the 5 most important MFIs in Morocco, representing 98% of outstanding credit, have exchanged their list of clients weekly from their databases starting in February 2008.
Last year Microfinance industry was heavily criticized and even was compared with subprime crisis.
India has also faced issues like multi lending, unprecedented growth, high competition in this industry. There is a huge debate in Indian MFI industry about setting up credit bureau. The debate goes on with the unanswered questions like who will head the bureau. By proper analysis of Morocco’s response to crisis, India can also come up with a sustainable model to support MFI industry. We hope this year there will be less critics and more success stories come up for Micro finance sector.
Bhaumik Shah KIIT School of Rural Management. Bhubaneswar, Orissa India
29 Jan 2010
Uh... what about the clients?
I appreciated Xavier Reille's (Hi Xavier!) thorough article, but was struck by how absent any concern for the borrowers was from his analysis. Is the health of financial institutions all we care about? Reading CGAP sometimes is like listening to Tim Geithner. Who really cares what happens to the MFIs or CitiBank? Oh, "too big to fail". I forgot.
Look, seriously, this is all of our fault, not just the fault of the Moroccan MFIs. We all have participated in counting clients as if they were objects, we've all believed convenient but implausible claims that "microcredit alleviates poverty", and of course the poor people who got swept up in donor and NGO-induced Debt-o-Mania now find their goods repossessed by accelerated recovery policies.
Massive debt is very 20th Century. It's time to chill and reconsider and look at new options for bringing financial services to the poor. Like, those I discuss on my blog at www.ALTmf.com.
Paul Rippey
co-founder of Al Amana
United States
27 Jan 2010
UNSUTAINABLE GROWTH
The Morrocco experience is worth sharing to allow other MFI prepare for such happenings,the Industry in Africa faces also challenges from mainstreaming of traditional lenders, massive client drop outs and emergence of competition. Lets share more
Tanzania
26 Jan 2010
Is it possible that the huge investments in MFIs’ information technology in Morocco have failed in delivering a business capability?
To endeavour to scale-up microfinance institutions without adequate and appropriate information systems is an invitation to disaster. Is it possible that the huge investments in MFIs’ information technology in Morocco have failed in delivering a business capability?
Success of MIS projects relies on improving how work gets done. Unfortunately, in many MIS projects, the focus is mainly on implementing the technology. Business processes, people and information management are neglected and not addressed properly. In the end, the new technology is installed, the IT department cheers, but employees and managers continue to work manually struggling with paper and Excel based systems. MFIs end-up with systems that 1) do not fit into their operations, 2) have practically little usefulness for management and 3) represent a high risk if volume of business operations is increased significantly.
Perhaps the start of the solution would lie in recognizing that an MIS involves more than just technology and software, and requires more than just the contribution of IT experts. Activities dealing with business processes, human capital, and information management should represent an important part of the total effort in a MIS project. The use of business analysts could simplify a lot the work of IT experts and facilitate their communications with MFIs’ management. How can we influence MIS projects sponsors to revise their strategy to include the work of consultants in business processes, business requirements management and internal control systems?
Finally, is it possible that to endeavour to scale-up microfinance organizations with mobile banking, without adequate core MIS systems is another recipe for disaster? Are the fund providers aware of the risks involved? However, the good news is that it is never too late to improve an MIS system in trouble. MIS systems sponsors only need to contract business analysts to carry out appropriate evaluation and needs assessments including a comprehensive analysis of information-flow and workflow, definitions of key functional and technical requirements, an evaluation of internal controls, and a quick review of organizational structure and workforce management. Results will be much improved lending operations, arrears management, customer services, and back office functions. Management control willl be greatly facilitated through tracking and reporting and the organization can grow on a sustainable basis.
Working only on improving internal controls may not solve the problem as the real issue could very well be the inadequate and inappropriate information systems in place.
Morocco is another country in the list that is going through the same cycle due to same reasons as many other countries have gone through: reckless lending, relaxing monitoring and control systems within the MFIs, borrowers having multiple access to loans that are spent on unsustainable consumption rather than investment, and then the toppling down of the mini pyramids like dominoes until a donor or government comes to the rescue. See http://www.microfinancegateway.org/p/site/m/template.rc/1.9.40294/ for a detailed analysis of the cycle that only recently manifested itself in Pakistan.
Pakistan
23 Jan 2010
Unsustainable Growth
The article is an interesting and encouraging reading. Morocco's experience is a lesson for other developing countries with rapidly growing micro finance sector and they can do well to take preventive measures to address the major risk areas of the sector, namely, institutional framework of MFIs, multiple lending and over-indebtedness, uncertain liquidity environment for the sector and improve the regulatory framework rather than allow the sector's growth to depend on piggy ride on subsidized loan and grant funds.
India
23 Jan 2010
Morocco’s mfi crisis needs proper diagnosis to choose the right remedy
Morocco’s mfi crisis needs proper diagnosis to choose the right remedy
The article rightly points out that the microfinance crisis at morocco can not be blamed on the global financial crisis.
Equally important to recognize is that the poor borrowers from the MFIs should not be blamed and charged as delinquent. The default is unlikely to be willful; the reasons could, possibly, be outside their capacity. The capacity to absorb micro credit, any where, is limited, though the assistance is life saving.
The people alone know to what extent they can avail themselves of the loans. They know what type needs they have – consumption needs and economic enterprise viable to them. People naturally restrict the loan quantum to the level the overall economic policies of the country permit. To be clearer they don’t take up the activities undertaken by the big business as they can’t compete with them; they never venture to produce goods in the tiny sector which have no market. These decisions they take when lent in self help group mode.
Instead, when lent to individuals and by multiple agencies and without proper assessment of the need, viability prospects of the enterprise under taken and repayment capacity, the loans are bound to go bad as happened in Morocco.
Having done that, it is unjust think of coercive measures for recovery like developing dedicated recovery team and judicial action, instead of making a case by case analysis to separate the willful defaulters, if any, from the non-will full
The solution to the problem lies in the proper diagnosis of the disease and choosing a suitable remedy for that while developing preventive action to arrest further proliferation and recurrence of the malady.
Since the government assistance has helped the augmentation of the microfinance sector, and the people involved are poor, it will be the responsibility of the government to go to the rescue of the MFIs without hurting the interests of the ultimate beneficiaries. Together with this, the regulatory framework suitable to the MFIs in the country should be put in place.
The experiences learnt should be taken as the lessons learnt for ensuring the sustainable growth of the sector.
Dr PSM Rao Freelance Columnist and Consultant mfi and livelihood issues
S M Rao P Freelance Columnist and Consultant microfinance and livelihood issues India
22 Jan 2010
same could be said for Bosnia
I appreciate Xavier's comments and those of participants in the sector who say Morocco's crisis cannot be blamed on the global financial crisis. Any time there is rapid growth it usually means a lag in internal controls, since it is hard to keep hiring and developing loan officers at a rate that keeps up with portfolio growth (and this is only one of the internal control weaknesses).
There are several countries experiencing similar levels of portfolio growth (India is one) and I wonder if market participants there are aware of the potential risks of unsustainable growth rates?
Perhaps the focus on achieving scale and furthering outreach (i.e. focus on growth) needs to be tempered by the recent experiences in countries like Morocco and Bosnia?
Karla Brom, independent consultant, USA
