Saving Chiapas, Saving Ourselves: How to avoid a repayment crisis in Mexico

Financial Access Initiative, 5 June 2013

My last two posts described the high risk of a repayment crisis in Chiapas, Mexico, and its potentially devastating consequences to the microfinance sector around the world.  But here is the good news: thus far there is no crisis, and one could still be avoided.

I have argued before that DFIs and other funders could leverage Smart Certification to enforce client protection practices and thus avoid the kind of overlending that’s happening in Chiapas.  However, that prescription alone would not work in Mexico, mainly because a large number of Mexican MFIs are independent of foreign funding, and there are many other lenders active in the same space, including consumer finance companies and large retailers that provide credit.

The answer to avoiding a repayment crisis in Mexico will thus require government action, most likely new legislation that would bring all lenders under a common set of regulatory standards.  Specifically, there are two key areas that must be addressed:
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What’s Next: Another Repayment Crisis?

Financial Access Initiative, 14 February 2013

It’s been over two years since the start of the great India insolvency.  Four years since the Bosnia blight and No Pago Nicaragua.  And nearly six years since the Morocco microfinance meltdown.

At this point, it’s reasonable to say that the first global crisis in microfinance has passed.  Life is on the mend.

In a recent email, Alok Prasad, head of the Microfinance Institutions Network in India (MFIN) described its most recent quarterly report as “green shoots in evidence.”  The numbers certainly bear him out. Elsewhere, investors speak of tightening their exposure to countries with overheating markets, pay attention to issues of overindebtedness, and are wary of the sort of runaway growth that was being posted by Indian MFIs back in 2008-10. more →

Can self-regulation protect microfinance clients?

CGAP, 6 February 2013

Last month the Smart Campaign launched its certification program.  For those who care about client protection, this is an important and welcome milestone in what has been an impressive journey, involving a broad spectrum of activities to promote client protection.

In the first post in this series, Philippe Serres describes one such project by the French development organization AFD and the Cambodian Microfinance Association (CMA) to support implementation of the Client Protection Principles, including support for MFIs seeking to undergo the Smart Certification process itself.  Notably, this support comes alongside client protection requirements that funders like AFD, Proparco and FMO  have been incorporating into their financing agreements with MFIs.  Thus, not only are these funders supporting MFIs in their bid to strengthen client protection, they are increasingly making their funding conditional on the implementation of client protection practices.

In many respects, this is an exercise in self-regulation.  The arrival of Smart Certification presents a unique opportunity to take these efforts to the next level and apply this self-regulation to the entire microfinance market in Cambodia and beyond.  Read full article here.

From Responsible Lending to Responsible Profit

Financial Access Initiative, 16 November 2012

If there’s one issue that’s most difficult for microfinance practitioners to explain to the lay public, it’s high interest rates.  As Elisabeth Rhyne describes it, at some point the numbers get so high that people become outraged and stop listening altogether.  Most recently, the issue was put back in the public eye through Hugh Sinclair’s Confessions of a Microfinance Heretic and the media coverage it has spurred.

With few exceptions, his critique that microfinance investors are investing in MFIs charging exorbitant interest rates has gone largely unanswered. That’s not a tenable position for the long-term.  For a socially responsible fund, the case ought to be simple – if you have investments that you’d rather not have to publicly support and explain, then either those investments don’t belong in your portfolio or you should learn how to explain those investments.

Rates in excess of 100% (in APR terms) are not unknown in microfinance.  more →

Can borrowers be trusted to reschedule their own loans?

Financial Access Initiative, 13 September 2012

I have written before how tiny Zidisha Microfinance is challenging long-held assumptions by leveraging internet social media and mobile payments like M-PESA to lend to clients without the help of loan officers or local staff.  Since then, Zidisha has grown from tiny to small, with a portfolio now at $200,000, over 430 active borrowers, not to mention its 1400+ lenders.  And, as before, its operations remain solid, with PAR30 at a respectable 6.6%[1] (check out its stats for more).

I’ve been advising Zidisha since before its launch in 2010, and with that had the opportunity to watch the evolution of the platform’s many innovations.  One feature, introduced in August 2011, allows borrowers to request to reschedule their loans, regardless of whether they are delinquent or not.  more →

What’s wrong and what’s right about consumer finance?

Financial Access Initiative, 8 May 2012

It’s the microfinance bête noire.  The great unspeakable.  The furtive shadow slinking down the narrow alleys of poverty.  Yes, the consumer loan.  Has microfinance really come to this, we ask?  Helping the poor buy a TV?  Charging 40% interest for the couch to go in front of that TV?  And what about family celebrations, festivals, dowries?  Is that really what microcredit is for?

Consumption lending has been creeping out from the shadows for some time, but mostly for “good” consumption like school fees, urgent medical care, or basic needs like food during those difficult periods when income is scarce.  Still, for many of us the TV-on-credit notion that represents what is so easy to think of as “bad” consumption remains too painful an idea to swallow.

But how to draw the line?  If not the TV, then what about a microwave?  A motorbike?  Plumbing in the home?  Is there a framework one can use to evaluate when consumer credit is acceptable and when it is not?  No less importantly, how does an institution dedicated to serving poor customers decide what type of funding mechanism – savings or credit – is more appropriate for a given purpose?  more →

Repairing a Tarnished Image: a Plea for Transparency in Indian Microfinance

MicrofinanceFocus, 28 March 2012

Last month, the headlines of the world’s papers read déjà vu.  “Suicides in India linked to microfinance debt.”  “SKS Microfinance implicated in farmer suicides.”  The headlines may have differed, but the article was one and the same, penned by Erika Kinetz of the Associated Press.  SKS was appalled, calling the report “libelous” and “scurrilous.”

For what it’s worth, the damage has been minimal.  SKS stock slid 4.25% on the day of the article, but recovered within a few days of trading.  The slide shows little distinction from its already volatile trading pattern (Figure 1).  Of course bad news can also cause lenders and investors to take a second look, or simply slow things down.  One MFI manager told me of exactly this very reaction on the part of an Indian bank in the immediate days after the AP article.  But the story got relatively little press in India, and no follow-up of significance.  By now it’s reasonable to say that the microfinance sector in India can breathe a sigh of relief. Seeing bad news get swept back under the carpet can be quite satisfying, even if the stink remains. more →

Freedom to Default: dealing with overindebtedness when all else fails

Financial Access Initiative, 11 January 2012; Microfinance Focus, 14 January 2012

If there’s one microfinance word that rose above all others in 2011, it’s overindebtedness. As of the time of writing, it racks up the highest count on CGAP blog’s tag cloud (not counting generic terms like “microfinance”).  It seems fitting, then, to start 2012 with a blog post on this very subject.

When we talk about overindebtedness, it usually comes for the perspective of the industry’s responsibility, whether the MFI, funders, or regulators. Prevention of overindebtedness came up as the most widely evaluated client protection principle in the Smart Campaign’s survey of social rating agencies and microfinance investors.

This is, of course, all right and proper. It is the industry’s job to practice responsible lending, and avoiding overindebting clients deserves a place at the top of that agenda. But no matter the level of diligence on the part of lenders and financial education provided to clients, some borrowers will still become overindebted – be it because of bad business decisions, destabilizing macroeconomic shifts, or simply a string of bad luck. So what becomes of clients that, despite best efforts, still become overindebted? more →

Rethinking Multiple Borrowing

Financial Access Initiative, 14 September 2011; MicrofinanceFocus, 15 September 2011

Some time ago, I had a conversation with a microfinance investor.  What is the greatest challenge facing the sector? – I asked.  His answer:  multiple borrowing – multiple borrowing getting people into too much debt; multiple borrowing transforming micro-enterprise lending into consumer finance; multiple borrowing rewriting the traditional relationship between MFIs and their clients.

Of course, multiple borrowing is present in all of these cases.  But thinking about multiple borrowing along these lines misunderstands the basic situation. Multiple borrowing isn’t a reflection of some recent or extreme developments to be ascribed to runaway growth, greed, or willing ignorance.  And despite press articles to the contrary, it is neither a result of heavy market penetration, nor even saturation. No, multiple borrowing is an intrinsic part of the practice, one that has been with us for years. more →