e-MFP, 6 October 2014
This is part 1 of a 3-part installment from my brief visit to Mexico in October 2014. See: parts two and three.
I’m on my way to Mexico, for what I hope to be the start of a deeper exploration of overindebtedness in the country. Data analysis an ocean away can be revealing, but there’s nothing like seeing the numbers come alive when visiting the field. First stop: Tapachula, Chiapas.
Every analyst has his or her own approach. For me, I find it best to come with a number of hypotheses and then see to what extent reality reflects those initial preconceptions. I like to keep an open mind and am always willing to change my view. Still, having a pre-existing framework in mind helps structure field observations, especially when time is short.
I’ve already shared my thoughts on multiple borrowing and overindebtedness in Mexico, but those go back a couple of months. Since then, I’ve spent a fair bit of time digging deeper into the data and comparing Mexico to what I’ve seen elsewhere (including finalizing a study of Moroccan MFIs during 2008-13, including how they dealt with substantial multiple borrowing during 2009). Based on this and earlier work, I’m putting down some of my hypotheses below. more →
e-MFP, 7 Jul 2014
My latest post on the credit bubble in Mexico had one especially interesting comment. Jose Manuel asked to consider the loan sizes in the country as a factor that might explain the prevalence of multiple borrowing.
The comment is highly relevant. What Jose Manuel suggests is that loans in Mexico are unusually small. And in a way, he is right. On a per capita GNI basis, Mexico’s loans are smaller than in any other country. By contrast, India’s loans are nearly three times larger. This has two potential implications: first, small microfinance loans put less of a burden on Mexican borrower incomes, and second, their inadequate size encourages clients to borrow from multiple lenders in order to meet their requirements. And yet, I find that both implications are incorrect and that multiple borrowing levels in Mexico continue to point to a very large bubble. more →
e-MFP, 2 Jul 2012
Last week, as its football team was preparing for its match with the Netherlands, Mexico hosted the International Forum for Financial Inclusion. It was an important event, opened by the President of Mexico, Enrique Peña Nieto, and attended by such notables as Christine Lagarde. By all accounts, it was an excellent meeting where representatives of financial regulators from around the world shared their experiences and strategies to promote financial inclusion in their countries.
But one thing stood out. During his speech, Jaime González Aguade, President of the Comisión Nacional Bancaria y de Valores (agency in charge of regulating Mexico’s financial sector) stated:
I have no reason to dispute his assertion. But one has to wonder — how should this leadership be reconciled with the high rates of overindebtedness among the country’s microfinance clients? And when the bubble bursts, might it not undermine the very efforts to expand financial inclusion that Mexico is promoting?
e-MFP, 24 Jun 2014
Last week, MFIN, received official recognition from the Reserve Bank of India as a Self-Regulatory Organization in charge of regulating the activities of its members. This is the first time a financial organization received such official recognition in the country. Indeed, I’m not aware of any other countries that have a similar arrangement, so this may well be a global milestone as well.
This is a big deal that bodes well for the future development of the Indian microfinance sector. It also reminded me of an article co-authored by M-CRIL‘s Sanjay Sinha and myself back in January 2010, nearly a year before the onslought of the Andhra Pradesh crisis. MFIN had been formed just months before, and had developed a Code of Conduct that included many important features, including strong limits to multiple lending – a maximum of 3 concurrent loans or combined amount of 50,000 rupees (~€750 at the time). However, we felt that as a purely self-regulatory institution, MFIN lacked the teeth to effectively monitor its members, and we made the case for a system quite similar to the one that’s just been implemented in India. more →
e-MFP, 19 Jun 2014
You know the game of musical chairs: players sit on chairs arranged in a circle. The music starts and the players start circling – dancing, running – while chairs are progressively removed. Then the music stops and chaos erupts as the players seek to find a place to sit.
In Mexico, the number of chairs remaining is few indeed, even as the MFIs continue to dance. The recently published study by the Microfinance CEO Working Group has shown just few chairs are left. More →
e-MFP, 30 May 2014
Or the more things change, the more they stay the same… Sometimes it seems as though there is no shortage of proverbs when it comes to looking at the seemingly inevitable credit business cycle. In my last blog I took a look at the unprecedented stability of the US banking sector during the 50 years following the Great Depression. Recent news from Mexico – in the form of a study by the Microfinance CEO Working Group – shows just how far away we’re from that world.
There’s much to say about that study, and also the Working Group itself, which deserves credit for the willingness to publicly share the data, no matter how distressing the findings might be. And yes, they are distressing. More →
e-MFP, 22 May 2014
Recently, I was reading the Economist and came across Charles Keating’s obituary. That name means little to most readers outside the US, but for me it reminded of an idea that’s been percolating in my mind for quite some time now: while rich countries offer valuable lessons for microfinance regulation, those lessons alone won’t be enough.
You see, Charles Keating was the poster-child of the Savings & Loan Crisis during the late-1980s, which saw the collapse of many of these small banks across the US, ending an unprecedented 50-year period of stability in the US banking sector. From today’s vantage point, that period is also difficult to understand. More →
e-MFP, 25 Apr 2014
A recent article by the Economist hails a study in Bangladesh by Shahidur Khandker as “the biggest study so far [which] finds that microcredit helps the poor after all.” Within the sector, the article has been widely circulated as proof that, indeed, microfinance does work. Rupert Scofield, CEO of FINCA, found vindication that this study finally resolved the problems of earlier randomized control trial (RCT) studies, which had found that microloans had zero impact on clients:
The recent short-term studies were undertaken in highly saturated markets and focused on clients who diverted some or even all of their loans into consumption. Microcredit works best when the client uses it to fund a business.
But there’s the danger of jumping to early conclusions. More →
e-MFP, 13 March 2014
For years, credit was the driving force behind microfinance. But times have changed. Instead of credit, we now speak of financial inclusion and expanding access to savings stands as one of the topmost objectives for the sector.
We also live in the age where it’s no longer acceptable to claim success without reliable metrics to back it. And on that front, the metrics applied to savings are woefully inadequate. According to a paper recently published by e-MFP, 50-75% of the savings accounts reported by MFIs stand empty. Like shadows cast by an evening light, the majority of savings clients are but illusions that obscure the real savers. We are thus doubly tricked – led to believe that more clients are saving than is the case, and that the clients who save are poorer than they really are. More →
e-MFP, 13 January 2013
It’s a question that comes up at nearly dinner discussion of microfinance: why are the interest rates so high, and how can poor clients afford them? So, you have the answer – interest rates are high because operating in difficult environments is costly, and because those costs have to be recouped from small loans. After a few examples (it costs the same $10 to make a $100 and a $1000 loan…), you eventually set your questioner at ease that most MFIs might not be ripping off the poor after all. But after all that, you’ve largely forgotten then main point of the question – how can the poor afford it?
After reading yet another article questioning the affordability of microfinance loans, it occurred to me: microfinance clients face the same economics as the MFIs. Consider your typical market trader. She buys stock to resell. The cost of the stock, together with some fixed assets, constitutes her investment capital. What are her returns? I propose that they must be high as a matter of principle. More →
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