Preventing client over-indebtedness in Cambodia

e-MFP, 20 October 2016

This week marks Financial Inclusion Week. In support of this effort to highlight what Financial Inclusion means for the Platform, e-MFP would like to highlight the work being done in Cambodia by its members and partners, including ADA, BIO, FMO, Incofin, and Proparco, as well as by the MIMOSA Project.

From its beginnings as a hotbed of NGO activity to one of the world’s most active microfinance markets today, Cambodia has always traced its own path in the sector. A decade ago, access to finance in Cambodia was minimal. Today, the Cambodia Microfinance Association counts 2 million loans outstanding for a population of 15 million, along with a growing number of deposit accounts, remittances, and other financial products. The Symbiotics MIV 2016 survey reports Cambodia receiving nearly 10% of microfinance investments in the world, second only to India – a country whose population is nearly 100 times larger.

What happens in Cambodia affects across the entire microfinance sector. And on that front, Cambodia is once again tracing its own path. more →

Inexorable growth in Cambodia: Like a rolling stone?

MIMOSA, 10 May 2016

Some lessons are unexpected. Back in 2000, during the height of internet stock craze, I was an amateur manager of a small stock fund consisting of 8 smalltime shareholders who were all my relatives. Being a bit of a contrarian, the fund focused mainly on biotech stocks, which were enjoying quite a strong run, even if not quite as exuberant as dotcom stocks. The fund did well – a roughly 250% return over 3 years, but as always, the lesson was not from this relative success, but from a far larger failure – the missed opportunity to bank a 750% return.

One stock stands out in my mind: Incyte Pharmaceuticals, which I had bought variously when it was trading in the $10-$20 range during 1998-99. By early 2000, it had crossed $100/share and was rapidly heading higher. At the time, I was well aware that there was no fundamental reason behind this runup – it was classic speculation. The question was when to sell? Internally, we had set a target of $150 (at a time when it was nearing $140 and rising rapidly). It was not to be. We sold some weeks later when it had slid down to the $60s…

Call me greedy and stupid. But I learned my lesson – I’m not made for stock trading! More importantly, it was my first introduction to the dangers of inexorable growth, which creates expectations that are difficult to reset and that far too often lead to disaster. more →

Living on the edge in Cambodia – is it worth it?

MIMOSA, 20 January 2016

Since publishing the first MIMOSA report – on Cambodia – I’ve heard one persistent critique.  We say that the market is saturated, yet none of the current indicators appear to support it: repayments are great, there’s no field evidence of widespread overindebtedness, and the major MFIs are all undergoing a process of Smart Certification. How can we assert that Cambodia is at risk of overindebtedness, let alone a credit crisis, when no other indicators seem to support it?

These are important and reasonable questions. But here’s the rub – all the factors that point to a healthy market are either lagging indicators or are too vague or too poorly understood to be used as benchmarks. more →

Microfinance in Mexico: beyond the brink

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 →

Introducing MIMOSA: Microfinance Market Capacity Measurement Tool

CGAP7 August 2013, co-authored with Emmanuelle Javoy

When you hear the word “Mimosa,” you might immediately think of the refreshing champagne cocktail. But now the MIMOSA – the Microfinance Index of Market Outreach and Saturation – also has relevance to financial inclusion. In brief, the MIMOSA is a simple way of measuring microfinance market capacity, an important complement to the approach described in a recent blog in this series by Annette Krauss and her colleagues from the University of Zurich. The key difference in the two approaches is that they work from entirely opposite starting points.  more →

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:
more →

MIMOSA: first complete cross-market model of credit market capacity

My collaboration with Planet Rating has just yielded its first publication:  the Microfinance Index of Market Outreach and Saturation (MIMOSA).  Here’s an excerpt from the introduction:

Outreach. Competition. Access. Over-indebtedness. Hardly any discussion of microfinance goes by without hearing one or more of these words. At heart, they are different facets of the same question: what is the potential market for loans from Microfinance Institutions (MFIs) in a given country?

This is a question that has not yet been fully answered, nor is this the first attempt at answering it. Perhaps the best-done study thus far was a recent paper by a team at the University of Zurich, and there are several others that preceded it. However, none of these studies have been able to propose a methodology that would simultaneously be simple to use, show reasonably accurate results, and be easily applied to nearly all developing countries. That is the objective we have set for MIMOSA.

The release in April 2012 of the Global Findex database, created by the World Bank, provides a unique opportunity to accomplish this. The Global Findex is a dataset on the use of formal and informal financial services (bank accounts, savings, credit, payments, etc.), based on surveys of at least 1,000 individuals in each of the 148 countries covered, all conducted in 2011. Both the initial analysis by the survey authors, as well as most of the subsequent analysis of this extraordinary dataset has focused on the question of insufficient access to financial services. This paper zooms in on one component of financial access – credit – and asks the opposite question: when is there too much access?

Read the full study here.

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 →

A Giant Stumbles: Why did investors abandon Blue Orchard?

Microfinance Focus, 10 December 2012; microDinero (Spanish), 12 December 2012

Over the past 18 months, one of the microfinance sector’s largest and most prominent funds, Blue Orchard’s Dexia Micro-Credit Fund (recently renamed Blue Orchard Microfinance Fund), saw a major outflow of investor capital, with some $268 million or nearly 50% of the fund’s peak value having been redeemed.  The scale of these outflows is unprecedented in the sector.  For years, investment capital largely flowed one way:  in.  The exit doors were there, but rarely used.  That is no longer the case.  The pioneer of the microfinance investment industry has now crossed another milestone in the industry’s development.

Like Dexia, many microfinance funds (commonly referred to as Microfinance Investment Vehicles or MIVs) are subject to unscheduled redemptions.  For those funds, their investors, as well as others in the sector, BlueOrchard’s experience holds important lessons, and it is those lessons that this article hopes to convey. 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 →