I very much enjoyed this thoughtful posting on Weathering the Storm. As you yourselves note, your work was critical in providing the foundation for my research. I also liked that you raised some very relevant and pointed questions to Weathering. So, I’ll take the opportunity to engage in the debate — agree with some, disagree with others…

Your focus on governance is exactly right — I believe it is the single most important factor in a successful turnaround. A review of the cases studied in Weathering will find that all those MFIs that were able to implement successful turnarounds all had capable and involved boards. Meanwhile, most of those that failed had serious flaws in governance. At the same time, I’m not sure I’d agree that only MFIs with weak boards find themselves in such critical situations in the first place. Mistakes can be made even by well-governed institutions, as was clearly the case for Caravela or ShoreBank, for example.

Regarding liquidity for depositories, once again, I couldn’t agree with you more. The ultimate focus in such cases should be on safeguarding depositors’ funds. Perhaps where I take issue is on the question of an orderly liquidation as the best means to achieve this. As it happens, I did a study on MFI liquidations (Throwing in the Towel, available on Microfinace Gateway), and the problem is that an orderly liquidation can be a tall order for many MFIs. It is also highly dependent on external factors, such as the legal environment. The main risk is that if an MFI that embarks on liquidation (i.e. stops new lending), it risks severely compromising its existing loan portfolio, as borrowers often stop repaying in such situations. That in turn undermines the very customer deposits the MFI is seeking to protect.

While personally, I’m strongly in favor of strong, well-managed deposit insurance funds that also form an important part of regulatory oversight, MFIs don’t get to choose which environments they operate in. So in certain weak environments, and MFI is forced to make its own decisions to protect deposits. There is of course no single solution, but the proposal for scheduled withdrawals comes from FuegoNord, which used the tactic quite successfully to protect depositor funds — exactly so as to avoid a collapse that would have resulted from an uncontrolled run on deposits. Over the course of about half a year, it was able to return the vast majority of its depositors’ funds, before it was ultimately closed by a local tax authority. It’s an interesting case, since I think this was one of the things this MFI actually did right.

Best,
Daniel