Two new articles about the Smart Campaign report  “Implementing Client Protection in Microfinance – The State of the Practice, 2011″ are now online:

• “Microfinance Industry Embraces Accountability, Report Finds,” a write-up from Philanthropy News Digest, leads by noting that “While problems remain, 88 percent of rated MFIs received overall passing marks for their client protection practices.”
• “The Smart Campaign’s ‘State of the Practice’ report claims that the effort to embed client protection deeply in the microfinance industry is still young, but is thriving,” says the Microfinance Focus article “Microfinance Industry Embracing Client Protection – Smart Campaign Report.”

Have you read?

IFC to Finance the Smart Campaign’s Microfinance Client Protection Initiatives in India

‘Client Protection: Are We There Yet?’ – Smart Campaign Director Isabelle Barrès Blogs at CGAP

The Only Solid Basis for Microfinance Having a Bright Future?

Haitian vendors at work in Port-au-Prince, Jan 20, 2010.

Besides containing a nice nod to the Smart Campaign‘s work on a process for certifying MFI client protection practices, Daniel Rozas’ post  “Rethinking Multiple Borrowing” on MF Focus offers a fresh take on a much-mulled topic.

Rozas, who recently authored the report “Weathering the Storm”  for the Center for Financial Inclusion, argues that despite press reports to the contrary, multiple borrowing is not the result of “heavy market penetration, or even saturation.”

Rozas looks at the phenomenon through the lens of Haiti, which he recently visited. (His post therefore brings to mind Alex Counts’ book project on Fonkoze, the Haitian MF pioneer.) Rozas begins his post:

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.  Nor is it some foreign element to be excised from microfinance.  No, multiple borrowing is an intrinsic part of the practice, one that has been with us for years.  Nor, despite press articles to the contrary, is it a result of heavy market penetration, or even saturation.

This is a realization I came upon during a recent trip to Haiti.  Haiti, you see, is a relatively unpenetrated market, with peak numbers on MIX showing about 120,000 borrowers, or about 1.2% of the population.  And yet the feedback from loan officers on the ground was that multiple borrowing is widespread, some suggesting that as many as 50% of their clients have loans with other MFIs.  And this wasn’t a case of saturation in one place and nothing elsewhere – I heard similar stories both in the capital and in the regions.

Haiti is full of informal markets and businesses that make up the heart of a traditional microfinance portfolio.  Demand is clearly there.  But given the spread of multiple borrowing, the true penetration numbers suggest less than 1% of the population – far below the numbers of other (stable) microfinance markets.  This level of penetration is very low indeed.

You can click this link to head for MF Focus and read the rest of Rozas’ “Rethinking Multiple Borrowing.”

Image credit: Fred W. Baker III

Have you read?

 The Center’s Best-Kept Secret: The Country-by-Country Client Protection Library (includes Haiti)

The Smart Campaign to Launch a Certification Program for Client Protection in Microfinance

On the Anniversary of the Haitian Earthquake: Fonkoze and the ‘Super Poor’

[Editor's note: This guest post accompanies the release of "Weathering the Storm: Hazards, Beacons, and Life Rafts," Daniel Rozas' examination (with extensive case studies) of lessons in microfinance crisis survival.]

First of all, we would like to thank Daniel´s mention of the work we did for Calmeadow, with support from the MIF/IDB, IAMFI, Deutsche Bank Foundation, and the Center for Financial Inclusion at ACCION International. We would also like to take the opportunity to comment that although he mentions just Beatriz Marulanda as author of “Taking the Good from the Bad in Microfinance: Lessons Learned from Failed Experiences in Latin America,” it was really a joint endeavor in which Mariana Paredes, Lizbeth Fajury, and Franz Gomez all participated and deserve equal credit.

Apart from highlighting the very entertaining style in which the paper is written, it is interesting that the author found similar causes for the crises in the 10 MFIs analyzed, despite using cases from outside of Latin America. In extension of our findings, Rozas adds two causes of crisis – financial vulnerability and macroeconomic crisis. With regard to the latter, he mentions, as we did, that these are present in many of the cases but in most cases they are just a “trigger that sets off institutional weaknesses already present” – a claim with which we completely agree. Also similar to our findings, Rozas concludes that in most of the cases, the crisis did not have a single cause but instead was a combination of elements that ended up creating great difficulties for the MFIs which were analyzed.

As Rozas moves from the “hazards” that MFIs encounter to the “beacons” they can use to steer away from the “storms,” the findings reveal similarities to the Latin American context and the scope of the work we undertook. Rozas’ paper, however, takes on an additional challenge, by providing a series of recommendations which he hopes can serve as “rafts to navigate away from the storm.” He provides a series of practical tips which undoubtedly can help, but one question emerges: Who will make the decision to implement them in institutions where the main failure was precisely lack of corporate governance? All MFIs, as any financial intermediaries, will encounter difficulties in their development, and we would argue that those able to face the difficulties to prevent a crisis are the ones that have been able to build and consolidate a solid corporate governance structure. Although it may sound simplistic, in Spanish we would say that “todo lo demás viene por añadidura” (everything else comes in addition).

We would like to comment on Rozas’ recommendations identified as Step 1 – Insure Immediate Survival. He correctly points out that it is critical to ensure liquidity. As he mentions, “an MFI that runs out of cash is facing death.” In the process of analyzing different alternatives to insure liquidity, he recognizes that liquidity is so critical that in the case of deposit-taking institution, this is precisely what determines an intervention by the regulatory authority which protects public deposits.

The disturbing fact is that he suggests that in the case of non-deposit taking institutions or in environments where weak regulatory oversight delays such a takeover, “it is possible that the MFI will be able to continue to operate on its own” as long as it can keep clients’ confidence. This could be understood as an approval of certain practices we saw in some of the cases we analyzed, in terms of a bad disclosure of financial information justified by the need to “keep the institution going.” In that sense, the next comment arrives: “If a group of depositors comes to withdraw, move mountains to meet their request. Then pray that no other depositors will come asking. In the very worst case, make a clear promise about when the money will be available, and then move more mountains to keep that promise” This comment should take into account that if the illiquidity has reached a point where the public´s money is at risk, the best thing to do is organize an orderly liquidation.

The important factor in these circumstances is not to keep an MFI afloat, but to protect the savings of its clients. This might even sound contradictory to another recommendation which we fully agree with, which says: “For MFIs that have large borrowings, being transparent and proactive with creditors is critical.” The abovementioned remarks would suggest that it may be necessary to make an additional comment to explain better the full dimension of the consideration that MFIs should protect liquidity at any cost.

We want to emphasize the importance of one other area he mentions – the conservation of capital – but not as an alternative that “might” be needed, but rather as one of the priorities management has to focus on, obviously as long as the institution can offer a strategic reorientation. From the cases we analyzed, the problem was that in the MFIs where governance was an issue, new amounts of capital solved the situation only when new stakeholders came into place and provided this new governance structure. This highlights the most important point from Rozas’ recommendations and from our own cases, namely that there is an opportunity to learn how to avoid the circumstance that these institutions encountered, and thus prevent a crisis that could lead to its failure.

Image credit: DavoO

Have you read?

India’s Microfinance Crisis: What Lessons Does It Hold for the Philippines?

Consequences of Over-indebtedness: Lessons from India

Understanding Failures in Microfinance

Nicaragua’s Microfinance Crisis: Looking Back, What Did We Learn?

Repayment Crises: Lessons Learned from Bolivia

The Center for Financial Inclusion today releases “Weathering the Storm: Hazards, Beacons, and Life Rafts,” which  explores the crisis-management experiences of ten MFIs in Asia, Africa, Europe, and the Americas.

The new white paper, which was written by Daniel Rozas and sponsored by Calmeadow, Deutsche Bank, and Credit Suisse, maps out  the ways in which MFIs most commonly get in trouble and offers a blueprint for sound management and crisis control.

Rozas’ new Microfinance Focus blog series, which is largely based on the white paper,  will examine the many facets of risk in microfinance. As he notes in his introduction to the series, some of the MFIs “were able to execute successful turnarounds, while others failed outright, but in the process they all left behind a set of valuable lessons for the rest of the industry.”

Today’s post, “Part 1: Bring Microfinance into Politics,” begins:

It seems wherever you turn these days, politics is getting into microfinance. In Andhra Pradesh, the state government exercised its prerogative to kill off an entire industry. Next door in Bangladesh, Prime Minister Hasina decided to hound Yunus out of Grameen Bank, no matter the cost. The No Pago (No Pay) movement in Nicaragua counted on the support of the country’s president. What’s the industry to do in the face of such onslaught?

Weathering the Storm identified state intervention as one of the core risks faced by MFIs. It drew its lessons from the case of PADME in Benin, which was effectively nationalized by the government in 2008. At the time, PADME was in the process of transforming from an NGO to a for-profit entity, and the Benin government had made clear from the start that it was not in favor of such a plan. Despite this, PADME’s management and prospective investors had decided to push ahead, thinking that they would be able to parry the government’s attempts to block the process.

They were wrong. A few months before the transformation was to be consummated, the Benin government ordered the removal of PADME’s management and board, and replaced them with its own people. As cover for its actions, the government cited a trumped-up audit it had commissioned a few months earlier that, among other things, cited the use of fraudulent guarantees for its loans. And what was the evidence to support this charge? – a falsified guaranty document from a single “randomly-selected” client who happened to be the auditor’s sister.

The takeover was a de facto nationalization, and it was done in single day. PADME’s management and future investors were dumbfounded. The sudden action with seemingly no warning took them completely unawares. It shouldn’t have. The signs had been there from the start; the suddenness of the move was simply a reflection of the government’s preferred tactic aimed to minimize PADME’s ability to fight back...

You can read the rest of  Part 1: Bring Microfinance into Politics by clicking on the link, and you can find the study itself here. The in-depth case studies are available here.