Who Inflated the Microcredit Bubbles?

March 27, 2010

A couple of weeks ago I wrote:

If there were not so much finance for microfinance, the industry’s weaknesses would not be so dangerous. Yes, the industry should reform, for example by setting up credit bureaus. But these things are easier said than done and take time. Hypergrowth robs the industry of time.

To fully understand the causes of the recent microcredit crises, this question must be confronted: Are donors and investors putting too much money into microfinance, or at least into some microfinance institutions? Is microfinance the overfunded underdog?

Recently, CGAP documented microcredit crises large enough to affect national statistics in Bosnia, Morocco, Nicaragua, and Pakistan. Reading that report, this impertinent, important question occurred to me: Who inflated the microcredit bubbles? To find out, CGD’s Paolo Abarcar began combing through the audited financial statements of the five biggest microfinance institutions (MFIs) in each of the four countries in order to learn who they have borrowed from.

Gathering this data showed us how difficult it is to get an up-to-date, comprehensive view of credit for microcredit. Annual financial statements are helpfully collected on the MIX Market. But extracting the data from them still takes labor. The statements are long pdf’s and each MFI’s creditor list, tucked somewhere at the back, is formatted differently. Some loan lists include the terms of the loans (interest rates, maturity dates); some don’t. Some disclose guarantees (when a third payment promises to honor a loan if the MFI defaults); some don’t. The same creditor can be named three different ways in three different documents, which impedes matching up entries. For MFIs in Bosnia, Morocco, and Nicaragua, 2008 statements were generally available, except from the defunct Zakoura in Morocco (and partly as a result we found 2008 statements for only four Moroccan MFIs). For Pakistan, we had to use 2007 statements. We spent hours cleaning up the data. No doubt people with more expertise can improve them further (please!). We did not even attempt to cull data on equity financing.

Below, I list the top five creditors in each crisis country, according to our imperfect, incomplete data. Complete lists are in the spreadsheet. Some of the macrocreditors are domestic government institutions which through Googling I learned are in turn financed by foreign donors or investors, such as the KfW-backed Financiera Nicaragüense de Inversiones. I include the names of such foreign investors in parentheses. (Many are listed in an appendix of Role Reversal.) Where we can see information about loan guarantees, we attribute the loan to the guarantor. For example, the financial statement of the Kashf Foundation in Pakistan mentions a “Citi Bank – Opic loan – secured” of 354 million rupees ($5.74 million). Citi lent that money but the U.S. government’s Overseas Private Investment Corporation assumed the risk for all losses, thereby, we assume, making the loan possible; so we count that loan as OPIC’s.

In Bosnia, Nicaragua, and Pakistan, foreigners dominate credit for microcreditors. Most of the big foreigners are public institutions. #1 in Bosnia is the European Fund for Southeast Europe, which is a conduit for the European Commission and other European donors. Apparently tops in Morocco is Spain’s Instituto de Crédito Oficial (ICO). The Asian Development Bank looms over the scene in Pakistan thanks to a single loan to the Khushhali Bank. Beneath it is the Pakistan Poverty Alleviation Fund, which has been placing World Bank money into microfinance. A few of the big creditors are private companies that invest funds from public and private investors with social missions. Blue Orchard, for example, is #1 in Nicaragua and #2 in Bosnia.

The role of foreigners in Morocco is less clear. We put the ICO atop the Morocco list on the strength of its association with a $100 million loan from Banque Populaire du Maroc to Al Amana. At the moment, we give the ICO “full credit” for that loan, viewing it as a guarantor. That may exaggerate the ICO’s role. At a coffee shop yesterday, Xavier Reille explained to us that the ICO lent millions of Euros to several Moroccan MFIs, which kept the foreign currency and leveraged it into bigger loans from Moroccan banks, evidently on the idea that the ICO would take first losses if Al Amana ran intro trouble. A Spanish government report shows exposure in Morocco of €46.5 million ($65.5 million) at end-2008, well below the $143 million in our tentative tally below. At any rate, the ICO is big in Morocco. We’ll improve the numbers as we learn more.

Update 3/28/10: The role of foreigners in Morocco is smaller, though arguably larger than suggested in the data below. At a coffee shop Friday, Xavier Reille explained to us that the ICO and Agence Française de Développement lent millions of Euros to several Moroccan MFIs, which kept the foreign currency and leveraged it into bigger loans from Moroccan banks, evidently on the idea that the ICO and AFD would take first losses if the MFIs ran intro trouble. The ICO makes it into the top 5 (below) while AFD is #7. Arguably, these totals understate the catalytic importance of the foreign loans. At any rate, the ICO is big in Morocco.

I will write separately about the implications of this data.

Bosnia: Top 5 creditors to top 5 MFIs with data, end-2008

Morocco: Top 5 creditors to the 4 MFIs with data, end-2008

[Revised 3/28/10.]

Nicaragua: Top 5 creditors to top 5 MFIs with data, end-2008

Pakistan: Top 5 creditors to top 5 MFIs with data, end-2007

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1. Nachiket Mor Says:
   March 27th, 2010 at 2:03 pm

   Dear David,

   I think it is increbily important that we fully understand the reasons behind these crises because nobody is hurt more than the poor when the lenders to them go through shocks like this one. I would therefore like to commend you and your team for taking on this very difficult task.

   I am writing this post also to share with you some of my thoughts (my only exposure is to the Indian markets so please do bear that in mind and apologies in advance for the length of the post):

   1. I feel that credit bureaus are a sophisticated idea and while very important in the long-run, are unlikely to be of much immediate use for containing default in the short-run and may perhaps even hurt (see below).

   2. Indian MFIs, particularly those that follow Professor Yunus’ JLG [joint-liability group] methodology (we refer to them as Grameen Replicators in the honour of Professor Yunus), I feel, using an argument similar to yours where you replace Citibank with OPIC, are providers of liquidity and process, operations and cash management capabilities—the credit risk is being borne by the Group and not by the MFI.

   3. I think our failures have come when we have become confused about this crucial feature of our small-ticket lending and have tried to use credit underwriting type tools such as credit scores and loan officers (we are perhaps even fortunate that our credit bureaus do not yet have good data for this segment because otherwise some may have attempted to use it for their lending operations as well). Our best performers know this and stick to the “knitting” and focus tightly on process discipline. They also ensure that the loan sizes do not breach the “savings envelope” under any circumstances and stay modest.

   4. While there are many attempts currently in progress in India to limit competition amongst MFIs I feel that that this could amount to anti-trust activities and lead to informal cartellisation to the detriment of the customer. No systematic research has supported the notion of the “gullible” customer eager to take money from all possible MFIs that offer them and “run to the alcohol shop”—on the contrary the evidence suggests entirely the opposite since, as it turns out, the Group does exercise careful credit discipline and the average borrower is quite worried about the consequences of default. Most such commentaries are based on anecdotes and pre-conceived notions—I am yet to see any systematic study in support of these notions.

   5. In my own view the key problems lie in two broad areas: (a) failure to follow strict process discipline while lending and (b) the idea of self-help where savings of poor people are put to grave risk by permitting small, under-capitalised organisations (including cooperatives, VLSAs and ROSCAS) with heavily concentrated regional exposures, to use the savings of their clients in their own lending operations. In my view, at least in India, these two problems have been at the root of most of the failures of rural and urban financial institutions which focus on the poor—with grave consequences for their borrowers and their depositors.

   My apologies for this long post. Would love to hear your comments.

   Regards,

   Nachiket

2. Jim Brenner Says:
   March 31st, 2010 at 6:28 pm

   David:

   Difficult as it is, this is useful exercise. This kind of ‘drill-down analysis’ is very rare, because—as you note—because the devil is in the details of those pesky footnotes, which can be idiosyncratic and obscure, and because guarantees and other credit enhancements can inadvertently obscure important trends. For example, I notice that Blue Orchard is listed in a few of the countries. As I understand it, they are a capital market conduit and certain IFIs guarantee some of their debt as well. Analytically, there must be a way to create some kind of a cash-flow water fall that easily illustrates the flow of fund into these structures. I enjoy your research. Keep it up!

3. Scott Gaul Says:
   April 2nd, 2010 at 10:02 am

   Hello David,

   It is always good to see people diving into the footnotes (and to see disclosure that is deep enough to support this kind of analysis). MIX has been collecting data on these financing relationships and the attributes of the loans for a few years now, although it has not yet been released for the public. We plan to roll this out on the MIX Market site this summer. Some more details can be found here: http://www.mixmarket.org/mix-m.....cture-data. Because the data includes some non-public disclosures, it will be aggregated a bit more than what you see here. However, maybe it will save Paolo some work the next time around.