AVOIDing Over-indebtednessAntwerp27 February 2013

Caroline Vance, Deutsche BankLisa Sherk, BlueOrchard

Progress since Jordan

• Improvements to the Managers’ Guidelines on Over-indebtedness:

▫ Fleshed out specific bullet points to provide concrete suggested actions

▫ Some editorial modifications

▫ Some changes to the order and description bullets

• Discussions with Emilie at UNPRI re: incorporation in PIIF

• Identification of what appears to be the weakest area of investor activity – assessment of market’s capacity to grow/ saturation levels – and suggestion of future areas of work

• Collecting approval of group members to add their names to the list of organizations supporting the Guidelines before formally presenting them to the PIIF Steering Committee

Managers’ Guidelines

1. Maintain reasonable estimates of each market’s growth capacity.

- Analysis of the market penetration at local, disaggregated levels (individual provinces, cities, villages, etc.)

- Assess the extent to which various market players target the same or different clients

Managers’ Guidelines2. Ensure that the MFIs in which they invest and to

which they lend adequately assess and monitor their clients’ repayment capacity.

- Encourage use of Smart Campaign tool among MFIs

- Loan file reviews

- Focus on policy regarding DSCR levels

Managers’ Guidelines

3. Perform a rigorous analysis of other elements of the MFI’s procedures and activities that could contribute to over-lending risks.

- Define a list of core practices and score MFIs

- Assess appropriateness of products

- Assess incentive schemes for Loan Officers

- Check for Operational Control Group

Managers’ Guidelines

4. Engage in open dialogue with MFI management and Board to ensure that they are aware of the risks and warning signs of over-indebtedness.

- Share results of due diligence visits

- Encourage endorsement of Smart Campaign

- Equity investors: take Board seats when feasible and encourage responsible lending

- Debt investors: include appropriate covenants

Managers’ Guidelines5. Require the use of credit bureaus when they exist,

and work to promote their development where they do not.

Include requirement that MFIs use credit bureau data when available (pre-screening eligibility criteria)

Covenants requiring use of credit bureau

Lobbying with regulators to develop credit bureaus where they don’t exist

Managers’ Guidelines6. Work together with peers in the industry to raise

awareness, improve measurement and take individual and collective action

- Participate in information sharing activities/events

- Dialogue with regulators when appropriate

- Finance OID studies

- Encourage MFIs to provide financial literacy programs

- Debt investors: coordinate with other lenders to minimize over-lending to MFIs

Incorporation into PIIF

• Initial presentation of the Guidelines to the PIIF Steering Committee by Emilie Goodall on February 22nd

▫ Universal support for inclusion of the Guidelines under Principle 2 (“Client Protection”)

▫ Once finalized, document may be incorporated by email approval

• Next Steps:

▫ Finalization of wording (some potential for suggestions from PIIF Steering Committee)

Focus on Assessing Market Capacity

• Key impediments to understanding market capacity / growth potential

▫ No common terminology or measure to understand how to frame the issue

▫ No practical tool to enable understanding of market capacity

▫ No single proven methodology that has been widely adopted for use in academic market studies

• These challenges were also at the heart of many of the “burning questions” from group members compiled at the start of our work

▫ Definitions / indicators?

▫ Drivers / risk factors?

▫ How much growth is OK? Beyond what levels does it become irresponsible?

▫ What is a critical level of market saturation?

Defining and Measuring Capacity• What does market saturation mean to you?

• How would you calculate it?

Numerator / Denominator

Defining and Measuring Capacity• Starting with a definition of demand and penetration:

▫ Measuring market demand:

% of population that is economically active

% of population engaged in informal economic activities

% of population below the national poverty line

▫ Measuring market penetration:

# of borrowers per total population (Gonzalez 2008; Rhyne/Otero 2006)

# of borrowers per poor population (Dieckmann 2007; Gonzalez 2008; MIX 2010a; Gonzalez and Javoy 2011)

# of borrowers per poor population adjusted by gender and age (Rozas 2009)

# of loans per poor household (Intellecap 2009)

• Additional challenge = finding data sources

Understanding Market Penetration

• “Lack of access or crowded markets? Towards a better understanding of microfinance market penetration” – working paper published August 23, 2012 by Annette Krauss, Laura Lontzek, Julia Meyer, Maria Rommelt (University of Zurich)

• Measure of market penetration:

▫ Numerator: includes all customers of relevant suppliers (banks, MFIs, cooperatives, consumer lenders, etc.) adjusted for multiple borrowing and segmented by rural/urban location

▫ Denominator: should be limited to relevant segment only: the poor (can be a very different number depending on whether one uses the national poverty line or the $2/day PPP definition) adjusted for the number of potential borrowers who actually want a loan, adjusted for average household size and segmented by rural/urban location

Results• Penetration rates vary dramatically according to various refinements:

Available Data SourcesMeasurement Source

Base data on number of borrowers MIX

Base data on poor population WDI (2002 – 2010)

Data on additional lenders (other than MFIs)

Consumer lenders – varies: South African regulator reports information (assuming that each consumer borrower has 2 consumer loans); Credit unions – WOCCU

Number of creditworthy borrowers who want a loan

Previous studies – assuming Nicaragua’s rate of 75% and Ecuador’s rate of 49% as ends of the range

Multiple Borrowing adjustment Previous studies (country-specific)

Household adjustment Previous studies – assuming 5 individuals per household (lower bound: each borrower lives in a different household; upper bound: every second household has 2 borrowers)

Rural vs. Urban segmentation MIX data – extrapolating the numbers from reporting MFIs to the country

Number of creditworthy borrowers who want a loan

Previous studies

Use of financial services by adult population

Findex (2011 data on 148 countries)

Working Toward a Practical Tool • Planet Rating tool soon to be published: MIMOSA (Microfinance

Index for Market Outreach and Saturation)

▫ To become a public resource to analyze markets by country and, ultimately at a more local level

▫ Looks at basic penetration rates (% of adult population that has taken a loan from a financial institution in the past year – Findex data)

▫ Compares this to “predicted market potential” to determine level of saturation

▫ Predicted market potential based on:

Human Development index (higher it is, the greater the potential market)

Use of formal savings (higher it is, the greater the potential market)

Use of semi-formal loans -- store credit, employer loans (higher it is, the greater the potential market)

▫ Countries are scored 1-5, with 1 being low saturation, and 5 being highly saturation

Digging deeper – sub-national regions

• A recognized weakness of both these approaches is that they are limited to analyzing at the country level

• Some attempts to collect more disaggregated data

• MIX Financial Inclusion Maps

▫ Kenya, Nigeria, South Africa, Rwanda, India

▫ Linking together public datasets to illustrate depth and breadth of access to financial services (savings + credit)

• Cambodia OID study

http://maps.mixmarket.org/india/

Practical Applications

•Do these approaches make sense?•How can we incorporate these studies’

findings in our work as investors in microfinance?

•How can we build upon them/ improve them?