over-indebtedness and competition among microfinance institutions - theory and evidence

7/21/2019 Over-indebtedness and Competition Among Microfinance Institutions - Theory and Evidence

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F r a n k f u r tS c h o o l . d e

Outline

Introduction

Client over-indebtedness and MFI competition - What are the links?

Oversaturated markets due to competition among MFIs

Aggressive lender behavior

Competition among MFI employees

Psychological biases of borrowers

Over-indebtedness crises in microfinance - Case studies

Andhra Pradesh

Bolivia

Morocco

Policy implications: How can negative impacts of competition on MFI clients bemitigated?

Credit Bureaus

Regulation on microfinance

Financial literacy

Conclusion


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Introduction

Client over-indebtedness and MFI competition - What are the

links?


Policy implications: How can negative impacts of competition on

MFI clients be mitigated?

Conclusion


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Introduction

Competition among MFIs has been quite a debated issue. It has shown

both negative and positive impacts

In this presentation we are trying to discuss the links between

competition and over-indebtedness of MFIs clients. We also aim at

presenting some of the measures that have been adopted to mitigate the

negative impacts of the competition


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Introduction

Recent rise in microfinance industry has attracted new entrants and it

has evolved from a donor-charity driven microcredit to the provision of a

wide range of small scale financial services to those segment of

population

MFI based on strong MFI client relations

Competition among MFI may lead to low screening and lending

standards

Increased competition associated with increased information asymmetry

which makes it difficult for MFI to know about general debt level of clients


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Introduction


links?

Oversaturated markets due to competition among MFIs

Aggresive lender behaviorCompetition among MFI employees

Psychological biases of borrowers




Conclusion



Client over-indebtedness and MFI competition

Oversaturated markets due to competition among MFIsApparition of an attractive market leads to many players (MFIs) coming

to it to do business in order to show better outreach and profit

At some point, this causes an excess availability of credit that eventually

cannot be repaid

This issue can be exacerbated when different institutions come into play,like commercial banks in a MFI-only market, which may not know the

proper lending technology or have adequate products for the clients

Lack of adequate information and information sharing between lenders

decrease the effectiveness of credit evaluation and selection of viable

borrowers

External shocksOvercompetition can trigger risk of over-

indebtedness by asymmetry of information and presence of multiple

lenders




Aggressive lender behaviorExcessive marketing and growth focus

Aggressive sales techniques exploits psychological biases of borrowers

and generates pressure to keep borrowing

Aggressive debt collection methods can cause additional or

unnecessary stress on still viable borrowers

Growth rate among MFIs demand employee growth, which paves thepath for recruitment of inexperienced loan officers or outsourcing of some

of the MFI loan process (client referral, client screening, debt collection) to

third parties




Competition among MFI employeesVolume focused incentive system (credit officers rewarded for loan

disbursements)

This focus can cause a reduction in proper risk evaluation standards

(worse loans being granted due to relaxed credit risk managementpolicies)

It has been observed that productive employees become also in demand

from other institutions (specially when commercial banks enter into the

market), which creates more incentives to issue loans




Psychological biases of borrowersIt has been studied that human beings are not homo economicus

rational, and that there are some psychological biases regarding

Value of present consumption vs. future reduction of consumption

(cognitive bias on short-term relevance)

Optimistic approach to own ability to repay a loan, given loan offers(overconfidence bias)

Difficulty of quickly adapting consumption patterns to changing levels

of income (habit persistence)

Inability to properly estimate event probabilities one seldom

experience (available heuristic bias)

Excessive competition allows borrowers to have access to multiple

lenders, hence reducing repayment incentives given the presence of

alternate credit sources



Introduction


links?

Over-indebtedness crises in microfinance - Case studiesAndhra Pradesh

Bolivia

Morocco

Policy implications: How can negative impacts of competition onMFI clients be mitigated?

Conclusion



Overindebtedness crises in microfinance

Andhra Pradesh (2010)Extensive presence of self-help groups (SHGs) since 1980s

SHGs extended training and other non financial services to rural areas

Bank linkages to SHGs started and, by using these links, SHGs started

granting bigger loans

By 2010 there were 4.5 million SHGs with 58 million members

In two decades many non-profit organizations transformed into

commercial MFIs

Rapid Growth of the MFI sector and Focus on Andhra Pradesh




Andhra Pradesh (2010)2005- 2006 crisis emerges shutting down of 50 branches of 4 MFIs

Rise of competition among MFIs and SHGs.

Double dip: SHG members have two loans, and additional loans from

commercial lenders.

Government intervention, under allegation of MFI illegal operational

practices (including deposit taking), high interest rates and aggressive debt

collection techniques by agents linked to incidents of farmer suicides.




Bolivia (1999)In 1990, commercial banks and non-regulated microlenders combined

reached only 120,000 borrowers.

In 1995, BancoSol had 63,038 borrowers and Caja Los Andes 15,954

borrowers. Together, they shared around 40% of the microlending market.

These are impressive numbers considering that in 1995 the wholecommercial bank sector (excluding BancoSol) reached only 126,912

borrowers (about 66% increase from 1990).

By Dec.1998, the microlending sector as a whole reached 415,609

borrowers. BancoSol and Los Andes together accounted for 43% of the

microfinance portfolio and 30% of all clients.By mid-2001, the total number of borrowers had declined to 378,037 (a

decrease of 9% from 1998).


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Bolivia (1999)Since the early 1990s, the population of borrowers reached by Bolivian

lenders exploded, as a number of diverse microfinance providers entered

to supply the market.

By the end of the decade however, a combination of intense

competition, limited information sharing amongst micro lenders, and adeep recession in 1999 brought this expansion to a halt.

Excessive competition amongst lenders weakened borrower discipline.

Bolivia experienced an inflow of consumer lenders offering products

similar to microfinance products in terms of loan amounts, terms and

prices but using consumer lending techniques

There was also evidence of multiple borrowing from different lenders.

After the crisis erupted, debtors associations appeared that have

adversely affected repayment behavior across the sector


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Morocco (2007)For a decade, the Moroccan microcredit sector was a rising star,

boasting top-performing institutions enthusiastically supported by local and

international funders. Morocco boasted 40% of client outreach in the Arab

world and hosted some of the best performing MFIs in the world.

Outstanding loans: from 300,000 in 2003 to 1.35 million in 2007.It had a clear regulatory framework, but for microcredit-only

nongovernment organizations. Financial support (government and donors).

Commitment of local banks to funding MFIs.

However, credit risk (NPL30+write-offs): from 0.4% in 2005 to 13.7% in

2009

Multiple lending above 45% in 2007

ROA: 9% in 2003 to 0% in 2008

In 2012, there were only 800,000 loans

Credit risk around 10% and Multiple lending < 15%


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Morocco (2007)2007: Global credit crisis and serious floods in Morocco

MFIs implemented some product diversification but suffered from weak

governance and risk management

Overstretched MFI capacity (field and headquarters)Lenient loan

underwriting and monitoring

Multiple lending with no credit bureau

Introduction of consumer lending techniques or products

Credit risk in 2007 was only 2.3%, but its extent was hidden by the

astonishing growth of the loan portfolio

Response to crisis: swift response from the Central Bank (assuming the

role of regulator) - Funders maintained lines of credit - Efficient short-term

recovery - Long-term measures being implemented


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Introduction


links?


Policy implications: How can negative impacts of

competition on MFI clients be mitigated?

Credit Bureaus

Regulation

Financial Literacy

Conclusion


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Policy implications

Credit BureausPros

Better informationBetter allocation of available credit (monitoring

effect)

Good clients are rewarded with better interest rates / loan conditions

Challenges

Marginalized clients: poorest and potentially good

Little effect on existing clients (forward-looking measure)

Incentives to compete for good clients (pressures on new loans)Potential social issues if clients dont understand how CBs work

Effectiveness depends on information availability (India: 25% of the

market; Bolivia: amnesty granted to borrowers who pay off past due

loans in public CB)


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Policy implications

RegulationAreas subject to improve by adequate regulation

Enhanced risk management of MFIs

Better product information for clients (adequate disclosure of terms

and conditions)

Clear rules regarding loan issue and debt collection

Improved consumer protection and recourse channels

Challenges

Excessive or inflexible regulation exclusion of good clientsFormal vs. non-formal MFIs

Weak stakeholder self-regulationDonors not always involved

Political interference


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Policy implications

Financial LiteracyPros

Improve awareness of day-to-day financial management and

understanding of terms and conditions of financial products

Improve awareness of clients rights and obligations

Can be focused through specific media or deployed massively through

formal educational channels

Challenges

Quick tips vs. formal education

Orthodox vs. unorthodox methods

Difficult to alter long-time habits and make up for education

shortcomings

Who should provide it? Different answers, different objectives

Doesnt affect the poorest clients


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Introduction


links?




Conclusion


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Concluding Remarks

Competition has good effects on MFIs: better conditions, better products

or services.

However, competition has some serious adverse effects if run

unchecked.

The case studies present how competition did affect those markets, andprovide some explanations about what went wrong and what was missing.

The theory and these case studies hint at some policy actions that could

help strengthening the MF market. However, these actions have

implications as well and present challenges for their application.

Designing a proper package of measures should be of crucial interest for

related stakeholders, including practitioners, donors and the government.

Final questionIs microfinance the promised cure against poverty?

Suggestions considering extended outreach and risk of overindebtedness


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F k f t S h l d

Luis Allain

Sandipan Patra

Any questions?

Thank you for your attention!

Over-indebtedness and Competition Among

Microfinance Institutions

Theory and Evidence

over-indebtedness and competition among microfinance institutions - theory and evidence

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