What lessons can we learn from the Moroccan microfinance crisis?
For a decade in Morocco, the microfinance sector was a rising star, taking advantages of very performing institutions supported by local authorities and international funders. However, in December 2009, the credit risk rose to 14%, up to 38% for one of the country's largest microfinance institutions (MFIs). Given this significant increase in the hazard rate, the central bank, suppliers, national associations and funders mobilized to restore the situation. Through these actions, in 2011 the credit risk has been halved, to know a new slight increase in 2012. So what lessons can we learn from this crisis in the Moroccan microcredit sector, so that they can also be useful in other countries facing similar problems?
How did the crisis start?
Let make a few steps back to understand how and why this microcredit sector crisis began in Morocco.
Since its start in the late 1990s, the Moroccan microcredit sector has experienced extraordinary growth rates with a portfolio that has increased sharply from 2003 to 2007, becoming the largest in the Middle East and North Africa, totaling USD 733 million to 1.35 million in assets in December 2007.
This rapid growth soon proved unsustainable and signs of stress resurfaced in 2007. Although credit risk was at an acceptable level of 2.3%, it jumped of 0.4% over a period of two years. The credit crisis began then.
Shortly after, the credit risk was much higher than previously and all investments were stopped.
This action had several important consequences that have plunged the country gradually in this crisis, as the decrease in cash for the repayment of customers, many defaults without penalty or nearly 40% of customers have started to accumulate loans in several MFIs.
In December 2009, the overall credit risk of the sector reached 13.7%.
How did the institutions face this crisis?
The response was swift for the implementation of measures for both the short-term recovery and strengthening the long-term industry regulators and the industry itself.
Although they failed to prevent the crisis, the Central Bank of Morocco, the Bank Al-Maghrib (BAM) and the Ministry of Finance played a catalytic role in avoiding contagion and restore confidence.
In 2007, BAM quickly started supervision missions and increased the frequency of its meetings with the MFIs.
BAM and the Ministry of Finance have tightened conditions on funding and governance. BAM commissioned ARDI, a medium MFIs supported by the Crown corporation Crédit Agricole, to help strengthen small MFIs by providing a common set of management tools and grouped under the “Réseau de la Microfinance Solidaire” (RMS) newly created.
After receiving more funding, it has allowed the improvement of the regulatory environment and the promotion of financial education in the country.
In February 2013, was published a new regulation allowing non-governmental MFIs (NGOs) to hold shares in microcredit companies and merge, a first step towards transformation.
Along with these government initiatives, MFIs have worked on improving their own systems: dedicated recovery teams, legal action against delinquent borrowers, change management, information exchange platform for customer blacklists and assets...In addition, MFIs have implemented an online tool for sharing geographic and demographic data to determine the level of poverty by area, areas of high concentration etc.
Despite all these efforts, the recovery was fragile and the overall credit risk rose to 9.6% in December 2012. Morocco now has 800,000 active customers representing $ 540 million outstanding.
What lessons does the Moroccan microcredit crisis offer?
Moroccan crisis has shown that risk across the market exist, even in the case of credit institutions.
As competitive microcredit markets often lead to multiple loans, active MFIs are de facto connected and defaults can spread as fast as the rumors of a client to another. To avoid such a contagion, the Moroccan case provides valuable lessons in governance, infrastructure and market supervision.
In retrospect, we can note that the MFIs that have performed better in governance received technical skills of their members in banking and finance. They focused on the long-term sustainability, more slowly but more often than their counterparts who have significantly increased their risk profile without changing their management practices of credit risk.
What are the new challenges for Moroccan microcredit sector?
New challenges are already emerging for traditional Moroccan microcredit actors.
In the medium term, finding the right market niche in the broader financial system will be crucial to integrate an increasingly diverse market.
The microcredit industry recently issued a white paper aimed at reaching 3.2 million borrowers by 2020, and some MFIs are considering reaching out to very small enterprises.
Ultimately, clients are expected to reap the benefits of those competing institutional models but an industry-wide consensus on how the country will achieve full financial inclusion has yet to emerge.
Sources : Cgap Brief
Tags : microcredit, microfinance, morocco, microfinance institutions, microworld, microcredit crisis, financial inclusion