IFC Experience with Responsible Microfinance in ECA
Nataša Goronja, Operations Officer, IFC
Tbilisi, January 31st, 2014
Agenda
1. Bosnia as an over-indebtedness cautionary tale, but on the mend now
2. How we learned to measure market level over-indebtedness and annual survey results
3. Partnering with SMART to raise the responsible finance standards in mf through self-regulation
2
Bosnia as a cautionary tale
• Microfinance started post-war, late 90’s
• Quickly grew and considered a success
case by early 2000’s
• In 2008, $800 million annual
MIV investment received into the sector
• In 2008, 28 alleged client suicides
• By 2012, 40% industry level equity loss
•
3
What do we mean by mean by over-indebtedness?
by Over-indebtedness?
• Refers to the risk faced
by credit customers of taking on levels of
debt that may be greater than they can manage, or that cause undue
sacrifices to repay
• Can result from a range of causes, including personal errors in
estimating levels of manageable debt, changes in income, unforeseen
circumstances
• Six over-indebtedness proxies: negative impact, default and arrears,
debt ratios, multiple borrowing, borrower struggle and sacrifice, and
composite indicators
from CGAP IFC Credit Reporting at the Base of the Pyramid
How do we establish the risk matrix?
Two dimensions:
• Essential and utility expenditure as
a % of income (objective)
and
• Risk vulnerability (subjective)
dimension
S
u
b
j
e
c
t
i
v
e
Objective (loan repayment to income)
Risk Vulnerability Questions Used
Result: Risk Segmentation of BiH Debtors - 2011
Vulnerability and Affordability
High
Debtor
Concern and
Inability to
meet Financial
Commitments
=
Weighted
Vulnerability
Score
Low
Essential Expenditure & Utilities
as % Income
High
2013 Risk Matrix : 3,000 people have different views of their financial position
Different risk and service propositions – not a simple financial formula
High
Exposed
Debtor
Concern and
Inability to
meet Financial
Commitments
=
Weighted
Vulnerability
Score
Low
Affordable
Vulnerable
Concerned
Essential Expenditure & Utilities
as % Income
High
Three years of data - Is risk exposure beginning to polarise ?
High
21 – 25 Debtor Concern
and Inability to
meet Financial
Commitments
=
Weighted
Vulnerability
Score
Low
29 – 28 -
24 %
31 %
23 – 21 - 24 %
27 –
26 -
22 %
Essential Expenditure %
Income
High
What outlook for the risk portfolios ?
Affordable
Concerned
Vulnerable
Vulnerable
Distribution
31 %
24 %
22 %
24 %
Net Disposable
Income (pre loan)
KM 1,480
KM 1,220
KM 530
KM 235
Average Loan
KM 5,600
KM 6,300
KM 4,800
KM 4,400
Loan Repayment
% of Net Income
16 %
21 %
47 %
99 %
Loan Arrears
0%
13 %
2%
24 %
Other Impact of Debt
Loan Arrears : 2013 9 % :
2012 9 % : 2011 9%
Utility Arrears : 2013 12 %
2012 19 % : 2011 21%
Awareness of Financial Strains : 23 %
Remainder : 2013 22 %
2012 20 % : 2011 22%
The Risk Dynamics of Different Markets : What Local Actions and Response?
© International Finance Corporation
Roy Pratt – December 2013
Why are cities so different … ?
© International Finance Corporation
Roy Pratt – December 2013
Partnership with SMART, Deutsche Bank, and others
January 2013
www.smartcampaign.org
www.smartcampaign.org
Vision of the Smart Campaign
The Smart Campaign envisions a fundamental transformation of the
microfinance industry in four key ways:
Focus on clients
• All industry
stakeholders will put
the interests of
clients first
Transparent and
prudent services
Full integration of
client protection
• MFIs will provide
transparent,
respectful, prudent
financial services
• Client protection
principles will be
fully integrated into
all microfinance
operations
17
Gain pro-consumer
reputation
• The microfinance
industry will be
distinguished as
leader in responsible
finance
Certification Overview
Client Protection Certification is an independent, third-party
evaluation to publicly recognize institutions that meet
adequate standards of care in client protection.
The Certification program was launched in 2013 to set global
standards around client protection in the microfinance industry.
The program is designed for retail financial institutions that
provide services to financially excluded or underserved
populations.
18
Certification Standards
7 Principles
30 Standards
95 Indicators
19
Epilogue: Some signs of improved budget control and realism in Bosnia … different clients – different needs
?
© International Finance Corporation
?
?
Roy Pratt – December 2013
Thank you!
Risk Segmentation : The Impact of Savers … A Different Risk Segment
14%
31%
36%
19%
Ratio
Household
Income
KM
Net
Disposable
Income
(after loan)
Loan
KM
Loan
Arrears
Utility
Arrears
MFI : Savers
27 %
1,950
KM 885
3,730
5%
6%
MFI : Non-Savers
73 %
1,500
KM 550
3,420
10 %
20 %
Bank : Savers
38 %
2,200
KM 950
7,210
2%
4%
Bank : Non-Savers
62 %
1,570
KM 560
7,430
15 %
28 %
© International Finance Corporation
Roy Pratt – December 2013
Risk Segmentation … What is the proposition ?
Net
Disposable
Income
(after loan
Loan
KM
Loan
Arrears
Utility
Arrears
Change of Lenders
Ratio
Household
Income
KM
MFI : Single
80 %
1,645
KM 710
2,750
6%
14 %
MFI : Multiple
20 %
1,575
KM 415
6,650
17 %
24 %
Bank : Single
81 %
1,770
KM 735
6,900
9%
17 %
Bank : Multiple
19 %
1,945
KM 620
6,800
17 %
28 %
Up to 6 months
36 %
1,450
KM 530
4,400
11 %
25 %
7 – 12 months
27 %
1,730
KM 700
5,100
9%
15 %
Over 12 months
37 %
1,920
KM 810
6,300
7%
11%
Time since last loan
approval
© International Finance Corporation
Roy Pratt – December 2013
Risk Segmentation … The Challenge of Low Household Income
12%
14%
26%
© International Finance Corporation
24%
24%
Roy Pratt – December 2013
Income Segmentation : Budget Pressures on Income Groups up to KM 1,500
Average
© International Finance Corporation
45%
52%
60%
76%
90%
Roy Pratt – December 2013
Responsiveness improves again … but still further to go … and some core problems
© International Finance Corporation
Roy Pratt – December 2013
Outlook for Lending … Risk sensitivity to the Saver Segment … What will they do ?
25%
34%
33%
3%
4%
Loan
Loan Arrears
Arrears
Utility
Utility
Arrears
Loan
Loan ::
Family
Family
Food
Food
Expenditure
Expenditure
Reduced
Reduced
Loan
Loan within
within 66
months
months
11
11 %
%
25
25 %
%
12
12 %
%
22
22 %
%
18
18 %
%
33
33 %
%
19
19 %
%
Need
Need to
to borrow
borrow
:: MFI
MFI
10
10 %
%
10
10 %
%
12
12 %
%
21
21 %
%
31
31 %
%
42
42 %
%
30
30 %
%
Need
Need to
to borrow
borrow
:: Bank
Bank
13
13 %
%
23
23 %
%
11
11 %
%
13
13 %
%
32
32 %
%
40
40 %
%
32
32 %
%
Other
Other borrower
borrower
No
Savings
No Savings
12
12 %
%
20
20 %
%
12
12 %
%
27
27 %
%
22
22 %
%
32
32 %
%
20
20 %
%
Other
Other Borrower
Borrower
Savings
Savings
3%
4%
3%
5%
12 %
16 %
11 %
© International Finance Corporation
More
More than
than 11
Additional
Additional loan
loan in
in last
last 33
Employment
Employment
years
years
More
More than1
than1
lender
lender in
in
last
3
years
last 3 years
Roy Pratt – December 2013
Own Business : Bank Borrowers Strengthen
2012
2013
MFI : KM 2,200 KM 2,050
Bank : KM 2,900 KM 2,500
© International Finance Corporation
2012
2013
MFI : KM 8,850 KM 7,050
Bank : KM 18,250 KM 9,400
Roy Pratt – December 2013
Surveys 2013 : A delicately balanced situation … for borrowers and lenders
LOWEST INCOME HOUSEHOLDS : Continued tightening
Impact on portfolio quality – debt dependency - lender support – additional debts
DIFFERENT BORROWER SEGMENTS : Different risks need different products and services
Low income – location – ‘savers’ / ‘non-savers’ – recent loan approvals – bank / MFI client movement
PROBLEM DEBT MANAGEMENT : Improved response to some borrowers and majority still want assistance
Lending institutions provide loans … but … many clients have minimal capacity to break from the ‘debt-trap’
LENDING STRATEGY : Reduced loan size and more stable employment
Changing structure of lending portfolios … incremental credit quality … performance of different segments
STRATEGIC RISK : Outlook for Loan Portfolios of Banks and MFIs
Structural risk profile – sensitivity to income and cost changes – business case of borrower segments
© International Finance Corporation
Roy Pratt – December 2013
Key Issues to Address
Strategic
Outlook for Borrowing
Institutional Reputation
Operational
Credit Quality of Incremental or Marginal Lending
Financial Counselling
© International Finance Corporation
Roy Pratt – December 2013