6th azerbaijan microfinance conference
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Microfinance – A Risky Business? The perspective of a development finance institution Baku, 5 October 2012 Sandra Lutz. 6th Azerbaijan Microfinance Conference. Tendencies of recovery, but effects of financial and reputational crises far from being overcome - PowerPoint PPT PresentationTRANSCRIPT
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6th Azerbaijan Microfinance ConferenceMicrofinance – A Risky Business?
The perspective of a development finance institution
Baku, 5 October 2012
Sandra Lutz
2Microfinance - a risky business? / Baku / 5 October 2012
Global Developments
› Tendencies of recovery, but effects of financial and reputational crises far from being overcome
› Leading professional MFIs continue to show a robust performance
› Improved (and mostly acceptable) levels of portfolio quality
› Stable earnings situation with „decent“ RoEs (10-20 %)
› Strong inrease of the volume of deposit collection (now on av. more savers than borrowers)
› Fund portfolios: good portfolio quality, more private funding.
› Continued criticism over industry practices
› Indications of unhealthy competition and tendencies of saturation in some markets
› Growing evidence on institutional deficits in MFIs (Management, Corporate Governance)
› Improvements on the regulatory front but remaining risk of undue political interference
Some good news… …but also some challenges
3Microfinance - a risky business? / Baku / 5 October 2012
What went/can go wrong
High growth/Return expec-
tations
Fundingdistortions
Unhealthycompetition
Client over-indebtedness
Low creditApproval standards
Low client aware-Ness/irresponsible
borrowing
Lack of informationPoor market infra-
structure
Investor/FinanciersFund managers financial institutions clients
Regulators
4Microfinance - a risky business? / Baku / 5 October 2012
Perceived microfinance risks:Results of the „Banana Skins Report“
Report „Microfinance Banana Skins 2012“
1. Over-indebtedness (- -)
2. Corporate Governance (4)
3. Management Quality (7)
4. Credit Risk (1)
5. Political Interference (5)
6. Quality of Risk Management (- -)
7. Client Management (- -)
8. Competition (3)
9. Regulation (6)
10.Liquidity (16)
What does this story tell us?
› 7 out of 10 TOP risks refer to MFI capacities, the rest to op. environment
› most TOP10 risks relate, in some way or other, to responsible finance issues
› Risk perception reflects negative press on microfinance
What does this mean for us:
› Many of our partners perform better than this perception
› Professionalization is a prerequisite for sustainability
› Corporate governance and responsible finance key elements of professional MFIs
5Microfinance - a risky business? / Baku / 5 October 2012
Responsible Finance as a holistic response
What does Responsible Finance mean to KfW‘s role?
No Responsible Finance without responsible inestors, i.e. DFIs are part of the storyStrengthening responsible finance practices is part of KfW‘s additionality as microfinance funder
Promote responsible practices at institutional, policy and sector level
Setting up credit bureaus, study works on overindebtedness, contract clauses…
Be a patient investor –
„buy and hold“
Strengthen MFIs‘ governance through board seats
Putting RF on the agenda
„Crowd in“ the private sector, through Public Private Partnerships
6Microfinance - a risky business? / Baku / 5 October 2012
Addressing the risks, possible early warning indicators;for MFI management, DD and dialogue among stakeholders› Strengthen stakeholders at macro level, particularly improve the
effectiveness of credit bureaus› Number of financial institutions with delays in data transmission
› Number of client data records
› Number of reported multiple loans
› Time lag of data collection and reporting of credit bureaus
› Regulatory Framework addressing over-indebtedness issues
› Be more cautious with estimating the relevant demand in the financial sector
› Number of bankable clients
› Regional distribution of bankable clients
› Analyse carefully the competitive situation and the behaviour of competitors
› Number of relevant (M)Fis and number of different branch offices at „strategic locations“
› Market shares of five biggest relevant (M)Fis
› Homogeneity of credit products among competitors
› Major differences in competitors‘ lending conditions (e.g. „race to the bottom“?
› Number of multiple-loans-clients
7Microfinance - a risky business? / Baku / 5 October 2012
Addressing the risks, possible early warning indicators;for MFI management, DD and dialogue among stakeholders› Take a critical look at the loan selection and approval process
› Existence of a reasonably detailed credit approval manual
› Share of visits to client locations as part of loan analysis
› Duration of loan analysis
› Existence of incomplete borrower files
› Detailed analysis of the loan portfolio with regard to over-indebtedness factors
› Share of „pure“ consumer loans in the portfolio
› Shrae of open foreign currency loans in the portfolio
› Evolution of the PAR > 1 day in the last three months
› Percentage of restructured loans and/or write-offs
› Clients with one, two or more loans with other MFIs according their repayment status
› Discuss the institutions‘ response strategy to (perceived) over-indebtedness
8Microfinance - a risky business? / Baku / 5 October 2012
Conclusions
› DFIs‘ role far beyond mere financing
› Key challenges: preparing the ground for future responsible investors and for conducive MFI governance
9Microfinance - a risky business? / Baku / 5 October 2012
Contact
Financial System Development Eastern Europe, Caucasus, Central AsiaSandra LutzProject Manager
KfW BankengruppePalmengartenstrasse 5–960325 Frankfurt am MainPhone +49 69 7431 - [email protected]
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Thank you for your attention!