Dr Zambry was quoted as stating that the Perak state budget will be a ’people-centric’ budget that will focus on ‘sectorial, business and socio-economic areas’. As mentioned in a previous Microcapital.Org story [5], the Malaysian state of Perak recently invited Professor Sukor Kasim to provide advice on how to eradicate income inequalities in the state of Perak. Professor Sukor was involved in the establishment and operation of AIM for many years. Details about the programme to be introduced in Perak on the advice of Professor Sukor have yet to be publicised although we have learnt from a recent informal discussion between Microcapital.Org and Professor Sukor that the forthcoming programme will target marginalised groups within Perak, including the indigenous Malays or ’Orang Asli’, low income individuals and households from the minority ethnic Chinese and Indian groups, single mothers, beggars and the disabled. Although details have yet to be finalised, it is anticipated that the programme will aim to provide very small and customised loans to targeted individuals and assist them in improving their economic productivity levels. As shown by official statistics [6], Perak is a relatively large Malaysian state and, unlike the states of Trengganu, Kelantan, Sabah and Sarawak, is not regarded as a ‘poor’ state in Malaysia.

Microfinance in Malaysia is currently dominated by commercial banks and development financial institutions. Recent state-led initiatives in the country suggest a blurring of boundaries between financing for small and medium enterprises and micro-enterprises. Recent developments on microfinance in Malaysia have been covered in previous Microcapital.Org stories [7], [8].

By Chinq Yee Chong, Research Assistant

Bibliography

[1] Article in ‘The star’ newspaper entitled ‘perak to launch micro-credit financing to help poor’: http://thestar.com.my/news/story.asp?file=/2009/10/24/nation/20091024210240&sec=nation#

[2] Grameen Bank: www.grameen-info.org/

[3] Amanah Ihktiar Malaysia (AIM): www.aim.gov.my/

[4] Microfinance Institution AIM Receives $28 Million Grant From Malaysian Government

[5] MICROCAPITAL.ORG STORY: Former Founding Member Of Amanah Ihktiar Malaysia And Current Professor At Universiti Sains Malaysia Professor Sukor Kasim Appointed As Government Adviser To Northern Malaysian State Of Perak to Help Address Problems Related To Poverty And Income Disparity

[6] Link to official Malaysia Department of Statistics: http://www.statistics.gov.my/portal/index.php?option=com_content&view=article&id=245&Itemid=14&lang=en

[7] MICROCAPITAL.ORG STORY: As Part of Malaysian Government Initiative, BMB Group and Organization of The Islamic Conference’s (OIC) International Zakat Organization (IZO) Will Launch The World Zakat Fund (WZF) in 2010 With Plans to Raise $750m in First Year

[8] MICROCAPITAL.ORG STORY: Credit Guarantee Corporation of Malaysia Agrees to Guarantee $29.6m of Standard Chartered´s Loans to Small and Medium-Sized Enterprises (SMEs)

[9] MICROCAPITAL.ORG STORY: Introduction Of Microfinance Scheme In Northern Malaysian State Of Penang – To Help The Poor Or Gain Political Mileage?

[10] MICROCAPITAL.ORG STORY: Exclusive Interview On The Current State Of Microfinance In Malaysia And Challenges Facing The Sector: Observations From The Assistant Governor Of Bank Negara Malaysia

[11] MICROCAPITAL STORY: Malaysia Allows International Banks To Provide Microfinance

[12] MICROCAPITAL STORY: Bank Negara Malaysia Launches a $56.6m Micro Enterprise Fund

[13] MICROCAPITAL STORY: Malaysia’s Central Bank to Offer African Governments Assistance in Developing National Microfinance Strategies

The RBI’s proposal is consistent with measures recently taken by banking regulators in other jurisdictions to ensure that originators of loans continue to have ‘some skin in the game’ or retain some exposure to the loans before selling them in a securitization. This is to incentivize banks to originate loans that are of good quality and to ensure that they retain a ‘material interest in the performance’ of those loans. The article notes that ’regulators in both the EU and the US now insist that the originator retain a minimum of 5% of issued securities on his own book, before sale’. The US Treasury is also mandating that ‘originators should have fees or incentives based on actual performance of the pool’ of loans, again an incentive for the originating banks to focus on the credit quality of loans. In Europe, it is reported that ’banks have also been barred from exposing more than 25 percent of its own funds to a client or group of clients’. 

The article notes that ‘securitization deals have come down dramatically’ in recent months, given the ‘regulatory uncertainty’ surrounding such products and the lack of investor appetite for them. Reference was made to the ‘reckless securitisation’ where a ‘loan advanced to pharma major Wockhardt changed hands a number of times in the course of a few days’. When Wockhardt defaulted on its obligations, the debt instruments the Wockhardt loans ‘backed’ became worthless. The RBI hopes that a ‘minimum seasoning’ period whereby the loans will continue to be held on the balance sheet of the originating bank for at least one coupon or interest period would limit the occurence of flagrant on-selling of loans.

Vinod Kothari [3], an India-based practitioner and author on asset-based finance pointed out that there is little difference between what market participants call a ’securitization’ and a ‘transfer of financial assets’. He added rules on minimum holding periods and regulations should apply to both full-blown securitizations and bilateral transfers of loan assets. The report further added that the seasoning period ‘should be linked to the total asset term’. As an example, the report stated that ‘a six month period may be too short for a housing loan, but too long for a microfinance loan’.

In recent years, the Indian securitisation market has grown to as high as Rs 50,000 crore (approximately USD 10.7 billion) per year with mutual funds and insurers lapping up securities allured by their higher yields.  The use of securitization as a fund-raising technique for microfinance institutions and its role in the current credit crisis have been covered in previous Microcapital.Org publications, some of which have been referenced in the Bibliography section below [4] – [11].  

By Chinq Yee Chong, Research Assistant  

Bibliography  

[1] Article in the Economic Times entitled ‘The Reserve Bank of India may ask banks to hold securitised debt for six months’ : http://economictimes.indiatimes.com/articleshow/5147307.cms?flstry=1  

[2] Reserve Bank of India (RBI): www.rbi.org.in/  

[3] Vinod Kothari: www.vinodkothari.com/  

[4] PRESS RELEASE: SKS Microfinance Securitization Receives “Highest Safety” Rating from Credit Analysis & Research  

[5] MICROCAPITAL.ORG STORY: CGAP Consultant Deborah Burand Blogs About What Subprime Mortgage Securitizations Can Teach Microfinance Participants About The Sales Of Microfinance Loan Portfolios  

[6] MICROCAPITAL STORY: SKS Microfinance Plans to Raise USD 104 Million in Rated Debt  

[7] MICROCAPITAL STORY: SKS Microfinance, Share Microfin, and Equitas Microfinance Collaborate with Yes Bank to Securitize a Series of Micro-loans in India that Cumulatively Amount to USD 38.3 Million.  

[8] MICROCAPITAL STORY: India’s microfinance sector softens while Indian MFIs Turn to Securitizing Loans to Raise Funds  

[9] MICROCAPITAL STORY: Equitas Micro Finance Gets Transaction Securitized and Rated by CRISIL, Structured and Arranged by the Institute for Financial Management and Research  

[10] MICROFINANCE PAPER WRAP-UP: Securitization in Microfinance, By Brad Swanson  

[11] MICROCAPITAL.ORG STORY: CGAP Microfinance Blog Comments On Case Studies On The Liquidation Of Microfinance Institutions And Highlights Challenges Associated With Retaining Borrower Repayment Incentives In The Midst Of A Deteriorating Loan Portfolio

The report goes on to make observations about MFIs in Jammu and Kashmir and the North-East of India where outreach is generally poor. The fact that ‘there aren’t any truly pan-India MFIs’ is telling. Microlenders are not keen to go to remote areas such as ‘parts of eastern Uttar Pradesh, West Bengal and Bihar, the hilly areas of Himachal Pradesh, the tribal areas of Jharkhand and Chhattisgarh, the more remote regions of Rajasthan and Orissa, apart from Punjab’, many citing the safety of their business and staff as a major concern. Hyderabad-based SKS Microfinance Ltd (SKS) [2], India’s largest MFI which is currently active in 19 of India’s 28 states, was reported to have said that ‘some areas are just too dangerous to operate in’.

In addition, Mr Suresh Gurumani, CEO of SKS, was quoted as stating that the economy in some of these remote areas ‘isn’t necessarily cash-based’. Mr Gurumani added that it is difficult to have microlending operations in the ‘tribal areas of Jharkhand and Chhattisgarh as these people have not seen cash’ and where ‘the only exchange they understand is barter of products’.

MFIs say that though they have been present in certain districts of Jharkhand, Chhattisgarh and West Bengal, Naxal-dominated areas such as Midnapore, Purulia and Bankura in West Bengal; Koderma, Latehar, Palamu and Gumla in Jharkhand; Bastar in Chhattisgarh; and Sundargarh in Orissa are now being seen as extremely risk-prone zones. Other areas are off limits because of criminal activity.

By Chinq Yee Chong, Research Assistant

Bibliography

[1] Article on the Live Mint online financial news portal entitled ‘Crime, inaccessibility impede spread of microfinance activity’: http://www.livemint.com/2009/10/19210620/Crime-inaccessibility-impede.html?h=B 

[2] SKS Microfinance Ltd: www.sksindia.com/ 

In response to a question of whether microfinance has survived the recession, Mr Sharma noted that self-help groups (SHGs) linked to banks through NGOs or MFIs have not been as badly hit as MFIs that borrow in bulk from commercial banks. He reiterates the point that has been made several times in the aftermath of the credit crisis that ‘shrinking of liquidity takes a toll on lending funds’. Microfinance in the form of SHG-bank linkages have about 60 percent of the share of the Indian microfinance market with a total of about Rupees 9,000 crore (approximately USD 2 billion) outstanding. Mr Sharma added that government intervention in microfinance in India ‘has been a disaster’ and that government authorities should ‘either withdraw from the scene’ or hand over operations to ‘competent organisations’. According to the article, interventions in the region of Adhra Pradesh has meant that interest on some MFI loans is currently being paid by the government which according to Mr Sharma ‘is not a good idea’ as microlending should be a ‘market-oriented process’.

In response to the differences he has seen in the last 12 months in the world of microfinance, Mr Sharma was quoted as stating that the focus on high growth in the MFI sector in the past 5 to 6 years led many institutions to lose their focus on the poor. The over-emphasis on growth and the building of more MFIs have caused a number of stakeholders to forget that microfinance is ‘more than loans’ and that the sector should be about ‘empowering the poor’. He added that the focus now is ‘to make microfinance the entry-point strategy to engage the poor’ and to build not just financial capital but social capital as well. In other words, institutions need to focus on ‘making the poor employable, to enable [them] to access resources’ and to improve governance.

As to how these would impact the profits of MFIs, Mr Sharma added that MFIs need to consider how best to ‘replough’ profits back to the business and ‘improve the breadth of services’ offered by MFIs. In terms of what stakeholders are calling ‘MFI plus’ services, Mr Sharma noted that the ‘plus’ at this stage ‘is not happening’ and that the challenge is for MFIs to establish links or look into business development with entitles that focus on ‘livelihood planning’. As an example, he stated that ‘we can’t leave people with $100 loans and expect them to move up with buying a cow. You have to help him cope with more cows, and help him link to the market’.

Mr Sharma noted in conclusion that commercialisation of MFIs can be ‘a bit dangerous’ and that the focus on the forthcoming event organised by ADS would be on responsible and social finance.

By Chinq Yee Chong, Research Assistant

Bibliography

[1] Article in the Business Standard entitled ’There is a tension between scale and soul in microfinance’: http://www.business-standard.com/india/news/%5Cthere-istension-between-scalesoul-in-microfinance%5C/373588/

[2] Access Development Services: www.accessdev.org/

[3] Access Microfinance Alliance platform: www.accessdev.org/microfinance-amfa.php

Mr Sinha gained experience with India-related investments during his time as Managing Director of Courage Capital Management [3]. He was also previously a Partner with McKinsey & Company in Delhi and Boston. It is anticipated that Mr Sinha will build on Omidyar’s existing Indian investments. To date, Omidyar has invested more than USD 43 million in India by funding organizations such as the non-profit Rural Development Institute [5] which focuses on rural land rights, the online classifieds company Quikrand and Unitus Equity Fund [6], which funds MFIs in 19 of India’s 28 states. It is hoped that the new entity in India will allow Omidyar to work closely with participants in the Indian microfinance sector.  

Omidyar was established in 2004 by Pierre Omidyar and his wife Pam. The organization’s principal investment mandate is to help ’scale innovative organizations to catalyze economic and social change’. To date, Omidyar has committed more than USD 300 million to for-profit companies and nonprofit organizations across multiple investment areas, including microfinance, property rights, government transparency and social media. Previous Microcapital.Org publications on Omidyar have been set out in the Bibliography section below [7] – [12].  

By Chinq Yee Chong, Research Assistant  

Bibliography  

[1] Report on the Reuters news wire entitled ‘Omidyar Network establishes new entity in India’: http://www.reuters.com/article/pressRelease/idUS39832+14-Oct-2009+PRN20091014

[2] Omidyar Network: http://www.omidyar.com/  

[3] Courage Capital Management LLC: http://www.couragecap.com/index.php  

[4] McKinsey and Company: www.mckinsey.com/  

[5] Rural Development Institute, India: www.rdiland.org/OURWORK/OurWork_India.html  

[6] Unitus Equity Fund: www.unitus.com/about-us/unitus…/unitus-equity-fund  

[7] MICROCAPITAL.ORG STORY: BRAC, Soros Economic Development Fund (SEDF), Open Society Initiative for West Africa (OSIWA), Omidyar Network and Humanity United Form $15m Microfinance Partnership in Sierra Leone and Liberia  

[8] MICROCAPITAL STORY: Microfinance Investors Back The Leapfrog Financial Inclusion Fund To Raise USD 44 Million For Microinsurance  

[9] MICROCAPITAL STORY: Omidyar-Tufts $100m Microfinance Fund Earns 12 Percent Return and $6.6m for Tufts University in 2008  

[10] MICROCAPITAL STORY: Omidyar Network Grants $4.5m to Opportunity International to Scale Technology-Based Microfinance Services in Africa

[11] MICROCAPITAL STORY: Indian Technology Company, Comat, Raises $12.5m from Omiydar Network and Unitus Equity Fund of the United States

[12] MICROCAPITAL STORY: Unitus Launches $56m Microfinance Fund; Key Stakeholders Include Legatum, Omidyar Network

The RBI was also reported to be considering the relaxation of requirements on transaction reporting. According to the report in the Economic Times, ’transactions now need to be reported in the books of banks within 24 hours’. This is onerous particularly in relation to ’distant transactions in rural areas’ said a banker explaining the rationale for such a move. 

An officer of the RBI was further quoted as stating that the central bank was ’not in favour of capping the interest rates charged by banks’ although the regulator was concerned about the ’lack of transparency in lending practices’. The officer added that there was a need to promote more transparent pricing mechanisms. In addition to the developments mentioned above, the Indian government is also working towards tabling a Microfinance Bill in Parliament. The report in the Economic Times mentioned that India’s National Bank for Agriculture and Rural Development, which has pioneered several microfinance initiatives in the country, is expected to gain regulatory powers over non- deposit taking entities under the proposed Bill. 

By Chinq Yee Chong, Research Assistant  

Bibliography  

[1] Article on the Economic Times entitled ‘RBI may widen scope of correspondents’:  http://economictimes.indiatimes.com/news/economy/policy/RBI-may-widen-scope-of-correspondents/articleshow/5117615.cms  

[2] Reserve Bank of India: www.rbi.org.in/  

[3] Information on RBI website on ‘Business Correspondent’ model: http://www.rbi.org.in/Scripts/BS_CircularIndexDisplay.aspx?Id=2718  

[4] National Bank for Agriculture and Rural Development: www.nabard.org/

Indeed, some of these exceptional cases may be deceiving as they relate to women ‘from the affluent class’ who ‘are doing a flourishing business’ partly because of the status and ‘influence exerted by their male family members’. The article in The News observes that whilst this ‘is not meant to deny [these women] credit for their success’ but the reality is that it is ‘almost impossible for a woman without influence in Pakistan to expand her business beyond a certain limit’.

The News further reported that efforts to overcome this particular gender related challenge ‘is also flawed’. The Lahore Chapter of the Federation of Pakistan Chambers of Commerce and Industry [2] recently organised a roundtable conference of women entrepreneurs who are on the cusp of starting a small business. Almost all the participating women at the conference ‘were from rich families and did not lack resources’ according to The News and ‘genuine women entrepreneurs’ who started ‘from scrap through microfinance’ were notably missing from the conference.

In Pakistan, it is conventionally understood that a microenterprise is one ‘under which business is managed by a single person’ and which can be started up with an amount as little as Rs20,000 (approximately USD 238). However, the International Labour Organisation [3] and the State Bank of Pakistan [4] consider microenterprises to include businesses ‘run by a small team, led by an entrepreneur, but which operate on a relatively bigger scale’.

Of 1.6 million microfinance borrowers in Pakistan, around 100,000 enterprises are exclusively owned by women. According to research conducted by the Civil Society Human and Institutional Development Programme for the European Union in 2005, 26 to 32 per cent of microfinance borrowers drop out of the loan after one year. About 63 per cent of microborrowers drop-out because of ‘organisational design and policy’ in relation to particular microloan products where the loan size and payment schedules were considered unsuitable. Approximately 16 percent of borrowers drop out because of idiosyncratic unexpected events while 15 percent drop out because they no longer require microloans.

In the latter category, some microborrowers abandon their microcredit facilities when they become fairly successful and ‘generate sufficient income as retained earnings’, thus becoming ‘self-sufficient’. The News reports that within this group are a significant number of successful women microentrepreneurs, numbering over 13,000 in Pakistan, who need help to pursue further growth in their individual ventures.

The News further reported that about 70 percent of small and medium enterprises (SMEs) in Pakistan prefer to borrow from friends and families, from whom funds can be ‘easily and immediately available’. Thus if banks want to offer loans to such enterprises, ‘they must compare their product with the ones offered by friends, families or other informal channels’. Key characteristics of loans provided informally include quick access, reliability, cheap or free loans and small transaction amounts. The News noted that entrepreneurs will ‘return to better-known sources’ for funding if banks cannot offer competitive products, a phenomenon that ‘further limits the amount of investment and growth that can take place in an SME’.

Women entrepreneurs in the SME sector in Pakistan are most likely to age between 20 and 49 years and possess a graduate or vocational degree at the least. They are computer literate, have one or two children and typically start-up the business on their own. It has been established through various studies, details of which were not provided in The News report, that women entrepreneurs in Pakistan with no assets of their own lack access to finance, markets, training and potentially helpful networks.

Gender related issues [5] – [10] and information about microfinance in Pakistan [11] – [14] have been captured in previous Microcapital.Org publications, some of which have been set out in the Bibliography section below.

By Chinq Yee Chong, Research Assistant

Bibliography

[1] Article on Pakistan’s The News portal entitled ‘Women face hurdles to developing business’: http://www.thenews.com.pk/print1.asp?id=202572

[2] The Lahore Chapter of the Federation of Pakistan Chambers of Commerce and Industry: www.fpcci.com.pk/

[3] The International Labour Organisation: www.ilo.org/

[4] The State Bank of Pakistan: www.sbp.org.pk/

[5] MICROCAPITAL.ORG PAPER WRAP-UP: Acute Poverty Alleviation Through Women’s Targeting by Micro nance Programs, by Alexandra Dobra

[6] MICROCAPITAL STORY: Study Reveals Ghanaian Women Still Face Challenges Accessing Microfinance

[7] MICROCAPITAL STORY: A Brief Survey on the Impact of Microfinance on Women Part 3 of a 3-Part Series: Focusing on Women Clients for Financial Sustainability

[8] MICROCAPITAL STORY: A Brief Survey on the Impact of Microfinance on Women Part 2 of a 3-Part Series: Evidence of Women’s Empowerment

[9] MICROCAPITAL STORY: A Brief Survey on the Impact of Microfinance on Women Part 1 of a 3-Part Series: Targeting Women and its Effect on the Wellbeing of Poor Families

[10] MICROCAPITAL STORY: European Microfinance Network Releases “Fostering Gender Equality,” Including Country Reports on Hungary, Slovakia and Six Others

[11] MICROCAPITAL.ORG STORY: State Bank Of Pakistan Amends Prudential Regulations Applicable To Microfinance Banks to Remove ‘Regulatory Bottlenecks’, Cap Microloan Sizes And Reduce The Risk Of Borrower Over-Indebtedness

[12] MICROCAPITAL STORY: Pakistan Ministry of Social Welfare and Special Education to Introduce Micro-Credit Scheme for Disabled

[13] MICROCAPITAL STORY: State Bank of Pakistan signs MoU with Tameer Microfinance Bank (TMFB) in Pakistan for Rs. 82 million (aprox USD 1 million)

[14] MICROCAPITAL STORY: The Impact Of Microfinance On Child Labour And The Need To Improve Outreach – Lessons From Pakistan

Ms Kudva added that the deterioration in asset quality largely coincided with the downturn in economic activity and that MFI customers, who often belong to the most vulnerable segments of society, felt the impact of the downturn most acutely and almost immediately due to economic dislocation.

Furthermore, Crisil expects the number of borrowers serviced by MFIs to increase from 21 million in March 2009 to 35 million by March 2011. Mr Ramraj Pai, a director at Crisil, was quoted as stating that the demand for funds in India’s microfinance sector is approximately USD 60 billion although actual disbursements currently only amount to about USD 6 billion. The potential for growth is significant and demand will continue to outstrip supply for a long time as ‘only 10 percent of the market has been penetrated’, Mr Pai observed.
At the moment, banks in the private sector account for the bulk of funding to MFIs in India. Such lenders dominate 45 to 50 percent of the MFI funding sector. Public sector banks contribute about 15 to 20 percent of the funding required by MFIs. Mr Pai was also quoted as stating that alternative sources of funding need to be found.

Ms Kudva and Mr Pai made these observations at the release of Crisil’s publication, ‘Top 50 Microfinance Institutions in India’, in Mumbai recently [2]. The publication gives an overview of leading MFIs in India. Related Microcapital.Org publications on the current state of the Indian microfinance sector and Crisil have been set out in the Bibliography section below [3] – [6].

[1] Article entitled ‘MFI’s bad loans may triple: Crisil’ on India’s Business Standard online news portal: www.business-standard.com/india/…bad-loans…crisil/372886/

[2] Article entitled ’Crisil releases Top 50 Microfinance Institutions in India’: http://www.domain-b.com/finance/rating/CRISIL/20091008_microfinance.html

[3] MICROCAPITAL STORY: Indian Public Sector Banks may see an Increase in Non-Performing Assets (NPAs) from Microfinance Loans

[4] MICROCAPITAL STORY: SME Rating Agency of India Limited (SMERA) Launches Ratings for Microfinance Institutions

[5] MICROCAPITAL STORY: Fund-raising Continues In India – Kerala’s ESAF Microfinance And Investments Raises $2.5 Million Through Sale Of Minority Stake To Opportunity International Australia’s Subsidiary, Dia Vikas Capital

[6] MICROCAPITAL.ORG STORY: Venture Capital and Private Equity Firms Invest Millions in India, but is there Risk in Microfinance Funding?

Still on the issue of rural banks, a recent article in the Manila Times entitled ‘Most rural banks very healthy, many exceed required CAR’ [5] pointed out that 103 of the 690 rural banks in the Philippines (or 17 percent of all rural banks in the country) are ‘undercapitalized’. According to Mr Jose Nograles, president of the Philippine Deposit Insurance Corp. (PDIC) president, these undercapitalized banks hold Peso 11 billion in deposits (USD 236 million), or 10.3 percent of the rural banking sector’s total deposits. Many of these non-compliant banks are nonetheless ‘solid institutions’, according to Mr Nograles, and have combined assets amounting to 8.8 percent of the total assets of the rural banking industry as of June 2009. Industry-wide, the average capital adequacy ratio (CAR) in the rural bank sector was 18.3 percent which is almost double the required 10 percent. Mr Nograles made these observations during the Rural Bankers Association of the Philippines (RBAP) 52nd charter anniversary. He added that these figures ‘point to the need for mergers and acquisitions in the rural banking sector’.

The article in the Manila Times stated that consequences of the failure of any of 103 undercapitalized rural banks on their respective communities ‘ would be more pronounced than the failure of a commercial bank’ as rural banks have a greater impact on the communities they serve compared to commercial banks that are mainly urban-based. The article added that the financial health of the other 587 rural banks is in good state and that ‘most of these 587 other rural banks are very well-capitalized and profitable’.

Related Microcapital.Org publications on the role of rural MFIs and the microfinance sector in the Philippines can be found in the Bibliography section below [6] – [10].

By Chinq Yee Chong, Research Assistant

Bibliography

[1] Article in the Philippines Star entitled ”BSP may allow rural banks to seel insurance’: http://www.philstar.com/Article.aspx?articleId=512988&publicationSubCategoryId=66

[2] Central Bank of the Philippines: www.bsp.gov.ph/

[3] Rural Bankers Association of the Philippines: www.rbap.org/

[4] The Monetary Board of the Philippines: www.bsp.gov.ph/about/charter_02.asp

[5] Article in the Manila Star entitled: ‘Most rural banks very healthy, many exceed required CAR’: http://www.manilatimes.net/index.php/component/content/article/86-special-reports/3738-most-rural-banks-very-healthy-many-exceed-required-car-

[6] MICROCAPITAL.ORG STORY: Philippines-Based MFI CARD Raises $10.4 Million In A 5-Year Privately Placed Bond Issue Supported By Grameen Growth Guarantee Program And ‘A(-)’ Rating By Planet Rating To Expand Its Microfinance Business

[7] NEWS WIRE: The Philippines: Rural Bankers Association of the Philippines, Microfinance Council of the Philippines and ACCION International Agree to Promote Client Protections

[8] MICROCAPITAL STORY: Philippines Government and Microfinance Institutions (MFIs) Initiate Loans Totaling $3.3b Since July 2004

[9] MICROCAPITAL STORY: Rizal Commercial Banking Corporation (RCBC) of the Philippines to Expand Microfinance Operations

[10] MICROCAPITAL STORY: Microfinance firms in the Philippines take to ratings

The topic is an important one, particularly in the current financial turmoil. Institutions that lend to MFIs often use that MFI’s loan portfolio as collateral for their loan. Similarly, structured finance investors purchase bonds that are ‘backed’ or collateralised by MFI loan portfolios in securitization deals. In view of the financial crisis and dampened investor sentiment, securitization activity has been significantly reduced in the past 18 months or so. In these transactions, there is often an implicit assumption that ‘if the MFI gets into trouble, someone else can collect its outstanding microloans’. In his article, Mr Rozas offers five case studies of distressed MFIs. The five cases appendixed in the report relate to the following organizations: SOMED in Uganda, WEEC in Kenya, Bank Dagang Bali in Indonesia, FOCCAS in Uganda and ICICI Bank in India [3]. It should be noted that ICICI Bank was not cited to illustrate an MFI failure followed by a liquidation (as the preceding case studies were) but it was used to show what might happen when investors are faced with collecting on a loan portfolio, without the cooperation or servicing infrastructure of the originating MFI.

In his blog, Mr Rosenberg describes microfinance as a ‘high-touch business’ where successful collection depends strongly on the borrowers’ relationships with individual loan officers and most importantly on borrowers’ expectation that their faithful repayment of their current loan will be rewarded by continued access to loans in the future. He adds that ‘when an MFI fails, its collection system is no longer functional, and clients’ principal incentive to repay disappears’. The assumption that there will be another MFI willing to ‘pick up the portfolio’ is possible, in theory, although Mr Rosenberg reminds us that ‘it can be hard to make such an arrangement work in practice, as painfully illustrated by the example of FOCCAS in Uganda’. In reality it is often ill-founded to assume that a ready buyer can be found for a failing MFI’s loan portfolio.

Although Mr Rozas’ paper contains useful suggestions on the pre- and post-default steps that an MFI can take to ‘maximize the chance of collecting a failed MFI’s loan portfolio’, Mr Rosenberg’s view is that lenders should not be overly optimistic about the value of such a loan portfolio ‘even if all those recommendations are implemented’.

A commentator to the blog known as Ms Deborah Burand was quoted as stating that not many microfinance practitioners would be willing to advance Mr Rozas’ recommendations. In response to one of Mr Rozas’ recommendations that ‘it is probably best to repay local creditors first’ in a post-default scenario, Ms Durand observed that from a policy perspective it would be unhealthy for ‘the microfinance sector to encourage weakened MFIs to cherry pick among creditors and pay their local creditors before foreign creditors’. Indeed such practices may fall foul of insolvency laws in some jurisdictions.

Other recommendations by Mr Rozas include the suggestion that the MFI’s management should, in almost all post-default scenarios, be replaced as soon as possible but that staff in charge of collections should be incentivized (through collection related bonuses or other measures) to promote early recoveries.

Mr Rozas’ paper has been set out in the Bibliography section below along with other Microcapital.Org stories on related issues [4], [5],[6].

By Chinq Yee Chong, Research Assistant

Bibliography

[1] CGAP Microfinance Blog entitled ‘When MFIs fail, is their loan portfolio worth anything?’: http://microfinance.cgap.org/2009/10/02/when-mfis-fail-is-their-loan-portfolio-worth-anything/

[2] ‘Throwing in the Towel: Lessons from MFI Liquidations’ 20 Sep 2009, Rozas, D.: http://www.microfinancegateway.org/p/site/m/template.rc/1.9.38716/

[3] ICICI Bank India: www.icicibank.com/

[4] MICROCAPITAL.ORG STORY: CGAP Blog Explains High Collection Rates And Clarifies Key Microfinance Concepts Including Loan-Loss Rates and Outstanding Loan Portfolio

[5] MICROCAPITAL.ORG STORY: Citi Microfinance Executive, Robert Annibale, Says Financial Crisis Will Spur Microfinance to Move Toward a Banking Model

[6] MICROCAPITAL.ORG STORY: Article in US Banker Magazine Refers To Microfinance Banana Skins Report 2009 And Analyses The Impact Of Global Financial Crisis On Microfinance Sector Based On Observations By Citi Microfinance, CGAP And ShoreBank International Ltd.