MICROFINANCE PUBLICATION ROUND-UP: Over-indebtedness in Mexico; Achieving Customer Centricity; Managing Over-indebtedness

“Over-Indebtedness in Mexico: Its Effect on Borrowers;” published by Microfinance CEO Working Group; May 2014; 32 pages; available at http://microfinanceceoworkinggroup.org/wp-content/uploads/2014/05/Over-Indebtedness-in-Mexico-Its-Effect-on-Borrowers-552014.pdf

This report cautions lending institutions in Mexico about rising levels of over-indebtedness – meaning more borrowers cannot reasonably repay their debts – which can threaten the financial system as well as the economic outlook of low-income individuals. The authors analyze credit bureau data, surveys of branch managers and interviews of borrowers to examine the challenges brought on by over-indebtedness. They argue that Mexico’s lending climate bears resemblance to situations in other countries that grew into credit crises citing as examples local markets oversaturated with lenders, resulting in multiple institutions lending to individuals. In 2006, regulations for lending institutions in Mexico were relaxed, which encouraged more creditors to enter the market and increased the number of loans disbursed. The authors allege that aggressive lending practices now exist, while clients are sometimes unaware of loan terms. This “profligate behavior” on the part of lenders is identified as one of the causes of over-indebtedness. A sizable portion of the report includes anecdotal evidence from borrowers, who describe their reasons for obtaining loans and their struggles to repay them. In addition to entrepreneurial ventures, many borrowers take on loans to finance medical or other family emergencies. Thus, when administering loans, the authors argue that bank managers should consider the financial situation of a household and not just the borrower since funds are often distributed to extended family. The authors offer several other remedies to over-indebtedness including: (1) developing a central credit bureau that maintains clients’ credit histories, (2) establishing more rigorous banking standards and (3) adopting client protection principles such as those espoused by the Smart Campaign of the Center for Financial Inclusion at the US-based non-governmental organization Accion.

“The Journey to Customer-Centricity;” published by CGAP (Consultative Group to Assist the Poor); March 2014; 16 pages; available at http://www.cgap.org/sites/default/files/Other-Kaleido-Brochure-March-2014.pdf

This report describes a project to develop a method to understand the diverse needs of microfinance clients. It is a collaborative effort of Indian microfinance institution (MFI) Janalakshmi Finance Services, US-based research center CGAP (Consultative Group to Assist the Poor) and Indian consultancy Innovation Labs. After conducting research to obtain “qualitative anthropological” data from various microentrepreneurial households, the team developed a platform called Kaleido, which can help institutions identify a microfinance client’s needs by organizing them into five components: (1) Composition – the number of family members living in the same household and the number of family members living outside of it, a family’s migration history; (2) Finances – the size of a household’s income, sources of income and assets and liabilities; (3) Business – the type of business being operated, its earning potential and its vulnerabilities; (4) Attitudes – the family’s attitudes toward spending and earning; and (5) Events – marriages, sicknesses and developments in the business. This information is synthesized and provided as a snapshot intended to allow staff of lending institutions to quickly assess the financial situation of a household.

“Over-Indebtedness: A Risk Management Approach;” published by Microfinance CEO Working Group; May 2014; 20 pages; available at http://microfinanceceoworkinggroup.org/wp-content/uploads/2014/05/Over-Indebtedness-A-Risk-Management-Approach.pdf

Over-indebtedness – the inability of borrowers to repay debts fully or on time – is a looming issue for microfinance institutions (MFIs). This report was prepared by risk managers from microfinance organizations Accion, Foundation for International Community Assistance (FINCA), Pro Mujer and VisionFund to highlight the risks of over-indebtedness as well as to suggest strategies to mitigate those risks. The primary policy recommendation offered by the authors is the establishment of a central credit bureau in countries that do not have one. This can allow borrowers to develop a credit history and help lending institutions determine which loan products to offer a client, if any. Also, the report suggests that credit bureaus and a more thorough screening process be used to help identify risky borrowers, since one of the biggest causes of loan defaults is multiple borrowing from different lending institutions. When lenders consider expanding into new markets, the authors recommend that they be more wary of saturated markets, as regions with many sources of credit (informal and formal) present an array of challenges. For example, some lending institutions lack “credit discipline” and are apt to dole out loans to risky borrowers. The report concludes with case studies from “microfinance crises” in Bolivia and India, which are intended to demonstrate the urgency of implementing the outlined recommendations.

By Meraj Husain, Research Associate

About Microfinance CEO Working Group

The Microfinance CEO Working Group is a collaborative effort by the CEOs of eight microfinance organizations: Accion, FINCA International, Freedom from Hunger, Grameen Foundation USA, Opportunity International, Pro Mujer, VisionFund International and Women’s World Banking. The Working Group seeks to support the microfinance industry in bringing a broad range of financial and related services to those who have traditionally been excluded. Its goals include promoting improved client outcomes through the provision of responsible financial services. The US-based Center for Financial Inclusion at Accion serves as the secretariat for the Working Group. Collectively, the organizations composing the Working Group represent approximately 250 microfinance institutions (MFIs) in 70 countries and approximately 40 million clients.

About CGAP (Consultative Group to Assist the Poor)

CGAP (Consultative Group to Assist the Poor) is a US-based nonprofit policy and research center dedicated to increasing financial access to poor people worldwide. It is supported by approximately 40 development agencies and private foundations in its mission to provide market intelligence, promote standards and offer advisory services to governments, microfinance providers, donors and investors. CGAP reported operating expenses of USD 9 million as of 2013. CGAP is co-located with the offices of the World Bank Group in Washington DC.

Sources and Additional Resources

[1] Microfinance CEO Working Group: Over-Indebtedness in Mexico: Its Effect on Borrowers

[2] Microfinance CEO Working Group: Over-Indebtedness: A Risk Management Approach

[3] Consultative Group to Assist the Poor (CGAP): The Journey to Customer-Centricity

MicroCapital, March 21, 2014, CGAP Branchless Banking Challenge Fund for West Africa Accepting Entries Through March 31, 2014

MicroCapital, October 15, 2013, “A Microcredit Crisis Averted: The Case of Bangladesh,” By Greg Chen and Stuart Rutherford, Published by CGAP (Consultative Group to Assist the Poor)

MicroCapital, September 9, 2013, Microfinance CEO Working Group Hires Anne Hastings as Manager

MicroCapital, August 21, 2013, Private Equity Funds to Buy Stake in Janalakshmi Financial Services of India for $50.9m

MicroCapital, January 26, 2012, Microfinance CEO Working Group Issues Road Map for Microfinance Industry Promoting Smart Campaign, Microfinance Transparency, Social Performance Task Force

MicroCapital Universe Profile: Microfinance CEO Working Group

MicroCapital Universe Profile: Consultative Group to Assist the Poor (CGAP)

MicroCapital Universe Profile: FINCA International