AVOIDing Over-indebtedness

1. AVOIDing Over-indebtedness Antwerp 27 February 2013 Caroline Vance, Deutsche Bank Lisa Sherk, BlueOrchard

2. Progress since Jordan • Improvements to the Managers’ Guidelines on Over-indebtedness: • Fleshed out specific bullet points to provide concrete suggested actions • Some editorial modifications • Some changes to the order and description bullets • Discussions with Emilie at UNPRI re: incorporation in PIIF • Identification of what appears to be the weakest area of investor activity – assessment of market’s capacity to grow/ saturation levels – and suggestion of future areas of work • Collecting approval of group members to add their names to the list of organizations supporting the Guidelines before formally presenting them to the PIIF Steering Committee

3. Managers’ Guidelines • Maintain reasonable estimates of each market’s growth capacity. • Analysis of the market penetration at local, disaggregated levels (individual provinces, cities, villages, etc.) • Assess the extent to which various market players target the same or different clients

4. Managers’ Guidelines • Ensure that the MFIs in which they invest and to which they lend adequately assess and monitor their clients’ repayment capacity. • Encourage use of Smart Campaign tool among MFIs • Loan file reviews • Focus on policy regarding DSCR levels

5. Managers’ Guidelines • Perform a rigorous analysis of other elements of the MFI’s procedures and activities that could contribute to over-lending risks. • Define a list of core practices and score MFIs • Assess appropriateness of products • Assess incentive schemes for Loan Officers • Check for Operational Control Group

6. Managers’ Guidelines • Engage in open dialogue with MFI management and Board to ensure that they are aware of the risks and warning signs of over-indebtedness. • Share results of due diligence visits • Encourage endorsement of Smart Campaign • Equity investors: take Board seats when feasible and encourage responsible lending • Debt investors: include appropriate covenants

7. Managers’ Guidelines • Require the use of credit bureaus when they exist, and work to promote their development where they do not. • Include requirement that MFIs use credit bureau data when available (pre-screening eligibility criteria) • Covenants requiring use of credit bureau • Lobbying with regulators to develop credit bureaus where they don’t exist

8. Managers’ Guidelines • Work together with peers in the industry to raise awareness, improve measurement and take individual and collective action • Participate in information sharing activities/events • Dialogue with regulators when appropriate • Finance OID studies • Encourage MFIs to provide financial literacy programs • Debt investors: coordinate with other lenders to minimize over-lending to MFIs

9. Incorporation into PIIF • Initial presentation of the Guidelines to the PIIF Steering Committee by Emilie Goodall on February 22nd • Universal support for inclusion of the Guidelines under Principle 2 (“Client Protection”) • Once finalized, document may be incorporated by email approval • Next Steps: • Finalization of wording (some potential for suggestions from PIIF Steering Committee)

10. Focus on Assessing Market Capacity • Key impediments to understanding market capacity / growth potential • No common terminology or measure to understand how to frame the issue • No practical tool to enable understanding of market capacity • No single proven methodology that has been widely adopted for use in academic market studies • These challenges were also at the heart of many of the “burning questions” from group members compiled at the start of our work • Definitions / indicators? • Drivers / risk factors? • How much growth is OK? Beyond what levels does it become irresponsible? • What is a critical level of market saturation?

11. Defining and Measuring Capacity • What does market saturation mean to you? • How would you calculate it? Numerator / Denominator

12. Defining and Measuring Capacity • Starting with a definition of demand and penetration: • Measuring market demand: • % of population that is economically active • % of population engaged in informal economic activities • % of population below the national poverty line • Measuring market penetration: • # of borrowers per total population (Gonzalez 2008; Rhyne/Otero 2006) • # of borrowers per poor population (Dieckmann 2007; Gonzalez 2008; MIX 2010a; Gonzalez and Javoy 2011) • # of borrowers per poor population adjusted by gender and age (Rozas 2009) • # of loans per poor household (Intellecap 2009) • Additional challenge = finding data sources

13. Understanding Market Penetration • “Lack of access or crowded markets? Towards a better understanding of microfinance market penetration” – working paper published August 23, 2012 by Annette Krauss, Laura Lontzek, Julia Meyer, Maria Rommelt (University of Zurich) • Measure of market penetration: • Numerator: includes all customers of relevant suppliers (banks, MFIs, cooperatives, consumer lenders, etc.) adjusted for multiple borrowing and segmented by rural/urban location • Denominator: should be limited to relevant segment only: the poor (can be a very different number depending on whether one uses the national poverty line or the $2/day PPP definition) adjusted for the number of potential borrowers who actually want a loan, adjusted for average household size and segmented by rural/urban location

14. Results • Penetration rates vary dramatically according to various refinements:

15. Available Data Sources

16. Working Toward a Practical Tool • Planet Rating tool soon to be published: MIMOSA (Microfinance Index for Market Outreach and Saturation) • To become a public resource to analyze markets by country and, ultimately at a more local level • Looks at basic penetration rates (% of adult population that has taken a loan from a financial institution in the past year – Findex data) • Compares this to “predicted market potential” to determine level of saturation • Predicted market potential based on: • Human Development index (higher it is, the greater the potential market) • Use of formal savings (higher it is, the greater the potential market) • Use of semi-formal loans -- store credit, employer loans (higher it is, the greater the potential market) • Countries are scored 1-5, with 1 being low saturation, and 5 being highly saturation

17. Digging deeper – sub-national regions • A recognized weakness of both these approaches is that they are limited to analyzing at the country level • Some attempts to collect more disaggregated data • MIX Financial Inclusion Maps • Kenya, Nigeria, South Africa, Rwanda, India • Linking together public datasets to illustrate depth and breadth of access to financial services (savings + credit) • Cambodia OID study http://maps.mixmarket.org/india/

18. Practical Applications • Do these approaches make sense? • How can we incorporate these studies’ findings in our work as investors in microfinance? • How can we build upon them/ improve them?