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IFC Experience with Responsible Microfinance in ECA Nataša Goronja, Operations Officer, IFC Tbilisi, January 31 st, 2014.

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Presentation on theme: "IFC Experience with Responsible Microfinance in ECA Nataša Goronja, Operations Officer, IFC Tbilisi, January 31 st, 2014."— Presentation transcript:

1 IFC Experience with Responsible Microfinance in ECA Nataša Goronja, Operations Officer, IFC Tbilisi, January 31 st, 2014

2 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

3 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

4 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

5 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)

6 Risk Vulnerability Questions Used

7 Result: Risk Segmentation of BiH Debtors

8 Vulnerability and Affordability High LowHigh Debtor Concern and Inability to meet Financial Commitments = Weighted Vulnerability Score Essential Expenditure & Utilities as % Income

9 2013 Risk Matrix : 3,000 people have different views of their financial position

10 Different risk and service propositions – not a simple financial formula High LowHigh Vulnerable Exposed Debtor Concern and Inability to meet Financial Commitments = Weighted Vulnerability Score Essential Expenditure & Utilities as % Income Affordable Concerned

11 Three years of data - Is risk exposure beginning to polarise ? High LowHigh Debtor Concern and Inability to meet Financial Commitments = Weighted Vulnerability Score Essential Expenditure % Income 29 – % 27 – % 23 – % 21 – %

12 What outlook for the risk portfolios ? Affordable Concerned Vulnerable 31 % 24 % 22 % 24 % Distribution KM 1,480 KM 1,220 KM 530 KM 235 Net Disposable Income (pre loan) KM 5,600 KM 6,300 KM 4,800 KM 4,400 Average Loan 16 % 21 % 47 % 99 % Loan Repayment % of Net Income 0 % 13 % 2 % 24 % Loan Arrears

13 Other Impact of Debt Loan Arrears : % : % : % Utility Arrears : % % : % Remainder : % % : % Awareness of Financial Strains : 23 %

14 © International Finance Corporation The Risk Dynamics of Different Markets : What Local Actions and Response? Roy Pratt – December 2013

15 © International Finance CorporationRoy Pratt – December 2013 Why are cities so different … ?

16 Partnership with SMART, Deutsche Bank, and others

17 17 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 MFIs will provide transparent, respectful, prudent financial services Full integration of client protection Client protection principles will be fully integrated into all microfinance operations Gain pro-consumer reputation The microfinance industry will be distinguished as leader in responsible finance

18 18 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. Certification Overview

19 19 Certification Standards 7 Principles 30 Standards 95 Indicators

20 © International Finance CorporationRoy Pratt – December 2013 Epilogue: Some signs of improved budget control and realism in Bosnia … different clients – different needs ? ? ?

21 Thank you!

22 © International Finance CorporationRoy Pratt – December 2013 Risk Segmentation : The Impact of Savers … A Different Risk Segment 14% 36% 19% 31% MFI : Savers 1,950KM 8853,7305 %6 % MFI : Non-Savers 1,500KM 5503, %20 % Bank : Savers 2,200KM 9507,2102 %4 % Bank : Non-Savers 1,570KM 5607, %28 % Household Income KM Net Disposable Income (after loan) Loan KM Loan Arrears Utility Arrears 27 % 73 % 38 % 62 % Ratio

23 © International Finance CorporationRoy Pratt – December 2013 Risk Segmentation … What is the proposition ? MFI : Single 1,645KM 7102,7506 %14 % MFI : Multiple 1,575KM 4156, %24 % Bank : Single 1,770KM 7356,9009 %17 % Bank : Multiple 1,945KM 6206, %28 % Household Income KM Net Disposable Income (after loan Loan KM Loan Arrears Utility Arrears 80 % 20 % 81 % 19 % Ratio Up to 6 months 1,450KM 5304, %25 % 7 – 12 months 1,730KM 7005,1009 %15 % Over 12 months 1,920KM 8106,3007 %11% 36 % 27 % 37 % Change of Lenders Time since last loan approval

24 © International Finance CorporationRoy Pratt – December 2013 Risk Segmentation … The Challenge of Low Household Income 24% 26% 14% 12%

25 © International Finance Corporation Income Segmentation : Budget Pressures on Income Groups up to KM 1,500 45%52%60%76% 90% Average Roy Pratt – December 2013

26 © International Finance Corporation Responsiveness improves again … but still further to go … and some core problems Roy Pratt – December 2013

27 © International Finance CorporationRoy Pratt – December 2013 Outlook for Lending … Risk sensitivity to the Saver Segment … What will they do ? 34% 33% 25% 3% 4% Loan Arrears Utility Arrears Loan : Family Food Expenditure Reduced Additional Employment More than 1 loan in last 3 years More than1 lender in last 3 years Loan within 6 months Need to borrow : MFI Need to borrow : Bank Other borrower No Savings Other Borrower Savings Loan Arrears Utility Arrears Loan : Family Food Expenditure Reduced Additional Employment More than 1 loan in last 3 years More than1 lender in last 3 years Loan within 6 months 11 %25 %12 %22 %18 %33 %19 % Need to borrow : MFI Need to borrow : Bank Other borrower No Savings Other Borrower Savings Loan Arrears Utility Arrears Loan : Family Food Expenditure Reduced Additional Employment More than 1 loan in last 3 years More than1 lender in last 3 years Loan within 6 months 11 %25 %12 %22 %18 %33 %19 % Need to borrow : MFI 10 % 12 %21 %31 %42 %30 % Need to borrow : Bank 13 %23 %11 %13 %32 %40 %32 % Other borrower No Savings 12 %20 %12 %27 %22 %32 %20 % Other Borrower Savings Loan Arrears Utility Arrears Loan : Family Food Expenditure Reduced Additional Employment More than 1 loan in last 3 years More than1 lender in last 3 years Loan within 6 months 11 %25 %12 %22 %18 %33 %19 % Need to borrow : MFI 10 % 12 %21 %31 %42 %30 % Need to borrow : Bank 13 %23 %11 %13 %32 %40 %32 % Other borrower No Savings 12 %20 %12 %27 %22 %32 %20 % Other Borrower Savings 3 %4 %3 %5 %12 %16 %11 %

28 © International Finance CorporationRoy Pratt – December 2013 Own Business : Bank Borrowers Strengthen MFI : KM 2,200 KM 2,050 Bank : KM 2,900 KM 2, MFI : KM 8,850 KM 7,050 Bank : KM 18,250 KM 9,400

29 © International Finance CorporationRoy 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 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’ STRATEGIC RISK : Outlook for Loan Portfolios of Banks and MFIs Structural risk profile – sensitivity to income and cost changes – business case of borrower segments LENDING STRATEGY : Reduced loan size and more stable employment Changing structure of lending portfolios … incremental credit quality … performance of different segments DIFFERENT BORROWER SEGMENTS : Different risks need different products and services Low income – location – ‘savers’ / ‘non-savers’ – recent loan approvals – bank / MFI client movement

30 © International Finance Corporation Key Issues to Address Financial Counselling Outlook for Borrowing Institutional Reputation Credit Quality of Incremental or Marginal Lending Strategic Operational Roy Pratt – December 2013


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