Morocco MFIs Confront Crisis and Strive for a Brighter 2010

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Jan 2010
Washington, United States , January, 07 2010 - According to Xavier Reille “Few countries boasted as strong and as vibrant a microfinance sector than Morocco, where microfinance institutions (MFIs) saw the size of their combined loan portfolio multiply 11 times between 2004 and 2007.” But the last two years have shown that this growth came at the cost of asset quality, which – combined with clients borrowing from multiple MFIs – have spurred write-offs and falling returns.

As the U.S. credit squeeze snowballed into a global financial crisis two years ago, the worldwide microfinance sector appeared to be well-positioned to ride through the turmoil given years of remarkably strong growth and support from a growing range of investors.

According to Xavier Reille “Few countries boasted as strong and as vibrant a microfinance sector than Morocco, where microfinance institutions (MFIs) saw the size of their combined loan portfolio multiply 11 times between 2004 and 2007.” But the last two years have shown that this growth came at the cost of asset quality, which – combined with clients borrowing from multiple MFIs – have spurred write-offs and falling returns.

According to new research by CGAP, MFIs in Morocco have embarked on a path to recovery, aided by timely government support and continued backing from commercial banks that have maintained their credit allocations to the sector.

To hasten recovery, Moroccan MFIs are tightening their credit processes, strengthening management, and placing a greater emphasis on loan recovery, including the use of legal action to pursue delinquent borrowers.

They are also sharing timely credit information to curb the practice of multiple MFIs lending to the same client, prompting a decrease in the share of clients with multiple loans to 29% in September 2009, down from 39% in October 2008.

At the same time, Moroccan MFIs have eased their growth rates, and reduced their balance sheet size. Total assets declined by 1.2% in 2008 and by 7.0% during the first half of 2009.

These actions reflect the severity of the crisis that confronted the Moroccan microfinance sector, which comprises 12 licensed MFIs that were serving close to 1 million clients at the end of last year. The industry is highly concentrated, with four MFIs serving 90% of the client base: Zakoura, Al-Amana, Fondation des Banques Populaires, and Fondep.

MFI Crisis in Morocco

As the crisis unfolded in 2007, Morocco’s MFIs still boasted strong financial indicators, with portfolio-at-risk of more than 30 days of 1.9%, still below the global average of 2.7%. With such strong growth in the preceding years, raters, funders, and MFI managers failed to see the scope of the crisis that was emerging.

During 2008, non-performing loans began to mount, affecting all MFIs. The portfolio-at-risk measure reached 5% at the end of 2008, doubling to 10% by June 2009. In May 2009, one of the four paramount MFIs, Zakoura, recorded a portfolio-at-risk of more than 30% and it decided to merge with Fondation des Banques Populaires.

According to Xavier Reille, author of the paper, ”MFI managers have realized the costs of unsustainable growth, namely lenient credit policies, obsolete management information systems, sub-standard governance, and lack of internal controls.”

Some MFIs also had diversified their loan products and offered larger loans without proper underwriting policies. The CGAP study contends that these factors – and not the onset of the global financial crisis – triggered the shock in the Moroccan microfinance sector.

Government Intervention

The change in practices now underway within the Moroccan microfinance sector aims to produce a recovery in 2010, although the government also should be credited for helping create the conditions for a rebound.

The government orchestrated Fondation des Banques Populaires’ takeover of the ailing Zoukara, buttressing confidence in the sector and preventing further contagion effects on loan delinquency.

The government has developed a plan in close collaboration with the Moroccan central bank and the Federation of MFIs (FNAM) to promote consolidation in the sector. The government’s program centers around four priorities:

  • Strengthen MFIs by promoting better governance and greater transparency, aided by a US$46 million loan from the U.S. government’s Millennium Challenge Account.
  • Control multiple lending and prevent over-indebtedness, in particular by bringing MFIs into a new credit bureau established by the central bank.
  • Secure the liquidity of the microfinance sector beyond 2009 by encouraging closer linkages between commercial banks and the MFIs.
  • Improve the regulatory framework, with the Ministry of Finance undertaking a survey to assess the strengths and weaknesses of the sector and provide recommendations to improve regulations. Results from the survey are expected in the second quarter of 2010 for subsequent discussion with the FNAM, the federation of MFIs and the industry in the second half.

According to Xavier Reille, “MFIs in Morocco are still treading dangerous waters and more MFIs are likely to fall in the coming months but these comprehensive measures should pay off and a recovery is expected in 2010. A stronger and more mature microfinance sector is likely to emerge out of this crisis."



Source : CGAP
 

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