Ending the Microfinance Crisis in Morocco: Acting early, acting right
Morocco is regularly included in the pantheon of microfinance crisis markets Bosnia, Nicaragua and Andhra Pradesh which together had a major negative impact on the sector’s reputation. However, the crisis in Morocco was both less sever and shorter than the markets to which it is often compared.
Since its remarkable rise and hard fall in 2008-09, much has been written about the microfinance sector in Morocco. As memories of what is often regarded as the Moroccan microfinance crisis recede, this report takes a look at how the sector has evolved since then. Using case studies from the three leading MFIs in Morocco – Al Amana, Fondation Banque Populaire (Attawfiq), and FONDEP – as well as a wealth of data from other sources, we seek to capture the lessons that can be learned from this experience. It is also an opportunity to deepen the understanding of how the crisis evolved and look ahead to future challenges and opportunities faced by the sector.
Morocco is regularly included in the pantheon of microfinance crisis markets – Bosnia, Nicaragua, and Andhra Pradesh – which together had a major negative impact on the sector’s reputation. However, the crisis in Morocco was both less severe and shorter than the markets to which it is often compared. Indeed, the most severe period of the crisis lasted just one year and the sector had stabilized by 2011.
This is not to minimize the impact the crisis, let alone to argue over its existence. The years leading up to 2008 featured most of the hallmarks of pre-crisis markets: rapid growth, aggressive competition, poor lending discipline, accompanied by poor governance, and lax controls. On the other hand, the level of multiple borrowing was well below that of the most heated markets, and overall microfinance penetration remained moderate. Moreover, the Moroccan crisis was defined by the crisis of one institution – Zakoura – without which the microfinance crisis in Morocco looks far less serious.
The year 2009 was a major inflection point for the sector in Morocco. That year, defaults of all loan types spiked across nearly all regions of the country and multiple borrowing played a major role: clients holding two or more loans accounted for nearly half of all defaults during the crisis.
Vision and Mission
However, 2009 was also the start of the recovery. It began with an IFC-commissioned sector-wide assessment by an outside consultant, which was completed in late 2008. Its findings of serious problems in MFIs’ portfolios provided the impetus for the leading MFIs – which previously had been driven by an aggressively competitive stance – to collaborate and rapidly deploy a credit data exchange. This allowed them to rapidly shrink the levels of multiple borrowing – from 37 percent to 20 percent within a single year. Meanwhile, the government quietly facilitated the merger between the fast-imploding Zakoura and the much stronger Fondation Banque Populaire, thus helping avert a potentially greater disaster.
The quick reaction paid off. By late 2009, about a year into the crisis, the performance of the lowest-risk loans (small amounts, short terms) had already stabilized. Improvements in more complex loans (longer terms, larger amounts) took longer, but those too stabilized by mid-2010. During this period MFIs were actively revising their lending policies, strengthening internal controls, and deploying methodologies aimed at collecting overdue loans. Staff compensation grew substantially beginning in 2010, and a concurrent increase in interest rates allowed MFIs to return to profitability in 2010.
From 2011 onwards, the MFIs focused their efforts on longer-term institutional development, including modifying staff bonus formulas to reflect the changed market conditions, implementation of new training methodologies, upgrades to risk management and governance, and further improvement of overdue recovery processes. Many of these changes were supported by a joint development program between the US and Moroccan governments that provided some $15 million in technical assistance to the sector during 2011-13, as well as by a number of development finance institutions.
The Moroccan microfinance crisis also differs from the rest of the “crisis pantheon” by the level of support the sector received from the Moroccan government, Development Finance Institutions, and other actors. Thus, unlike in India, where banks cut off funding to MFIs in response to the Andhra Pradesh crisis, Moroccan MFIs did not face the liquidity squeeze that could have lengthened and deepened the crisis. Many came into the crisis with long-term bank funding in place, and were further buoyed by the entry of JAIDA, a wholesale microfinance funder launched in 2009 that was well-positioned to play the critical role of funder of last resort.
The central bank, which assumed regulatory oversight of the MFIs on the eve of the crisis in 2006, provided another stabilizing force. Its internal control regulations promulgated in 2007 set the roadmap for the MFIs to begin improving their operations, while active on-sight supervision insured that problems were being addressed.
No less important is what didn’t happen: Morocco’s political class avoided the kind of destructive opportunism that undermined the microfinance sector in both Nicaragua and Andhra Pradesh. It helped that the Central Bank’s active involvement and Morocco’s long-standing support for the sector prevented the type of regulatory and policy vacuum that might have otherwise allowed opportunist politicians to push an anti-microfinance agenda.
The microfinance sector that emerged in 2011 was stronger than it had been in 2007, just prior to the crisis: The level of multiple borrowing had been halved, lending methodologies and internal controls were strengthened, and competition was less aggressive. Despite this, the sector continues to be dogged by a seemingly perplexing shift in loan performance. Until 2008, loan delinquency rates at the leading MFIs were consistently below 1 percent, yet for the past five years, delinquencies have held steady at 3-4 percent for even the lowest-risk loans.
There are no easy explanations for this apparent change, but one comes out most prominently: simply put, the relationship between borrowers and MFIs has fundamentally changed. For a multitude of reasons – less fear of authority, a decline in the social standing of the MFIs, greater awareness of the actual impact of defaulting – borrowers default in greater numbers than they used to. That shift may seem concerning when seen in the context of pre-crisis levels, but in fact it should be welcomed – the market in Morocco has matured, and repayment rates have now converged to global averages. After all, a sustainable lending operation must allow for some level of default by poor clients who for reasons beyond their control (illness or simple bad luck) cannot honor their repayment obligations.
This new market reality should not be an obstacle that prevents the sector from meeting the needs of many poor Moroccans who continue to be financially excluded. And yet, despite having stabilized in 2011, MFIs in Morocco have been unable to expand their outreach, and the number of clients served has remained static for more than three years. Loan offerings remain essentially unchanged, and while new payment and insurance products are being piloted, they remain a minor part of operations.
Part of this stasis is a reflection of post-crisis hangover, with both MFIs and their regulator remaining excessively cautious. However, part of the reason is that the MFIs are all NGOs, and not by choice, but by government mandate. In this, Morocco stands alone in the world. Large financial NGOs, even in microfinance, are a rare breed, yet Morocco features 3 of the 15 largest microfinance NGOs in the world. It is also the only country where large NGOs wholly dominate the microfinance sector. Without forward momentum on institutional transformation, the market will likely remain stagnant, with limited scope for innovation or further development.
The path ahead has many questions yet. The country’s microfinance actors – MFIs, investors, and regulators – face challenging decisions. And while the lessons they gained during the crisis will be useful to others around the world, their best beneficiary is the country’s own sector, which can apply its lessons learned to its own continuing development.