Microfinance Meltdown in Bosnia:

1
Microfinance Meltdown in Bosnia

• A view from the field
• Selma Cizmic, Deputy Director
• LIDER Microcredit Foundation

2
BH Microfinance sector Background

• 26 licensed MFIs, over 400 branches, 1779
  employees
• MFIs capital 193.000.000 KM
• MFIs loan portfolio (31.12.2008) 1,04 billion KM
• 390.000 MFI clients
• BH was one of the three fastest-growing markets
  in Eastern Europe Central Asia (gross loan
  portfolio rose by 85 and borrowers by 54 in
  2007)
• The microfinance sector in BH has grown at
  breakneck speed since 2006 and arrears have
  more than doubled

3
BH Microfinance sector Background
4
Local economy- overheating...

• Import of intermediary goods rose by 35 in 2008
• Rise in consumption fuelled by large salary in a
  tight labour market, mild rise in employment,
  higher pensions government transfers
• Inflationary pressures
• Capital inflow (loans and FDI) reducing
• GDP growth falling from 6 to 1,5-3
• Loan loss reserves rise with 12 in FBH and 20
  in RS (RS microcredit sector rise with 72)
• The downturn in economic activity since the
  second half of 2008 has in turn brought about a
  slowdown in loan portfolio growth and repayment
  rate decrease

5
Weaknesses of Microfinance Sector in BH

• Exposure to
• FUNDING RISK
• Inability to raise funding through deposits
• - Micro - investment funds
• Dependence on short-term funding from local banks
• LIQUIDITY RISK
• Thin cash cushions cash/total assets 3
• CREDIT RISK
• Significant exposure to retail lending (consumer
  housing 20 30)
• Long loan maturities average over 2 years
• Acute competition for clients resulting in
  cross-lending and potentially over-indebtedness
• Restrictive regulatory framework related to
  credit risk (MFI perspective)

6
Strengths of Microfinance Sector in BH

• Support from bilateral and multilateral
  organisations (mitigates funding risks)
• Bulk of liabilities of BH microfinance
  institutions are denominated in Euros (EUR-BAM
  peg seemingly secure) low FX risk
• Strong equity position of most microfinance
  institutions (equity-to-assest ratios gt20)
  shock absorber for loan losses

7
DEVELOPMENTS

• Agressive competition
• Cross-lending (multiple lenders)
• Over-indebtedness
• Inadequate lending practices
• Severe economic difficulties among borrowers
• Clients perception on loan repayments

8
CONSEQUENCES

• Sharp decline in number of clients
• Fall in loan portfolio
• Delinquency - rapidly deteriorating loan
  portfolios (3,5 on 31.12.2008 rising to gt10 -
  PARgt30 days)
• Fall in profitability
• Deteriorated communication process with
  customers, employees and markets

9
What could the MFIs do?

• LOAN PORTFOLIO (credit risk)
• Avoid cross-lending
• Focus on total borrower indebtedness
• Verify credit history of clients
• Intensive follow up of PAR (arrears committe,
  loan recovery units)
• Selective rescheduling for clients with
  willingness to pay
• Coordination between MFIs
• Strenthening internal audit and controls

10
What could the MFIs do?

• OPERATIONS
• Controls to mitigate fraud-related risk
• Reduce operating and administrative costs
• COMMUNICATION
• Clients advisory (identifying clients with
  liquidity problems and willingness to pay)
• Training for loan staff at all levels
• Regular information and contact with investors

11
What could the MFIs do?

• RISK MANAGEMENT
• Establish Risk department to monitor broad
  institutional risks
• BALANCE SHEET MANAGMENT
• Enhance cahs buffer
• Shorter loan maturities
• Improve Asset-Liability Management (Maturity
  management, ALCO)

12
LESSONS LEARNED

• Week communication process with customers
  (understanding of clients and their needs)
• Mission drift
• Cross-lending and clients indebtedness result
  of intense competition
• Negative image and reputation of MF sector
• Need to strengthen risk management and balance
  sheet management

13
RESPONSE TO CRISIS

• Adjustments in credit technology
• Focus on individual lending
• Emphasis on in-depth financial analysis
• Price differentiation in line with risks and
  costs (size, sector..)
• Mechanisms for delinquency and loan recovery
  refined (specialised staff for loan recovery)
• Verification of credit history and total
  indebtedness through increased reliance on credit
  bureau
• Multiple loans discouraged
• Improvements and more intensive use of Central
  credit bureau (Central Bank)

14
RESPONSE TO CRISIS

• Adjustments in credit staff performance targets
  through relaxation of quality parameters and
  refocus on collections
• Rescheduling of delinquent loans where
  appropriate
• Higher diversification of loan products
• Development of non-credit products and services
• Improved service quality

15
RESPONSE TO CRISIS

• Emphasis on marketing and advertising in order to
  improve the MFI image in the market
• Measures to enhance administrative and operating
  efficiency under pressure from falling loan
  portfolio yields and rising delinquency

16
CRISIS IS RISK but also opportunity

• Expansion into areas products and/or segments
  unbanked
• Enhance flow of credit information between MFIs
• Consolidation in MFI sector
• Initiatives for positive regulatory reforms