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Philip Brown
Global Risk Director
Citi Microfinance Group
October 6th 2009
Strictly Private and Confidential
Beyond Institutional Performance
Strictly Private and Confidential
Macroeconomic trends and shocks, e.g. - Too little funding
- Political / external interference
- Regulatory - Competition
MFI Individual performance,
e.g. - Portfolio risk- Management quality- Refinancing- Corporate Governance
Client credit risk
e.g. - Capacity- Stability- Behaviour and willingness- Over-indebtedness
Individual classification of important Risks
Most Important Risks identified
1. Credit Risk
2. Competition
3. Management Quality
4. Inappropriate Regulation
5. Liquidity / Macroeconomic Trends
Strictly Private and Confidential
Comments
Individual Identification of Most important Five Risks
Please rate the most Important 5 Risks out of the 25 Risks identified in the Microfinance Banana Skins survey 2009, in relation to Expected Performance over the next 12 months.
Please for each risk, state the name of the risk and its current ranking (number) in the Banana Skins report 2009
Introduction
From managing risk in a booming Industry …
in 2008
…to confronting crisis and change
in 2009
Philip Brown
Global Risk Director
Citi Microfinance Group
October 6th 2009
Strictly Private and Confidential
Looking for 2010 Banana Skins
1.
2.
3.
4.
5.
How it compares with the Top Risks identified in the Banana Skins Survey 2009
Most Important Risks – Round-Table Groups
1. Credit Risk
2. Liquidity
3. Macro-economic Trends
4. Management Quality
5. Refinancing
World
1 Credit risk
2 Liquidity
3 Macro-economic trends
4 Management quality
5 Refinancing
6 Too little funding
7 Corporate governance
8 Foreign currency
9 Competition
10 Political interference
Looking for 2010 Banana Skins in India
India
1 Competition
2 Liquidity
3 Management quality
4 Corporate governance
5 Managing technology
6 Staffing
7 Political interference
8 Inappropriate regulation
9 Transparency
10 Too little funding
Microfinance Risk Barometer - Increased Risk Profile
Low pressure – increased risk profile
Directionally – Where will we be in 2010?
What current and anticipated risk events will impact performance in 2010?
2008
2009
Microfinance Risk Barometer
MENA (Morocco)
2%
Asia13%
ECA27%
Africa6%
South Asia9%
LAC43%
MENA (Morocco)
3%LAC21%
South Asia48%
Africa7%
ECA4%
Asia17%
Composition of Loan Portfolio for the Top 100 biggest MFIs by GLP
Mix Market 2008
Composition of Borrowers for the Top 100 biggest MFIs by GLP
Mix Market 2008
Continued growth
Source: Symbiotics SYM50 Index
Strong decrease in GLP growth rate in 2008 and during 1st half of 2009 across all regions
Citi's internal Microfinance portfolio growth from 2008 to 2Q09 is in line with data reported by MIX and Symbiotics
Source: Mix Market 2007-2008Representing a sample of the top 100 biggest MFIs
per GLP in 2008
GLP Growth (%) 2007 2008
Africa 82.9% 30.1%
Asia 90.9% 44.8%
ECA 68.1% 25.4%
MENA (Morocco) 72.5% -3.5%
SA 42.3% 12.1%
South Asia 55.8% 46.4%
Total 56.6% 22.2%
Portfolio-at-Risk rising across all regions
Representing a sample of the top 100 biggest MFIs per GLP in 2008Source: 2007 and 2008 Mix Market
The highest increases are situated in Africa (1.6% increase in 2008), South America (1.3%) and ECA (0.9%) (excluding the Moroccan Market, 3.3% increase in PAR > 30d).
Citi Microfinance portfolio PAR >30 days also showed an increasing trend from 2008 to 2Q09. However most MFI's have provisioned in excess of 100% of PAR>90 days
1.5% 3.1%5.7%1.5%
6.5%
0.1%
3.5%
7.0%
4.9%
2.4%
8.1%
0.4%
0%
4%
8%
12%
Africa Asia ECA MENA(Morocco)
SA South Asia
2007 2008PAR > 30 days (%)
Institutional performance – Managing Structural Funding
Ability to absorb losses due to unexpected events - The high level of Stuctural Funding has helped manage refinancing risk and absorb operating losses over 2008-09
Management of Structural Funding expected to be a vital Financial risk management consideration for MFI’s over 2010
Structural Funding (%)((Long Term Debt + Equity)/Total Liabilities)
Representing a sample of MFI’s from Citi’s Microfinance Portfolio
91% 88%
93%
86%
64%
-5%
10%
25%
40%
55%
70%
85%
100%
Africa LAC ECA MENA INDIA
43%
27%
16% 22%17% 18%
35%39%
17%21%17%
27%
0%
15%
30%
45%
60%
Africa Asia ECA MENA (Morocco) SA South Asia
2007 2008
Institutional performance – Maintaining adequate capitalisation
Divergence in capitalisation across regions
Financial flexibility has been tested
Representing a sample of the top 100 biggest MFIs per GLP in 2008Source: 2007 and 2008 Mix Market
Capitalisation (%)Equity / GLP
CGAP Global Opinion Survey – May 2009
Based on answers of over 400 MFIs Managers
MFIs CLIENTS
60% of respondents say clients are somewhat affected, more in ECA and LAC
Repayment is down in all regions
Greater % of income spent on food
60% of respondents say clients are somewhat affected, more in ECA and LAC
Repayment is down in all regions
Greater % of income spent on food
Where is the bottom? - First quarter feedback 1Q09
64% of MFIs interviewed say Loan portfolio is stable or decreasing
Credit risk is up according to 69% of managers interviewed. More severe in ECA and LAC
Increasing liquidity constraints
especially for smaller Tier 3 MFIs
64% of MFIs interviewed say Loan portfolio is stable or decreasing
Credit risk is up according to 69% of managers interviewed. More severe in ECA and LAC
Increasing liquidity constraints
especially for smaller Tier 3 MFIs
Client Credit Risk – Can it be effectively managed?
– Commercial Strategy Clear Target Segment Lending model – Group vs. Individual, % of consumer and SME segment
– Borrower Screening Process – The Client Willingness and Ability to repay Stability of Income Level of indebtedness
– Loan Product Structuring (Purpose, Tailored to Ability of the Client to Repay)
– Close Monitoring (Delinquency Policy and Process) Early Warning Signs Trends - Rising PAR>30 days Learning lessons: drivers of delinquency
– Collections Active Oversight by Senior Management Portfolio Management Risk Concentration Adequacy of Reserves – Loan Provisioning Credit Culture
Quality of Management
Macroeconomic risk – Competition as a revelator
Competition - Competitive pressures in microfinance are mounting with the proliferation of MFIs, new entrants and unregulated institutions. Will these push MFIs to take greater risks in areas such as pricing, product innovation and credit quality?
Example - Maturity crisis for the Moroccan Microfinance Sector
Morocco was a micro-credit champion in MENA : Loan portfolio multiplied by 11x between 2003 and 2007
As of Dec. 2008, 12 licensed MFIs, 1.3 million clients, USD 705 million of assets, 45% of client outreach in the Arab world
2007 : First signs of stress, fierce competition between MFIs in urban areas, over-indebtedness and loan delinquency
2009 : PAR > 30d passed from 5% in Dec. 2008 to 10% in June + Collapse of MFI “Zakoura” in May
Responses: Merger of Zakoura with the Fondation des Banques Populaires
(Government backed) Management changes and freezing of new disbursement / loan
recovery plans Coordination among MFIs: MFIs will be integrated in new credit
bureaus
Macroeconomic risk – Local politics and performance
Examples
India
– Social /Communal tensions in some areas leading to rapid portfolio deterioration (e.g; Mysore, Kolar , Ramnagaram)
Pakistan
– Local Politicians issuing loan pardon slips to MFI borrowers in Kamoki and Ravi Rayon with the objective of gaining political mileage. Worst affected areas have been Lahore, Faisalabad, Sheikhupura and Gujranwala
Venezuela
– Direct competition from the government encouraging government backed social cooperatives and community production centres rather than private MFIs
– Interest rate caps and no recognition of special status for microfinance institutions
Nicaragua
– Government supporting the “Movement of no pay” initiated in July 2008 and which claims a 10-yr moratorium law and cap on interest rates on microfinance portfolio
– Loan disbursement were suspended by most MFIs in Northern Nicaragua in Sept. 2009
Political interference -MFIs may face political pressures, for example in the areas of interest rates, lending terms and subsidised government programmes. How big a risk do these pose to the business?
Source: Micro enterprise Americas 2003
Institutional performance – Learning Lessons
Strictly Private and Confidential
Corposol Case Study – What went wrong?
Failure to track multiple loans to a single client
High delinquency rate and loan losses
Accounting errors
Poor self-governance
Looking for 2010 Banana Skins
Microfinance Risk barometer
Directionally – Where will we be in 2010?
• Growth • Competition • Liquidity / refinancing • Management Quality• Regulatory
• In terms of identifying 2010 Banana Skins : What are the three success / failure factors to look in microfinance risks today?
* Unsustainable growth ?* Competition ?* Credit culture / discipline ?
2010
Winners and losers / Cornerstones of success
Winners and Losers
Emmanuelle Javoy, Managing Director of Planet Rating in France
“overall, one third of MFIs have systems, procedures and performance that should really allow them to manage the above stated risks without major problems, while another half have decent systems or procedures or performance, but that might take a little time to adapt to changing situations”.
Risk Management, a differentiator
Philip Brown, Risk Director at Citi Microfinance
“Effective risk management (strategy, process and culture), has become a differentiator of performance… Greater instability and uncertainty exists across the spectrum of macro and micro business risks. These risks have stressed some businesses, resulting in cracks appearing with negative performance, in some case threatening business survival…There is a renewed focus on the monitoring and management of risks associated with business fundamentals”.
For further details, please visit Citi Microfinance website
http://www.citi.com/citi/microfinance
THANK YOU
Commercial Financial
Environment Client / Other ?
Mapping Risks
7.
Corp Governance
23. Ownership
14. Staffing
16. Transparency
19. Mission Drift
15. Managing
Technology
24. Product
Development
1.
Credit Risk
22. Back Office
2.
Liquidity
20. Fraud
6. Too Little Funding
5.
Refinancing
5.
Refinancing10.
Political Interference
Natural Catastrophes
3.
Macro-economic trends
9. Competition
25. Too much
funding
8. Foreign Exchange
8. Foreign Exchange
18. Unrealizable expectations
Strictly Private and Confidential
13.Inappropriate
regulation
21. Depositor confidence
11. Interest Rates
25. Too much
funding
1.
Credit Risk
17. Reputation
4.
Management
12. Profitability
Deteriorating ROE – Credit provisions and declining efficiency
Source: Symbiotics SYM50 Index
MFIs’ performance is hit by increasing loan loss provision and costs linked to monitoring, collection and remedial management.
Credit Risk – Macro Economic Linkage
Portfolio at Risk >30 days%
0%
5%
10%
15%
20%
Jan 08 Feb 08 Mar 08 Apr 08 May 08 Jun 08 Jul 08 Aug 08 Sep 08 Oct 08 Nov 08
Bank A
Bank B
Bank C
Bank D
CEE – MFI Example