Instilling Client Protection in Moroccan Microfinance

> Posted by Stephen Thomas, Director of Risk Management, Credit Suisse

Morocco has one of the most extensive and vibrant microfinance sectors in the Middle East/North Africa region, with roughly 800,000 clients and $60 million in outstanding loans. The country’s microfinance industry hasn’t always undergone steady growth. After years of early, strong growth in a relatively lightly regulated environment, Morocco’s microfinance industry underwent a period of crisis beginning around 2006. During this time default rates rose to worrisome levels and the financial soundness of a number of microfinance institutions became imperiled.

The country’s government moved swiftly, both over this period of time, and continuing to the present. It enacted a number of laws designed to improve industry regulation. In 2006, it formalized the country’s Central Bank’s regulatory authority over the industry through Law No. 34-03. The Bank then took a series of steps to effectively enforce the government’s laws and expand its oversight of the lending activities. These steps included enacting additional legislation, conducting on-site inspections, and, when necessary, intervening. In September 2009, additional regulatory requirements were issued through the Directive on the Governance of Microfinance Associations. The Directive provided further clarification of managerial obligations with regard to governance, internal controls, external audit, the management of credit, liquidity and operations risks, and transparency. Other government-led measures during these years following the 2006 crisis include enhancements to regulations regarding risk management practices and contract transparency, and formally defining industry client protection principles. Adopted in 2010, these client protection principles were outlined in the Microfinance Code of Ethics and incorporate the concepts that are enumerated in the Smart Campaign’s Client Protection Principles.

As a result of these efforts, Morocco’s MFIs have since improved their lending practices, strengthened their finances, and the financial performance of the entire sector has improved greatly. The percentage of loans at risk has diminished from a high of 6.4 percent in 2009 to 4.3 percent in 2011, and the industry has returned to profitability. In addition, the implementation of industry-wide credit qualification and risk management procedures has greatly reduced instances of clients’ engaging in cross-borrowing beyond their ability to service their debts. The industry is once again experiencing growth at a sustainable rate.

What’s more, the principles of client protection have been incorporated into the operating policies of the market participants, and a culture of client protection is being effectively instilled within the industry.

As a Credit Suisse Virtual Volunteer for the Center for Financial Inclusion, I explored these issues, which you can learn about in greater detail at my newly published Client Protection Library profile, Client Protection in Morocco. If you follow Morocco or the MF industry in northern Africa, we would love to hear your perspectives.

Stephen Thomas is a Director of Risk Management at Credit Suisse.  His area of responsibility concerns portfolio market risk in the commodities markets in which the Bank is active.  Previous to his three years at Credit Suisse, Mr. Thomas has held a variety of positions in the petroleum industry, the merchant power industry, and the banking industry. He is a member of the Credit Suisse Microfinance Advocates.

Image Credit: microlinks

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