> Posted by Beatriz Marulanda, Mariana Paredes, Lizbeth Fajury, Franz Gomez – Co-authors of “Taking the Good from the Bad in Microfinance: Lessons Learned from Failed Experiences in Latin America.”
[Editor’s note: This guest post accompanies the release of “Weathering the Storm: Hazards, Beacons, and Life Rafts,” Daniel Rozas’ examination (with extensive case studies) of lessons in microfinance crisis survival.]
First of all, we would like to thank Daniel´s mention of the work we did for Calmeadow, with support from the MIF/IDB, IAMFI, Deutsche Bank Foundation, and the Center for Financial Inclusion at ACCION International. We would also like to take the opportunity to comment that although he mentions just Beatriz Marulanda as author of “Taking the Good from the Bad in Microfinance: Lessons Learned from Failed Experiences in Latin America,” it was really a joint endeavor in which Mariana Paredes, Lizbeth Fajury, and Franz Gomez all participated and deserve equal credit.
Apart from highlighting the very entertaining style in which the paper is written, it is interesting that the author found similar causes for the crises in the 10 MFIs analyzed, despite using cases from outside of Latin America. In extension of our findings, Rozas adds two causes of crisis – financial vulnerability and macroeconomic crisis. With regard to the latter, he mentions, as we did, that these are present in many of the cases but in most cases they are just a “trigger that sets off institutional weaknesses already present” – a claim with which we completely agree. Also similar to our findings, Rozas concludes that in most of the cases, the crisis did not have a single cause but instead was a combination of elements that ended up creating great difficulties for the MFIs which were analyzed.
As Rozas moves from the “hazards” that MFIs encounter to the “beacons” they can use to steer away from the “storms,” the findings reveal similarities to the Latin American context and the scope of the work we undertook. Rozas’ paper, however, takes on an additional challenge, by providing a series of recommendations which he hopes can serve as “rafts to navigate away from the storm.” He provides a series of practical tips which undoubtedly can help, but one question emerges: Who will make the decision to implement them in institutions where the main failure was precisely lack of corporate governance? All MFIs, as any financial intermediaries, will encounter difficulties in their development, and we would argue that those able to face the difficulties to prevent a crisis are the ones that have been able to build and consolidate a solid corporate governance structure. Although it may sound simplistic, in Spanish we would say that “todo lo demás viene por añadidura” (everything else comes in addition).
We would like to comment on Rozas’ recommendations identified as Step 1 – Insure Immediate Survival. He correctly points out that it is critical to ensure liquidity. As he mentions, “an MFI that runs out of cash is facing death.” In the process of analyzing different alternatives to insure liquidity, he recognizes that liquidity is so critical that in the case of deposit-taking institution, this is precisely what determines an intervention by the regulatory authority which protects public deposits.
The disturbing fact is that he suggests that in the case of non-deposit taking institutions or in environments where weak regulatory oversight delays such a takeover, “it is possible that the MFI will be able to continue to operate on its own” as long as it can keep clients’ confidence. This could be understood as an approval of certain practices we saw in some of the cases we analyzed, in terms of a bad disclosure of financial information justified by the need to “keep the institution going.” In that sense, the next comment arrives: “If a group of depositors comes to withdraw, move mountains to meet their request. Then pray that no other depositors will come asking. In the very worst case, make a clear promise about when the money will be available, and then move more mountains to keep that promise” This comment should take into account that if the illiquidity has reached a point where the public´s money is at risk, the best thing to do is organize an orderly liquidation.
The important factor in these circumstances is not to keep an MFI afloat, but to protect the savings of its clients. This might even sound contradictory to another recommendation which we fully agree with, which says: “For MFIs that have large borrowings, being transparent and proactive with creditors is critical.” The abovementioned remarks would suggest that it may be necessary to make an additional comment to explain better the full dimension of the consideration that MFIs should protect liquidity at any cost.
We want to emphasize the importance of one other area he mentions – the conservation of capital – but not as an alternative that “might” be needed, but rather as one of the priorities management has to focus on, obviously as long as the institution can offer a strategic reorientation. From the cases we analyzed, the problem was that in the MFIs where governance was an issue, new amounts of capital solved the situation only when new stakeholders came into place and provided this new governance structure. This highlights the most important point from Rozas’ recommendations and from our own cases, namely that there is an opportunity to learn how to avoid the circumstance that these institutions encountered, and thus prevent a crisis that could lead to its failure.
Image credit: DavoO
Have you read?
India’s Microfinance Crisis: What Lessons Does It Hold for the Philippines?
Consequences of Over-indebtedness: Lessons from India
Understanding Failures in Microfinance
Nicaragua’s Microfinance Crisis: Looking Back, What Did We Learn?
Repayment Crises: Lessons Learned from Bolivia