Who Inflated the Microcredit Bubbles?

A couple of weeks ago I wrote:

If there were not so much finance for microfinance, the industry's weaknesses would not be so dangerous. Yes, the industry should reform, for example by setting up credit bureaus. But these things are easier said than done and take time. Hypergrowth robs the industry of time.To fully understand the causes of the recent microcredit crises, this question must be confronted: Are donors and investors putting too much money into microfinance, or at least into some microfinance institutions? Is microfinance the overfunded underdog?

Recently, CGAP documented microcredit crises large enough to affect national statistics in Bosnia, Morocco, Nicaragua, and Pakistan. Reading that report, this impertinent, important question occurred to me: Who inflated the microcredit bubbles? To find out, CGD's Paolo Abarcar began combing through the audited financial statements of the five biggest microfinance institutions (MFIs) in each of the four countries in order to learn who they have borrowed from.Gathering this data showed us how difficult it is to get an up-to-date, comprehensive view of credit for microcredit. Annual financial statements are helpfully collected on the MIX Market. But extracting the data from them still takes labor. The statements are long pdf's and each MFI's creditor list, tucked somewhere at the back, is formatted differently. Some loan lists include the terms of the loans (interest rates, maturity dates); some don't. Some disclose guarantees (when a third payment promises to honor a loan if the MFI defaults); some don't. The same creditor can be named three different ways in three different documents, which impedes matching up entries. For MFIs in Bosnia, Morocco, and Nicaragua, 2008 statements were generally available, except from the defunct Zakoura in Morocco (and partly as a result we found 2008 statements for only four Moroccan MFIs). For Pakistan, we had to use 2007 statements. We spent hours cleaning up the data. No doubt people with more expertise can improve them further (please!). We did not even attempt to cull data on equity financing.Below, I list the top five creditors in each crisis country, according to our imperfect, incomplete data. Complete lists are in the spreadsheet. Some of the macrocreditors are domestic government institutions which through Googling I learned are in turn financed by foreign donors or investors, such as the KfW-backed Financiera Nicaragüense de Inversiones. I include the names of such foreign investors in parentheses. (Many are listed in an appendix of Role Reversal.) Where we can see information about loan guarantees, we attribute the loan to the guarantor. For example, the financial statement of the Kashf Foundation in Pakistan mentions a "Citi Bank - Opic loan - secured" of 354 million rupees ($5.74 million). Citi lent that money but the U.S. government's Overseas Private Investment Corporation assumed the risk for all losses, thereby, we assume, making the loan possible; so we count that loan as OPIC's.In Bosnia, Nicaragua, and Pakistan, foreigners dominate credit for microcreditors. Most of the big foreigners are public institutions. #1 in Bosnia is the European Fund for Southeast Europe, which is a conduit for the European Commission and other European donors. Apparently tops in Morocco is Spain's Instituto de Crédito Oficial (ICO). The Asian Development Bank looms over the scene in Pakistan thanks to a single loan to the Khushhali Bank. Beneath it is the Pakistan Poverty Alleviation Fund, which has been placing World Bank money into microfinance. A few of the big creditors are private companies that invest funds from public and private investors with social missions. Blue Orchard, for example, is #1 in Nicaragua and #2 in Bosnia.The role of foreigners in Morocco is less clear. We put the ICO atop the Morocco list on the strength of its association with a $100 million loan from Banque Populaire du Maroc to Al Amana. At the moment, we give the ICO "full credit" for that loan, viewing it as a guarantor. That may exaggerate the ICO's role. At a coffee shop yesterday, Xavier Reille explained to us that the ICO lent millions of Euros to several Moroccan MFIs, which kept the foreign currency and leveraged it into bigger loans from Moroccan banks, evidently on the idea that the ICO would take first losses if Al Amana ran intro trouble. A Spanish government report shows exposure in Morocco of €46.5 million ($65.5 million) at end-2008, well below the $143 million in our tentative tally below. At any rate, the ICO is big in Morocco. We'll improve the numbers as we learn more.Update 3/28/10: The role of foreigners in Morocco is smaller, though arguably larger than suggested in the data below. At a coffee shop Friday, Xavier Reille explained to us that the ICO and Agence Française de Développement lent millions of Euros to several Moroccan MFIs, which kept the foreign currency and leveraged it into bigger loans from Moroccan banks, evidently on the idea that the ICO and AFD would take first losses if the MFIs ran intro trouble. The ICO makes it into the top 5 (below) while AFD is #7. Arguably, these totals understate the catalytic importance of the foreign loans. At any rate, the ICO is big in Morocco.I will write separately about the implications of this data.[Revised 2/26/11.]

Bosnia: Top 5 creditors to top 5 MFIs with data, end-2008

Creditor/guarantor	Outstanding loans and guarantees (million $)
European Fund for Southeast Europe (EC, Austria, Denmark, Germany, Switzerland)	86
Blue Orchard	57
European Bank for Reconstruction and Development	35
Instituto de Crédito Oficial, Spain	34
Hypo-Alpe-Adria Bank	25
Total, all creditors	532

Morocco: Top 5 creditors to the 4 MFIs with data, end-2008

Creditor/guarantor	Outstanding loans and guarantees (million $)
Instituto de Crédito Oficial, Spain	143
Banque Populaire du Maroc	104
Banque Marocaine du Commerce Extérieur	48
Agence Française de Développement	34
Banque Marocaine du Commerce et de l'Industrie	24
Total, all creditors	425

Nicaragua: Top 5 creditors to top 5 MFIs with data, end-2008

Creditor/guarantor	Outstanding loans and guarantees (million $)
Blue Orchard	46
Central American Bank for Economic Integration	33
ProCredit Holding	28
Financiera Nicaragüense de Inversiones (KfW)	27
responsAbility	19
Total, all creditors	326

Pakistan: Top 5 creditors to top 5 MFIs with data, end-2007

Creditor/guarantor	Outstanding loans and guarantees (million $)
Asian Development Bank	71
Pakistan Poverty Alleviation Fund (World Bank)	32
Domestic money market	8
Syndicated Commercial Loan Facility	7
OPIC	6
Total, all creditors	131