Regulators and micro-finance deposit-taking: The case of MENA region

Regulators and micro-finance deposit-taking The case of MENA region Microfinance deposit-taking is first and foremost a theme and task of regulators. This article discusses the regulatory (change) perspective for the MENA-region, which has so far been less advanced than several other regions in terms of transformation of credit-only microfinance institutions (MFIs) into microfinance deposit-taking institutions (MDI). overcome the managerial and organizational challenges and turn them into opportunities moving the MFIs forward.

Implications of deposit-taking for MFIs One of the regulators’ tasks is to assess realistically the readiness of its MFIs for transformation into MDIs. Undoubtedly, deposit taking is a formidable managerial challenge because a savings-led approach follows a fundamentally different business model than a credit-led approach (cf. Ledgerwood & White, 2006)

b)

In Morocco, non-governmental organisations (NGOs) uniquely dominated the MFI-sector.

However, the legal form of NGO tends to constrain development potential of the sector such that NGOs cannot accommodate investors and are more limited in access to credit than companies are.

c)

In Egypt, the nine for-profit MFIs have a larger cumulative loan portfolio than the 938 non-profit MFIs. Non-profits tend to have less room for innovation and growth than companies.

In those countries in which MFIs successfully manage deposits, the advantages for the MFIs themselves are obvious such as:  MFIs can offer a wider range of products to each customer and thus differentiate income streams;  Savings are, in the long run, a more costefficient source of funding;  More importantly, savings are a more stable and more reliable source of funding.

In many MENA-countries, regulators are reserved about the technical and organisational capacities of MFIs to manage deposits: a)

In Jordan, practitioners themselves acknowledge some of these reservations (cf.

Arndt & Schmidt, 2019). Tanmeyah, the national association of MFIs, has started to engage its members on a strategic level to

Implications of deposit-taking for the the countries’ financial systems: There are advantages for the financial system as such when MFIs are permitted to manage deposits. It is noteworthy that all microcredit crises have been caused by credit-led MFIs that caused ‘credit bubbles’. A widely quoted example is the Moroccan microcredit crisis (cf.

Reille, 2009; Rozas et al, 2014). Roodman (2012), comparing data from 25 countries, suggests that the more the MFI market is funded by deposits mobilised from the public, the less likely the sector is to generate a credit crisis.

Note that Roodman’s set of countries excluded India – home to the world’s largest MFIs in 2009.

It was just experiencing a credit crisis at the time for which the data was drawn.

Since then, India created legislation and all but forced those large credit-only MFIs to transform into deposit-taking ‘small banks’.

Implications of deposit-taking for the regulators: Experience from countries who allowed their MFIs to transform into MDIs shows that the regulator needs to take the driver’s seat.

Interestingly, the shift of the microfinance debate into a financial inclusion debate has rather taken away interest from this theme. For instance in Jordan, it does not feature prominently in the national Financial Inclusion Strategy, and the same can be observed in other countries. Yet, as Ogden (2019) pointed out, savings is more flexible than other financial instruments in addressing financial needs.

Table 1: Savings contribute to most financial-inclusion-domains Savings Credit Manage Liquidity ✓ ✓ Investment ✓ ✓ Mitigate Risk ✓ Source: Ogden (2019).

Depending on the strategy and on the legal framework, transformation to MDI requires legislative changes. The decision to pursue such a change depends on many variables which would be subsumed under the political economy of each country.

Furthermore, regulatory realms vary – some countries like Jordan and Morocco have unified financial sector regulation under the Central Bank. Other countries such as Egypt have divided bank and non-bank supervision between different agencies.

The question is not if, but how to create deposittaking for low income households

Payments ✓ ✓

Insurance ✓ ✓

Internationally, three approaches to create deposit-taking for low-income households can be differentiated1: 1) Supporting informal savings groups and linking them to financial institutions; 2) Creating a tiered microfinance regulation that provides for deposit-taking and/or promoting transformation of MFIs into MDIs as well as MDIs into banks; and on the other side; 3) Downscaling of banks to reach low-income households and medium & small enterprises.

Although there are some examples of banks in Egypt, Jordan and Morocco with substantial microfinance portfolios, most banks have not risen to the opportunity.2

There are quite different approaches to the ‘how’.

1 Arndt

& Schmidt (2019) discuss each of these approaches in detail, each based on one or more case studies from around the world.

2 Instead,

telecommunication companies, which are much more digital- and tech-savvy than banks have taken the lead in some countries. However, regulators will not allow them to venture into savings.

Within the MENA countries, the deposit-taking debate today is probably most advanced in Morocco among practitioners, donors, and regulators. In Morocco, a new microfinance bill is currently underway that will allow MFIs to transform into internationally sizeable companies. This would be the first step towards deposit taking, when the government chooses to create the corresponding regulatory framework.

In Jordan, the national microfinance association Tanmeyah, as mentioned above, has been advocating for making transformation of MFIs into MDIs part of the National Financial Inclusion Strategy.

This article draws on the according study that was delivered by AFC, funded by the EU (cf.

Arndt & Schmidt, 2019).

The case for moving towards deposit-taking at some point of the microfinance sector’s trajectory is straight-forward. ‘When’ might differ due to technical-managerial variables at the MFI-level and due to political-economyconsiderations at the regulators’ level.

Ultimately, readiness is a function of the regulator’s resolve.

References: Arndt, C., Schmidt, O. 2019: The microfinance eco-system of Jordan: Challenges and prospects. Tanmeyah Jordan Microfinance Network, Amman, Jordan Ledgerwood, J. and White, V., 2006: Transforming Microfinance Institutions: Providing Full Financial Services to the Poor. The World Bank Ogden, T., 2019: Microfinance: What Have We Learned? Presentation at the European Microfinance Week 2019 Reille, X., 2009: The rise, fall and recovery of the microfinance sector in Morocco. CGAP Brief Roodman, D. M., 2012: Due Diligence – an impertinent inquiry into microfinance. Brookings Institution Press Rozas, D., Pinget, K., Khaled, M. and El Yaalaoui, S., 2014: Ending the microfinance crisis in Morocco: Acting early, acting right. International Finance Corporation (IFC)

Autors: Oliver Schmidt, Christoph Arndt.