MICROCREDIT CRISES AND UNSUSTAINABLE GROWTH: A MANAGEMENT PERSPECTIVE

Bert D'Espallier, Marc Labie and Philippe Louis

Introduction

Over the last few years, several major crises have drawn the attention of the international community to the limits of microcredit and the risks the industry must be able to face. Of course, different factors play a critical part in these crises, and we need to analyse them from different perspectives, taking demand, supply and environment into account, among other things. The goal of this chapter is to improve understanding of the potential mechanisms that may contribute to the origin of supply crises. The chapter is based on a bottom-up approach. A better understanding of these sources and their consequences will be beneficial for a wide range of stakeholders such as regulators, donors and, evidently, the management of microcredit institutions (MFIs).

We define a supply-side microcredit crisis as a situation in which the industry is disrupted since some MFIs are no longer able to operate properly because the MFIs themselves are having difficulties, often of a financial or operational nature. This covers supply-related problems that should be understood as the MFIs becoming unable to appropriately deliver the microcredit products and services. More specifically, we try to give an overview of the dynamic that may generate crises, focusing particularly on the issue of 'sustainable growth'. Indeed, in many of the crises observed on the ground, it appears quite clear that once the crisis is there, many people consider that it is somehow linked with the way the MFI(s) has developed and more specifically with the way it has grown. So we will try to present here a framework of analysis to discuss this issue. The remainder of this chapter is made up of six sections. The first will discuss the fundamentals of microcredit. The second will review the challenges generated by high growth and how it can represent a danger for the fundamentals presented in the previous section. The third will then discuss to what extent it is possible to identify what is 'too strong a growth'. The fourth will suggest how such excessive growth can affect MFIs. The fifth will suggest a 'preventive check list' resulting from the previous discussions and the last one will provide preliminary conclusions.

Fundamentals of microcredit

In order to be able to discuss how microcredit can get into crisis dynamics, it is important to describe what the fundamental characteristics of successful microcredit institutions are, because when a crisis occurs it is reasonable to assume these fundamentals characteristics will be endangered. Of course, not all cases will be similar and there is plenty of space to discuss to what extent those changes are part of the causes or the consequences of the crisis.

Present-day microcredit is composed of a great variety of actors and practices that aim to offer financial services to people who have no access to the traditional banking sector (Armendariz and Morduch 2010). Owing to this heterogeneity, it is not straightforward to easily summarize common characteristics. However, generally speaking, successful microcredit institutions operate in a decentralized fashion and offer simple, rather standardized products to well-screened clients who are under enough peer pressure to guarantee their repayments. In a nutshell, there are four key common characteristics of successful MFIs: decentralization, proximity, simple (and usually standardized) products, and growth strategies that allow for a true development of the portfolios while keeping their quality under control.

Decentralization and hence high proximity between clients and institutions is vital for several reasons. First, it offers an in-depth knowledge of the local context in which the clients will undertake their activities and projects. As such, the credit officer has a very good grasp of the economic, social and cultural reality. Besides, knowing this reality will also give some credibility to the credit officer. Second, assessing the clients is essential. Most clients cannot provide documents or definite proof of their reliability. As a consequence, credit officers will be in a better position to assess a client's 'a priori' reliability if they 'belong' to a community. Third, since follow-up is necessary, high proximity allows the credit officer to get in touch with clients if problems should arise. In sum, it is clear that MFIs need to give priority to the proximity with their clients.

Local microcredit branches generally have real decision-making capacity and autonomy. Credit officers are responsible for their clients and have to manage their portfolio in the best possible way. Incentive schemes encourage them to pursue portfolio growth and maintain an appropriate portfolio quality. Yet microcredit institutions limit the size of their branches to prevent bureaucracy, which could dissuade clients.

Credit is often limited — at least officially — to the financing of working capital and to relatively short-term investments. Usually, credits are standardized in order to facilitate the clients' understanding and the MFIs' everyday management of their portfolios. When savings services are provided, they are very often relatively simple and allow clients to save according to their capabilities. They also allow clients to have easy access to their savings when needed. Of course, the various programmes differ, but generally savings programmes that have been successful aim to provide a simple, safe and available product to their clients. Returns on savings are clearly a concern of less importance in those programmes (Rutherford and Arora 2009).

In terms of the institution's growth strategy, several approaches are possible. First, a horizontal growth strategy which intends to increase the number of branches without changing the products offered within each branch. This growth tactic is appropriate when the...