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EFFECTS OF MDI LAW & REGULATION
Study Commissioned by
Conducted byAugust 2007
• Mainstreaming of microfinance has been a topical issue
• Upsides of commercialization, which at the top end had institutional transformation, largely won the debate in the recent past
STUDY COMMISSIONED TO EXAMINE:
• Impact of the MDI regulation
• Costs & benefits of transformation/ regulation
• MDI model as a vehicle for MF service delivery
• +s and -s of the MDI Act 2003
• Possible alternative approaches.
SOME QUESTIONS
• Does regulation strengthen the institutions?
• Does it always result into increased outreach to the poor or the reverse?
SOME QUESTIONS (Contd..)
• Is it necessary to promulgate a separate law for MFIs to be licensed and regulated?
• What happens when regulated MFIs feel they are overregulated in comparison to other formal financial institutions?
SOME QUESTIONS (Contd..)
• Is regulation (especially prudential) what MFIs need to enhance their outreach?
• What happens when new players bring in their venture/ equity capital, transformed MFIs get more of the money from the market for portfolio growth and the regulator has stringent performance requirements for the institutions?
FINDINGS: Expectations
• MDIs – Largely met
• BoU – Largely met
• Government – Not met
• AMFIU - Partially met
• Tier 4 MFIs -
FINDINGS: MDIs
• Clear ownership – Shareholding Cos
• Control more diversified
• Significant external shareholding
• More board skills
• Keener governance/ oversight stipulations
FINDINGS: MDIs
• Improved management quality
• Improved controls & reporting
• More products
• Institutional image & signage
FINDINGS: MDIs
• Profitability suffered a temporary dip, and is recovering.
OSS
80%
90%
100%
110%
120%
130%
140%
2002 2003 2004 2005 2006 Jun-07
1
2
3
4
FINDINGS: MDIs
• Portfolio yield increased slightly overall
PORTFOLIO YIELD
0%
20%
40%
60%
80%
100%
120%
2004 2005 2006 Q1 2007
Period
Portf
olio
Yie
ld (%
) 1
2
3
4
FINDINGS: MDIs
• Overall D/E Ratio went up
OVERALL DEBT/EQUITY
0
1
2
3
4
5
6
7
8
2002 2003 2004 2005 2006 Jun.2007
1
2
3
4
FINDINGS: MDIs
• Portfolio quality temporarily worsened, and this is now reversed
PAR > 30 days
0.0%2.0%4.0%6.0%8.0%
10.0%
2002 2003 2004 2005 2006 Jun.2007
1
2
3
4
FINDINGS: MDIs
• Numbers of savers grew fast while borrowers reduced
TOTAL BORROWERS & SAVERS
-
50,000
100,000
150,000
200,000
250,000
300,000
2002 2003 2004 2005 2006 Jun.2007
Total Savers(voluntary)
Total Borrowers
FINDINGS: Outreach & Client focus
• Average loan size grew rapidly while savings only modestly
AVERAGE SAVINGS & LOAN SIZES
-
100,000
200,000
300,000
400,000
500,000
600,000
700,000
2002 2003 2004 2005 2006 Jun.2007
Savings
Loans
FINDINGS: Outreach & Client focus
• Total number of Borrowers MDIs 2.3%; Tier 4 Control Group 7.4%
• Loan Portfolio Outstanding MDIs 22.8% Tier 4 Control Group 22.8%
• Average Loan Size MDIs 20.0%; Tier 4 Control Group 14.3%
FINDINGS: Outreach & Client focus
• Of all perform ace projections, only average loan balance was exceeded by actual performance
Savings No. Of Savers
Gross Loan Portfolio
No. Of Active Loan Clients
Average Loan Balance
2006 -31% -14% -24% -30% 13%
FINDINGS: Outreach & Client focus
• Smallest loan disbursements have reduced notably across the board
No. of Disbursements <Ush 200,000
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
2004 2005 2006 Jun. 2007
1
2
3
4
FINDINGS: Outreach & Client focus
• More loans of Sh=> 3m being disbursed every year
No. of Loans with Disbursed Loan Amount>Ushs 3,000,000
-
500
1,000
1,500
2,000
2,500
3,000
3,500
2004 2005 2006 Jun. 2007
FINCA
PRIDE
UFT
UML
FINDINGS: Outreach & Client focus
• Percentage Of Group Loans
• 100% to 92%
• 98% to 83%
• 81% to 25%
• 74% to 66%
COSTS
• Donors have spent between US$ 470,000 and US$ 910,000
• Including the costs borne by the MDIs themselves, on average US$ 1.3 and adding costs by other stakeholders, each MDI’s transformation could have cost an estimated US$ 1.8 to 2.0 million
COSTS JUSTIFABLE?
• The yardstick/ benchmark..?
• Long term benefits measured short term?
• Core principle: Tier 4 Working Group
• Pay-offs for MDIs – status, deposits, commercial funding, governance & systems
• Increasing numbers of savers
• BUT Tier 3 status is more more tasteful
• All existing advantages and perhaps more could have been achieved through amendment of the FIA 2004
CONCLUSION
• Some advantages
• Some drawbacks
• Some lessons learnt
