How Can Microfinance Institutions in the Middle East and North Africa Manage Ris...
Global, October, 04 2017 -
Over the past few years, the financial inclusion landscape in the Middle East and North Africa (MENA) region has rapidly evolved with new market entrants, changing regulations and increased financial risks. The industry aims to expand access to formal financial services and achieve much needed economic stability, and yet the financial inclusion ecosystem in MENA has experienced slower growth over the last 10 years compared to their peers in other parts of the developing world.
According to reports by the World Bank and CGAP, microfinance institutions (MFIs) in MENA are currently reaching approximately 3 million borrowers, with a loan portfolio of over $2 billion — far below the market potential estimated at 56 million borrowers. The stakes are getting higher and MFIs need to reconsider their strategic directions in order to reach the unmet clients at the base of the economic pyramid.
The ability of MFIs to manage market and financial risks in a perpetually unstable economic environment will depend on the strength of their risk strategies, corporate governance structures and board dynamics. The Center for Financial Inclusion at Accion, Calmeadow, and the Sanabel Network, with support from the Dutch Development Bank (FMO), sought to understand key governance challenges facing MFIs in the MENA region by conducting a technical needs and demand assessment (TNDA). This assessment examined the challenges as perceived by board members and CEOs of MFIs, with an emphasis on the question of whether boards are well-equipped to steer their organizations onward to both stability and growth. The TNDA surveyed and interviewed 140 CEOs and board members of MFIs in the region, indicating their least effective technical areas and their largest governance concerns are:
•Managing market and financial risks
•Assessing technology and new business models
A majority of respondents to the TNDA felt that their boards lacked the diversity, skills, dynamics, and microfinance knowledge needed to effectively govern their institutions.
In terms of diversity, a key governance concern is the infrequent rotation of MFI board members. Most boards have an average three-year term that is often renewed. As a result, most board members have seats on their boards for a decade or more, and in some cases since the founding of the institution. While this ensures continuity in leadership, it sometimes poses challenges if special skills and fresh perspectives are needed to make decisions that effectively serve the MFI.
Board members and CEOs felt that their boards lacked effectiveness in monitoring market and financial risks. What’s more, only a handful of institutions across the region have board members that actively participate in external training events. The sociopolitical turmoil that has afflicted the region in recent years has had severe implications for financial service providers. Some have faced widespread defaults as their clients’ economic lives have been disrupted. Others have faced liquidity challenges. As recent evidence shows, weak governance at a leading MFI in Morocco was a significant contributor to the 2008 Moroccan repayment crisis, where rapid growth led to unsustainable stress for many MFIs. The crisis ended when the top three MFIs in the country started making efforts to improve long-term institutional development, including by implementing new training methodologies, assessing risk management and governance practices, and improving the overdue recovery process.
Many MFIs in the region are facing financial risks because of their non-profit status. They struggle to raise enough capital to support growth and deepen equity cushions during difficult times. In response, and as regulation evolves, more MFIs are transforming to for-profit, non-deposit taking financial institutions, which is creating a greater need for investors and consequently a need for sound corporate governance with these partnerships.
Digital financial services offer great potential for MFIs to expand their delivery channels and increase access to financial services for excluded populations. Although many players in the region see new market entrants as competition, only 4 percent of TNDA respondents indicated that their boards were effective in assessing technology and new business models. As competition from fintechs increases, MFIs in the region will need to think strategically about establishing innovative business models and developing partnerships with these non-traditional players.
Going forward, strong governance structures will play a critical role to help MFIs in MENA sustainably grow and meet the client demand as the sector evolves. There will be no shortage of risks confronting inclusive finance providers in the region. MFIs in MENA will need to think seriously about their future strategic direction and how to address their identified shortcomings and bring their governance structures to the level needed to achieve their strategic goals.