88168 FOCUS NOTE Managing Failing Deposit- Taking Institutions: Regulatory Experience from Africa A ccess to finance in the West African Economic Monetary Union (WAEMU) and Economic and Monetary Community of Central Africa (CEMAC) TGA is delayed or if there is insufficient funding. A few efforts to turn around failing institutions yielded positive results, but many did not. In some cases, grew significantly from 2001 to 2011. However, the the MFIs should not have been licensed in the number of ailing and failing microfinance institutions first place and/or are too small to be sustainable. (MFIs), including market leaders, increased during the In other cases, the problems are due to MFI fraud, same period, raising serious concerns about the status poor governance, or poor management. Most MFIs and financial health of institutions serving low-income remain in TGA limbo much longer than the initially populations and, in particular, the safety of the deposits specified timeframe of 6–12 months, often due to an held by such institutions (see Box 1). To address the under estimation of the time needed to deal with the situation of failing deposit-taking MFIs, supervisory problems or to the desire to avoid unnecessary (but authorities have relied on temporary government often unavoidable) liquidation. These experiences administration (TGA), one of several supervisory tools. 1 are relevant for other countries seeking to license depositary MFIs. They show how critical it is for MFIs The experiences in the two regions suggest that and regulatory authorities to take the necessary steps implementing TGA presents significant challenges, to protect small depositors, including appropriate especially if the decision to place an institution in and effective prudential regulation and supervision. Box 1. Basic facts about WAEMU and CEMAC and their MFIs • WAEMU comprises eight countries: Benin, • During 2001–2011 Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, oo Aggregate outstanding loans extended by Niger, Senegal, and Togo. CEMAC comprises six licensed MFIs and savings held by such MFIs countries: Cameroon, Central African Republic, grew at average annual rates of 18 percent and Congo, Gabon, Equatorial Guinea, and Chad. 16 percent in WAEMU and 26 percent and 30 • The microfinance sectors of WAEMU and CEMAC percent in CEMAC, respectively. represents almost a fifth of the sub-Saharan African oo Twenty-five MFIs in WAEMU and four MFIs in microfinance sector, as measured by aggregate CEMAC were placed in TGA, including some outstanding loans and savings. large institutions in their respective markets.b • As of 2011, over 1,500 licensed MFIs—financial • Seventeen of the 29 MFIs placed in TGA (i.e., those cooperatives, nongovernmental organizations for which detailed information were available) held (NGOs), and limited liability companies (LLCs)— in the aggregate more than US$170 million in served over 13 million clients with an outstanding deposits of approximately 1,140,000 customers at loan portfolio of approximately US$1.7 billion and the time they were placed in TGA. savings of approximately US$2.2 billion. No. 91 • Most of these MFIs are licensed to take deposits, an December 2013 atypical situation for the rest of the world.a Corinne Riquet In 2011, the number of MFI depositors in the two regions was 4.2 times higher than the number of borrowers. Sub-Saharan Africa is globally a.  and the only region where depositors far outnumber borrowers and is close behind South Asia in absolute number of depositors (MIX 2011). Christine Poursat Most sector observers believe there are many more failing MFIs that have gone unchecked than institutions that have been placed b.  under TGA, a perception corroborated by two recent studies (Ministry of Economy and Finance of Mali 2010 and Ministry of Economy and Finance of Burkina Faso 2012). 1 Another supervisory tool is liquidation. The two regions’ supervisors have generally preferred TGA as liquidation involves shutting down the institution—potentially leaving customers without financial access—and reimbursing its depositors (not due to legal requirements but as a result of political pressure). 2 to be placed under TGA. Section three outlines how Box 2. What is temporary government TGA is intended to work. Section four discusses the administration? challenges and outcomes of the TGAs implemented Temporary government administration (TGA) is imposed by regulators when the poor management with the 17 MFIs. The final sections include lessons of a financial institution threatens its financial learned on managing TGAs. health and/or the interests of its clients, especially depositors. 1. Microfinance Providers Under TGA, all governance bodies (management, elected representatives, board of directors and Supervision in representing shareholders) are suspended, and may WAEMU and CEMAC be wholly or partially replaced by a “temporary administrator”—either an individual or another Overview of the microfinance market MFI—appointed by the regulator for an initial defined period, usually 6–12 months. The temporary administrator assesses the situation and either The history and current situation of the microfinance proposes a recovery plan, a takeover by another sectors in the two zones share several commonalities. institution, or liquidation. The recovery plan, which (See Figure 1.) First, cooperatives and their the temporary administrator will put into effect, may networks/federations have historically been the involve recapitalization, accounting adjustments, or a change in management. dominant institutional type of provider due in part to the first laws established to govern the sector in each zone. Today, the percentage of licensed MFIs To better understand the regulatory experience of that are cooperatives is 97.6 percent in WAEMU managing failing deposit-taking MFIs, CGAP—in close and 90.8 percent in CEMAC. In both subregions, consultation with supervisory authorities—conducted the leading MFIs measured by number of clients, an in-depth study of TGAs and liquidations in WAEMU size of loan portfolio, and/or aggregate deposits are and CEMAC in 2011 and 2012. The study included a cooperatives: FECECAM in Benin, RCPB in Burkina, review of all 29 TGA cases during 2001–2011 (as well UNACOOPEC in Côte d’Ivoire, and CAMCULL in as two liquidation cases) and a detailed analysis of 17 Cameroon, for instance. Second, savings mobilization of the TGA cases, including a subsequent liquidation. is much higher than in most other regions of the Due to the support of the regional supervisory world. In WAEMU, total savings held by MFIs authorities, the research team was given access to slightly exceed outstanding loans; in CEMAC, total detailed data on the MFIs under TGA—including savings held by MFIs are double total outstanding sensitive and confidential information. loans. This distinguishing feature is driven by the cooperative model, which emphasizes savings. This Focus Note discusses the events leading Banks are not really serving the low-income clients to the crises in these MFIs and the challenges of in both regions. Third, in each region, the sector successfully turning around ailing or failing deposit- is fairly concentrated around a few leading MFIs.2 taking MFIs through TGA. (See Box 2.) The Focus Alongside these leaders there is a preponderance Note is organized into six sections. The first section of small MFIs that receive insufficient supervision. provides an overview of the microfinance sector and Fourth, market infrastructure is still underdeveloped. the regulatory framework in WAEMU and CEMAC. Neither region has operational credit bureaus for The second section presents the evolution of the MFIs, although there are plans to create one in sector and the main characteristics of the 17 MFIs WAEMU, and local information exchange initiatives studied, including the key weaknesses that led them exist. Essential parts of the market infrastructure— 2 In WAEMU at the end of December 2011, 21 of 759 licensed MFIs represented more than 64 percent of outstanding loans and 75 percent of deposits (BCEAO 2012). In each WAEMU member country, five or fewer MFIs hold the majority of both credit and deposits. In CEMAC, the two largest cooperatives in the region represented at the end of 2008 45 percent of deposits and 39 percent of outstanding loans (COBAC 2008). 3 Figure 1: Map of sub-Saharan Africa with supervision is shared between the regional central WAEMU/CEMAC regions bank (Banque Centrale des Etats de l’Afrique de l’Ouest or BCEAO) and the Ministry of Finance of each country. BCEAO adopted a new microfinance law in 2007. However, it took some years for the law to become enforceable in each WAEMU country as it needed to be ratified by national authorities. In 2012, the new law was finally in effect in all eight countries. Many problems described in this paper reflect the limitations of the initial law, passed in 1994, which had lenient licensing requirements, lack of an independent supervisory authority, and insufficient prudential and reporting requirements. The new law brings several important changes, including a single licensing regime for all three types of institutions (cooperatives, associations, and LLCs), tighter control by BCEAO, more demanding reporting requirements, and stringent prudential regulations (see main such as the payment system and deposit insurance changes in Table 1). mechanisms—are underdeveloped or nonexistent. National microfinance associations are weak in most Under the new law, BCEAO has a greater role in countries, particularly in CEMAC. licensing and supervision and is responsible for MFIs with total savings or outstanding loans exceeding Despite their commonalities, the two regions also US$4 million. Ministries of Finance remain responsible have differences, and the microfinance sector is more for smaller MFIs. Since the new law encourages the developed in WAEMU than in CEMAC. At the end consolidation of the sector through the imposition of of 2011, MFIs in WAEMU were considerably larger, prudential requirements and more frequent reporting serving 11.6 million clients, with an outstanding loan requirements, it is expected that the number of small portfolio of US$1.15 billion and savings of US$1.2 MFIs will decline over time. Thus, it is expected that billion. In CEMAC, at the end of 2010 (when the most BCEAO will eventually have supervisory authority recent data are available), the sector covered about over most of the sector. The new law holds promise 1.6 million clients for an outstanding loan portfolio of to address part of the problems mentioned in this US$0.54 billion and savings of approximately US$1 paper and should have positive effects in particular billion. Cameroon accounted for over two-thirds in on strengthening supervision. Nonetheless, due to number of clients and volumes. the lengthy ratification process, the law has only just come into effect, and it is too early to assess its Regulatory framework and supervision effects. Both WAEMU and CEMAC have a specific legal and In CEMAC, MFIs have been governed by a regional regulatory framework for microfinance that applies to regulation since 2002.3 The law applies to all MFIs, its respective member countries. regardless of institutional type, and specifies fairly comprehensive prudential ratios and reporting In WAEMU, each member country enforces the standards. The regional central bank (Commission common regulatory framework; responsibility of Bancaire de l’Afrique Centrale or COBAC) is in charge 3 Regulation No. 01/02/CEMAC/UMAC/COBAC; this regulation was supplemented by instructions in 2002 and 2009–2010. 4 Table 1. Main changes in the microfinance law (WAEMU) Initial law (1994–2007) New law (since 2007) Legal status for MFIs Cooperative only Cooperative, association, LLC (single licensing regime) Other MFIs could, however, request a 5-year authorization from the Ministry of Finance Licensing Licensing by Ministries of Finance only Licensing process submitted to approval of BCEAO Prudential/reporting No solvency norms 9 prudential ratios, including a solvency requirements ratio—prudential ratios are tighter and Reporting requirements: annual financial more in line with banking norms statements New requirements, especially for cooperatives (e.g., obligation to set up an internal “security fund”) New accounting framework specific to microfinance Reporting requirements: annual financial statements and indicators sent every month (MFIs with savings/loans greater than US$4 million) or every term (smaller MFIs) Larger MFIs must have certified accounts Supervision Ministries of Finance only BCEAO/Banking Commission for large MFIs (savings/loans greater than US$4 million), Ministries of Finance for smaller ones of supervision. CEMAC regulation sets relatively low to promote microfinance. In the CEMAC zone, low- entry barriers, including no or very low minimum entry barriers facilitated a wave of LLCs started by capital requirements. eager business people focused on fast-paced deposit mobilization and motivated by profit. Overall, MFI In both regions, regulators are keenly aware of capacity has not kept up with the pace of growth, the challenges associated with implementing and particularly in terms of information systems, internal enforcing the legal framework, as well as their own controls, and credit management. As a result, most supervisory weaknesses. MFIs do not have reliable financial and portfolio information and are ill-equipped to manage their 2. Rising Risks and Growing credit portfolio or protect customers’ savings. Number of Deposit- Taking MFIs under TGA A striking illustration of capacity lagging behind growth is found in the portfolio-at-risk (PAR) figures. Growth and increased number In WAEMU, during 2001–2011, PAR904 was above of failing deposit-taking MFIs 5 percent for most MFIs, reflecting a combination of rapid growth and institutional weaknesses.5 In MFIs in both WAEMU and CEMAC experienced fast Cameroon, the largest market in CEMAC, PAR45 growth over the past decade (2001–2011), spurred days was an alarming 26 percent in 2008 (more recent by efforts of both national governments and donors data are not available). This very high PAR was linked 4 PAR90 expressed as a percentage refers to the percentage of all loans outstanding that have one or more installments of principal past due for more than 90 days. PAR45 is similarly defined but the overdue period is 45 days. 5 WAEMU PAR90 is higher than most of other regions in the world (MIX 2010 and 2011). However, these numbers likely do not reflect the full extent of bad loans. PAR figures in both WAEMU and CEMAC are often understated due to incomplete and/or inaccurate data on MFI portfolio quality. 5 to the crisis of several large MFIs in the country, loss of client confidence and reduced investment (i.e., including three put under TGA that represented refinancing of loan portfolios by banks/investors) in approximately 20 percent of total deposits of MFIs. MFIs. Several major banks and investors have scaled Some MFIs maintained solid asset quality, but the back expansion into microfinance, making other microfinance sector overall has suffered.6 donors/investors wary to fund the industry, as well. The problems are severe enough to risk a possible During 2001–2011, the number of ailing institutions— loss of confidence in microfinance across the entire for instance, MFIs with negative equity, severe region, especially in WAEMU. governance issues, and/or those not in compliance with regulatory prudential requirements—increased Profiles of the institutions under TGA in both WAEMU and CEMAC. The list included large players: in each of the seven countries studied (see CGAP studied 17 MFIs of varying types, sizes, and Table 2) across the two regions, at least one major ages that were placed under TGA in WAEMU and MFI has gone through a serious crisis, sometimes CEMAC in 2001–2011.9 The 17 cases in the sample lasting several years. 7 The result has been an represent more than half of the total 29 TGAs in that increasing number of MFIs under TGA. period and two-thirds of the more recent cases. (See Table 2.) At the end of 2011, 14 MFIs (mostly cooperative networks and several LLCs) were under TGA in The diversity of MFIs in the study sample reflects the WAEMU (compared to eight in 2008), representing overall composition of the sector more generally in about 6.6 percent of MFIs’ total assets in the region.8 the two regions: 11 cooperatives (nine networks and In CEMAC, the three MFIs placed under TGA in two retail cooperatives), two associations, and four December 2007 in Cameroon were still under LLCs, of which three are in Cameroon. All but one of temporary administration in 2010. All but one of these the 17 MFIs mobilized deposits with an aggregate of MFIs had collected relatively large volumes of savings. more than US$170 million of approximately 1,140,000 Given that there is currently no explicit deposit customers at the time they were placed in TGA. insurance mechanisms, there is a risk that customers will lose their deposits should any one of these MFIs The sample includes large players10 as well as small fail—which already happened in several cases, with MFIs,11 pioneer cooperatives created in the late depositors unable to recover their deposits. 1970s (e.g., FECECAM, URCPSO/FCPB, ABOBO/ UNACOOPEC) and younger MFIs created in When a failing MFI is a large player, it can undermine the 1990s and 2000s (e.g., IDH, CFCC, RCMEC, an entire country’s sector. Crises can trigger a AZAOUAD, and TIMPAC). Nine of the 17 MFIs in the domino effect, first affecting customer confidence, sample were founded in the 1990s—a period that saw leading to a drop in deposit mobilization and then the creation of most MFIs in the two regions. investor confidence. It can also engender government clamp down and political interference. At least three All but one of the 17 TGAs in the sample were under countries—Togo, Mali, and Côte d’Ivoire—have felt TGA for a long time, notwithstanding the intention the consequences of failures and TGAs, in terms of that TGA was supposed to be a “temporary” 6 Based on at least one diagnostic conducted in 2013 in Cameroon, it appears that the situation has not improved (Cameroon 2013). 7 E.g., JEMENI (number 5 in Mali), TAIMAKO (number 1 in Niger), FECECAM (number 1 in Benin), UNACOOPEC (number 1 in Côte d’Ivoire), IDH (number 2 in Togo), URCPSO/FCPB (number 1 in Burkina), and COFINEST (numbers 2–3 in Cameroon). 8 These MFIs also represented at the end of 2011 7.4 percent of outstanding savings and 5.6 percent of outstanding loans (BCEAO 2012). 9 Except for Guinea Bissau and Senegal, where it was not possible to access comprehensive information, all the countries that have had cases of TGA are covered. These exceptions do not undermine the representativeness of the sample, especially since the TGAs in these countries have involved small MFIs. 10 JEMENI in Mali, TAIMAKO in Niger, IDH and TIMPAC in Togo, COFINEST in Cameroon, and FECECAM in Benin. 11 MCPEC in Niger, FCIC in Cameroon, and CANEF and AZAOUAD in Mali. 6 Table 2. A snapshot of the selected sample of 17 MFIs under TGA Market sharec TGA situation Rank in sector b % of clients % deposits Country Institution (as of 2012) Legal statusa (before TGA) (before TGA) (before TGA) WAEMU Benin FECECAM Completed Cooperative No. 1 77 73 FENACREP Completed Cooperative Small MFI 3.3 1 .2 Burkina URCPSO Merged Cooperative Largest retail 11.4 8.8 Faso cooperative of the country’s leading MFI Mali CANEF Closed Association Medium MFI 3 <0.1 without liquidation JEMENI Ongoing Cooperative No. 5 6 9 AZAOUAD Closed LLC Small MFI 0.1 <0.1 without liquidation Niger TAIMAKO Ongoing Cooperative No. 1 12.5 27.7 MCPEC Ongoing Cooperative No. 3–4 13.5 14.3 Côte RCMEC Completed Cooperative No. 2 5.2 4.6 d’Ivoire CFCC Closed Cooperative No. 3 2.7 2.4 without liquidation ABOBO Ongoingd Cooperative Second 6.5 3.5 (UNACOOPEC) largest retail cooperative of the country’s leading MFI Togo IDH Ongoing Cooperative No. 2 20 13 TIMPAC Ongoing Association No. 3 1.3 0.6 PAPILLON Ongoing— Cooperative Small MFI 0.6 0.2 merger in process CEMAC Cameroon COFINEST Liquidation LLC No. 2–3 4.2 10.2 ongoing FTSL Completed — LLC No. 3–4 3.9 8.4 Take over FCIC Ongoing LLC Small MFI 0.2 1.5 a. URCPSO and ABOBO cooperatives are retail cooperatives; all others are the cooperative networks (i.e., apexes). b. Indicative ranking, based on outstanding savings and/or credit volumes. c. In respective market at the time of TGA decision according to available data. d. The ABOBO retail cooperative of the UNACOOPEC network in Côte d’Ivoire was placed under temporary administration of the apex (i.e., network). situation lasting for a period of six to 12 months. formally liquidated by the authorities, and therefore Two cases (in Niger) were under TGA for 11 years and depositors could not recover their savings. Seven were still under TGA in 2012. Three TGAs resulted TGAs were ongoing at the time of the study, since in turnarounds, and three resulted in take-overs by at least one year. other MFIs; one ultimately led to liquidation of the MFI. Three MFIs had merely their licenses revoked— Most TGAs studied took place in WAEMU because they stopped their activity, but they were never Cameroon is the only country in the CEMAC region 7 that has had cases of TGA. In WAEMU, with 14 cases with prudential requirements, such as loan ceilings across six countries, the difference in the number of and maximum percentage of aggregate principal TGAs per country seems to have more to do with how amount of outstanding loans granted to managers national-level supervisory authorities (the Ministry of and board members, and (iii) to protect savings Finance) judged the need for a TGA, particularly in (e.g., maximum percentage of deposits that can light of political considerations, rather than size or be used for lending). Failure by the MFIs to follow health of MFIs in specific countries. these rules (as was the case in at least 12 of 17 cases) resulted in fraud and loss of deposits. In several Poor governance: The cases, supervisory authorities identified the lack of common denominator compliance with bylaws and regulatory requirements in inspection reports, but no follow-up action was Why did the 17 MFIs end up under TGA? All the taken to address these violations. institutions studied—cooperatives, associations, and LLCs—suffered from one major common weakness: Fraud—committed by board members, shareholders poor governance.12 In at least 13 of the 17 cases, and/or managers—was in fact present in most of governance problems were the primary cause of the the 17 MFIs studied. Examples of fraud include crises. dipping into cash reserves for personal purposes (including for transfers abroad and personal real The specific governance problems varied across estate purchases), granting favors to family and the institutions, but generally encompassed serious friends (such as jobs, or free shares in the MFI, in weaknesses at the board level: “rubber stamp” boards the case of LLCs), negotiating overpriced real estate validating decisions, including obvious fraud by the acquisitions by the MFI, and granting large loans to main shareholder or manager; ineffective oversight elected representatives and their relatives, directly by the board due to collusion with fraudsters, or or through front companies. In the absence of strong to a lack of commitment and/or skills; unclear role governance bodies and effective control mechanisms, of the board in regard to managers and severe fraud sometimes escalated to massive levels, with no conflicts between board and managers, especially in one working to stop this—neither at the MFI level nor cooperatives; no change in board membership over at the level of supervisory authorities, at least in the long periods of time; and no validation of decisions short run. There were at least six cases of outright at the General Assembly level (in a few cooperative 13 embezzlement with large amounts of funds being cases, the General Assembly simply did not meet). stolen. The magnitude of such fraud meant that the Moreover, inadequate management information MFIs were illiquid and thus unable to return deposits systems (MIS) and control mechanisms often made it to low-income clients after being put under TGA. extremely difficult for board members to effectively perform their role. The absence of effective MIS and 3. Implementation of control procedures resulted in accounting that, in at TGA—The Theory least three cases, was deliberately distorted. TGA is one of a number of sanctions WAEMU and Another major governance issue faced by the MFIs CEMAC supervisory authorities may apply in the event was lack of enforcement of regulatory requirements of breach of legal requirements or serious financial and MFIs’ bylaws. Bylaws include, especially for difficulty. In addition to basic financial penalties cooperatives, rules (i) to prevent fraud, (ii) to comply levied for late submission of financial statements, for 12 Governance here refers to the division of powers and roles inside an MFI, as well as the capacity of stakeholders (elected representatives/ board, shareholders, management) to obtain the necessary information to effectively manage operations and prevent risks (through internal controls and MIS, in particular). 13 The General Assembly gathers all members of a cooperative once a year in ordinary session, according to legal provisions, with the purpose to approve the annual financial statements of the year, the annual budget, and strategic decisions. 8 example, the laws in WAEMU and CEMAC provide specification in either law regarding responsibility for injunctive measures, 14 withdrawal of license, for the costs of the administrator) and (ii) selects the and liquidation. These are typical measures in the “monitoring committee,” which acts as the board of microfinance law of Francophone African countries directors during TGA. The temporary administrator is influenced by French law, and give supervisory in charge of assessing the situation of the MFI. Then authorities considerable power over MFIs in serious the administrator will either propose a recovery plan financial difficulty. covering all aspects of the institution that need to be redressed, including recapitalization, accounting CEMAC and WAEMU laws do not lay out specific, adjustments, or changes in management that the objective criteria that trigger TGA. It is thus left to administrator implements, or recommend liquidation the discretion of supervisory authorities to decide to the monitoring committee. The monitoring when to place an MFI under TGA. Several steps may committee usually includes representatives of the precede the TGA. An onsite inspection may lead to supervisory authorities (central bank and Ministry of injunctions that call for specific action, including, for Finance) and in a few cases other sector stakeholders, example, a recovery plan. Noncompliance with these such as a representative from the national micro­ injunctions may result in the supervisory authorities finance network. The temporary administrator must summoning the Board and/or manager to a meeting. provide regular reports (quarterly or biannual) to the However, these preliminaries are not obligatory. The monitoring committee. supervisor can place an MFI under TGA whenever it considers this necessary. As the name suggests, a TGA is supposed to be a temporary solution that leads to recovery, take over, In CEMAC, it is up to the regional central bank to or liquidation of the MFI. It generally starts out as decide whether and when to place an MFI under a 6–12 month mission, although, as evidenced by TGA. In WAEMU, before the adoption of the new the 17 TGAs studied, it often continues far beyond microfinance law in 2007, Ministries of Finance the initial period. There is nothing in either law that were in charge of making decisions about placing specifies the criteria to extend the appointment of MFIs under TGA, and political considerations would the temporary administrator. often interfere with or influence the decision. Today, BCEAO is in charge of all MFIs with loans or deposits 4. Implementation of TGA— exceeding US$4 million, including the decision to The Practice Based on place any such MFI in TGA. The Ministries of Finance the 17 Cases Studied remain in charge of the smaller MFIs. Overview In both CEMAC and WAEMU, the decision to place an MFI in TGA must be announced publicly In most of the 17 cases studied, the TGA successfully by decree. All management bodies are suspended put an end to fraud and the most flagrant and partially or completely replaced by a “temporary mismanagement; by doing this, TGAs contributed administrator.” The relevant Ministry of Finance (in in the short run to protect deposits at risk. However, WAEMU) or the COBAC (in CEMAC) (i) appoints the TGA lead to tangible improvement in the MFI’s the temporary administrator (an individual or legal situation as measured by a better portfolio quality, entity) and specifies in writing the objectives and increase in credit volumes, and improvement in duration of the appointment (although there is no profitability in only five of the 17 cases. In these five 14 Injunctions include the prohibition of certain risky activities and suspension of a part or all operations (credit, savings, and transfers) or suspension of Board members or the CEO. The supervisor may also impose a recovery plan (recapitalization, accounting adjustments, or a change in management). 9 cases, the MFIs have survived as a result of a recovery Challenges of implementing TGA plan that, in three of the cases, involved a take-over by a stronger institution. However, these five MFIs, The use of TGA to turn around failing deposit-taking especially those that did not merge, remain weak, MFIs has faced significant challenges in WAEMU and with their long-term viability dependent on continued CEMAC due to (i) delayed decision-making on when donor support. to place an institution under TGA; (ii) inadequate management and implementation of the TGA; (iii) In the remaining 12 cases, the TGA did not manage to insufficient funds to cover the investments needed to foster an effective turnaround of the MFIs in question. redress institutions; and (iv) inadequacies of the legal For example, only two MFIs managed to bring equity system to address fraud. above zero, while all of them showed negative equity at the start of the TGA. At best, the MFIs continued Decision to trigger TGA comes too late to operate but struggled financially and continued to Supervisors often recognize—or at least act on—the experience operational weaknesses and governance warning signs of MFI weakness and failure too late. problems, particularly in cooperative networks. (Three This is often due to the lack of reliable information MFIs probably should not have been licensed in the provided by MFIs (e.g., financial statements, reports first place due to their small size.) In the case of the on indicators and prudential ratios, as required by cooperative networks (9 of the 11 cooperatives in law), insufficient reporting requirements (among other the sample), the elected representatives at the apex things, the initial microfinance law did not include an board level were suspended but generally not at the indicator on solvency), and over-burdened supervisory retail level, where governance issues may have been capacity.18 Onsite inspections by supervisors are more difficult to overcome. In the cases where credit inadequate due to both limited resources in terms operations were suspended (to recover delinquent of dedicated staff, high turnover of staff, limited loans, for example) or declined due to client departure, means of transport to get to MFIs, methodological the MFI’s health deteriorated further. weaknesses (such as insufficient focus on operations or portfolio), and lack of methodological tools Liquidation was rarely undertaken as supervisors supporting risk analysis. In addition, the remedial sought to avoid the political/popular pressure it actions to be implemented by the MFIs, as set forth in would then face to reimburse depositors.15 Instead, inspection reports, do not sufficiently prioritize critical in some cases, MFI licenses (in WAEMU countries) financial risks and governance risks. As a result, they were withdrawn or agreements not renewed (including are rarely addressed by the MFIs, and supervisory in the cases of small MFIs). In other cases, the TGA authorities with limited resources have little capacity, was renewed repeatedly.16 The result has been that and sometimes no political will, to follow-up. Thus, creditors and depositors were rarely or poorly repaid: TGAs become a last resort of supervisory authorities. failed MFIs often were in a critical financial situation and could not repay debts, whereas governments rarely In addition, in many cases, lack of political will or ability allocated any financial resource for this in the absence to counter strong political incentives, supervisory of a deposit insurance mechanism. In only two cases 17 authorities have been slow to react to weaknesses did loan collections and a government injection allow even when identified in inspection reports. Providing depositors to recover part of their savings. access to finance to the poor has become a “hot 15 Of all the TGAs in CEMAC and WAEMU since 2001, only three have resulted in liquidation: two very small MFIs and one large one that is still in the process. In at least three cases, liquidation with immediate repayment of depositors should have been the chosen path from the outset. 16 The initial law in WAEMU required any MFI that was not a mutual or cooperative (i.e., an association or LLC) to sign an agreement with its country’s Ministry of Finance. These agreements had a five-year term and were renewed by mutual consent. 17 According to the WAEMU central bank, the law implicitly requires the government to repay depositors if an MFI is liquidated and does not have enough money/assets to repay all of its debts. 18 WAEMU and Cameroon had large numbers of licensed MFIs due to a lax approval policy in the 1980s and 1990s motivated by the objective of promoting microfinance. 10 button” issue with high stakes for many politicians In addition, the level of involvement of the in the two subregions. Local and national elected “monitoring committee” has varied from one MFI to officials, representatives of political parties, and the next. While some of the larger or more politically even government officials with interests in the MFI sensitive MFIs were monitored more closely, most may have views on the decision whether to place an TGAs had only minimum oversight by the committee. MFI under TGA and influence the supervisors. There In the cases where the administrators prepared may also be ties between the shareholders or the reports for the monitoring committee, they were not director of the MFI and political parties that impact always read, or in some cases did not elicit a reaction the decision and timing. In some cases, repeated even when the temporary administrator requested inspections and external audits raised the alarm, but liquidation of the MFI, for example. it was only when small savers created pressure (“the pressure of the street”) that the alarm was heeded Moreover, temporary administrators were not always and the decision to set up a TGA was made. clear on whether they should scale back operations or, on the contrary, grow the institution. Importantly, The lag time between problem identification and they also often did not communicate their plans to establishment of a TGA often stretches several months, staff or clients of the MFIs. Most often, the main even years. Of the 17 MFIs studied, the shortest period communication strategy was to keep quiet about the observed was two months after an inspection mission TGA—the rationale being to avoid panic. In several rang the warning alarm. In most cases it took more cases, the administrator sought to boost product than six months with an average delay of 13.5 months. sales (credit, new savings products) to increase cash The delayed decision-making typically means that by inflows without making any fundamental changes the time the TGA is finally instituted, the health of the to operations, even when the MFI was in critical MFI has deteriorated to the point that the chances of a condition, deposits were at risk, and a governance recovery or turnaround are significantly compromised. clean-up and overhaul was needed. Weak TGA management Insufficient resources to support TGA process In the majority of the 17 MFIs studied, the TGAs An effective TGA comes with costs linked to lacked professional implementation hampered by a investments needed to redress the institution. The shallow initial assessment, vague objectives, lack of most substantial costs are linked to the reimbursement strategy, and poorly designed (or altogether absent) of depositors and creditors, such as banks, which can business plan. be several million U.S. dollars for a large MFI.19 In most cases, the temporary administrator was just If the MFI is illiquid, reimbursing depositors can one individual with no team or back-up support, no require more funds than external funders are willing performance incentives (i.e., fixed salary), and insufficient or able to provide. The governments of the countries resources—financial and human—to perform the tasks in the two regions cannot easily foot this large a required. In addition, the temporary administrator bill, which helps explain the delayed decision to often faced pressure from depositors, shareholders, liquidate in a number of cases (i.e., in a liquidation, creditors, or politicians and was managing employees the government would be under political pressure who themselves may have been involved in fraud. In to reimburse depositors). While banks can collect three cases, however, the temporary administrator was on their collateral, such as mortgages on buildings, a leading MFI. In each case, mostly because of the MFI’s depositors do not have this option. Rarely do experienced team, management skills, and credibility, regulators or temporary administrators have a the results were far better. clearly defined strategy for meeting withdrawals 19 For example, of the cases studied, the total deposits to be reimbursed amounted to US$9.4 million in one case and US$18.6 million in another. 11 when liquidity is insufficient. Depositors are often 5. Steps to Improve vulnerable and poorly organized and very few have the TGA Process been reimbursed in the wake of an MFI failure. Other costs include the expenses of implementing the Critical to ensuring a stable and strong financial redress plan (operating expenses; investments, such as sector, including financially healthy and well-governed MIS or product development; auditors; MIS providers; deposit-taking MFIs, is effective supervision. This in employee compensation; legal fees; etc.). For large turn depends on appropriate licensing requirements MFIs, these costs can also be quite significant. The and supervisory capacity, both in terms of staffing and more modest costs are those associated with experience. The decision to place a deposit-taking implementation of the TGA itself: the salaries of the MFI in TGA should be taken after the supervisor’s temporary administrator and the team, if applicable, financial and institutional assessment based on and the TGA operations (e.g., office rental, computers, regular and effective supervision of the institution, audits, and other external services). including offsite and onsite inspections. TGA should never be chosen “by default”—i.e., to compensate In a third of the cases (6 of 17), donors or government for not having sanctioned the MFI earlier or because helped finance the turnaround. In many cases, the of the lack of political will to liquidate an institution temporary administrator did not receive any external and face pressure to repay depositors. (See Box 3.) funding; his fees, as well as the recovery activities, were funded by the MFI, even though the MFI was When TGA does make sense, it needs to be already in a critical financial situation. This not only undertaken without delay. The earlier the TGA is made it impossible to fulfill the mandate, but it also set up, the greater the chance of success. Reacting worsened the financial situation of the MFI. The need as soon as the first red flag goes up reduces the risk for external funding goes beyond the TGA period: of the situation deteriorating to a point of no return. even when an MFI does recover, it is often fragile in Resuscitating an MFI is a tremendous challenge the aftermath and needs ongoing support to get the that requires (i) a full institutional and organizational institution on solid ground. audit, especially given the frequently unreliable data communicated by MFIs, (ii) a restructuring— Fraud and theft are not addressed usually long and costly—that may include branch/ In cases of massive fraud, legal proceedings against retail cooperative closures or mergers and an often fraudsters are critical both to addressing the harm unwelcome reorganization of management and staff, to defrauded depositors and to maintaining public and (iii) an overhaul of the governance structure (e.g., trust in the institution and in the financial sector for cooperatives, replacing elected board members more broadly. However, the judiciaries in WAEMU at the apex level but also at the retail unit level with and CEMAC countries are well-known for their governance issues), which is often the root of the complexity, uncertainty, and partiality under political problem. pressure. Work of such magnitude demands focused In 9 cases out of 10 in which the temporary professionalism, ability to manage an MFI, adequate administrator initiated legal proceedings against funding, and a motivated temporary administrator. those accused of fraud (managers, employees, In this respect, appointing as administrator a leading elected officials), the accused were not convicted— MFI that has the necessary experience, internal skills, some of them fled abroad. The one case that and incentive to see it succeed and the potential to resulted in a successful conviction (imprisonment of absorb the failing MFI presents a clear advantage— a manager charged with fraud) was due to pressure but obviously with risks for the leader. This option may from depositors. be considered when the failed institution is smaller 12 Box 3. Anatomy of a successful turnaround, the case of FECECAM The FECECAM TGAa was implemented in November • Committed monitoring committee, to support the 2007 and completed three years later in December temporary administrator, that was deeply invested 2010. This followed a series of earlier unsuccessful in building buy-in around the recovery plan, attempts to redress Benin’s leading cooperative especially among reticent elected representatives network. What made this TGA effort more effective? in retail units. The Benin Government was very committed in the • The temporary administrator’s independence from implementation of this TGA due to FECECAM’s the institution, due (at least in part) to the fact that the position—the largest MFI in Benin—the systemic government covered his salary from the beginning. risk in the event of bankruptcy, and a real political • Cancellation of US$2.4 million in debt to the African will, with the Ministry of Microfinance chairing the Development Bank, paid by the government as committee. financial contribution to support the TGA, which allowed the institution to turn a profit in the first • The swift decision to suspend the FECECAM apex’s year of the plan. governance bodiesb following an audit report • Adequate financing and support: donors confirming governance anomalies and deteriorating contributed during the diagnostic phase (the financial health, followed by quick action of institutional assessment and operational audit, in supervisory authorities: the appointment of an particular) but did not cover the cost of the TGA. interim managing director pending recruitment of Since the end of 2010, FECECAM has benefited a temporary administrator. from technical support funded by the Canadian • The transparent recruitment of the temporary development agency. The seven-year contract administrator whose personality, credibility, and provides for onsite technical assistance for the first skills were a good fit for an institution crippled by three years. bad governance and in need of a quick turnaround. • Elaboration of a well-designed recovery plan before While the turnaround has been a success, FECECAM the temporary administrator’s arrival, thus giving is still fragile. Equity levels still do not meet regulatory him a clear mandate and road map.c requirements. a For FECECAM, the TGA process was called a “recovery plan.” It was essentially a TGA except in name. b FECECAM is a federated cooperative with integrated financial cooperatives supervised by an apex organization, and a high degree of functional specialization between the cooperatives (retail units) and the apex level (federation) where most common services are housed, e.g., back office processing, IT services, technical assistance, training. c It was unusual for the recovery plan to be prepared before the arrival of the temporary administrator. and when the methodology and target audience clearly established procedures, including an updated are similar across the two institutions. If the TGA assessment of recovery perspectives and clearly is successful, the leading MFI will, with agreement defined objectives to be achieved in the prescribed of supervisory authorities, be able to take over the extended period. Effective coordination between institution, thus gaining a more dominant position in the supervisory authorities (e.g., Central Bank and the market. Moreover, by avoiding a bankruptcy, the Ministry of Finance) is key, especially in the case of MFI that serves as temporary administrator protects liquidation. the market and itself from reputational risk. In case of an individual acting as temporary administrator, In the event the TGA is set up, there should be to ensure a high level of professionalism and sufficient funding to cover key expenses: temporary commitment, part of his or her salary should be based administrator’s fees, recovery plan, and technical on performance indicators. support during and post-TGA. In addition, there should be funds to pay out at least small depositors. Rigorous oversight and professionalism by the Funds may come from donors, government, monitoring committee and supervisory bodies are shareholders, or the MFI itself. Government could crucial to making the right decisions at the right also temporarily reduce the penalties and taxes time. It is also a way to support the temporary levied on MFIs under TGA, linking the reduction administrator. The extension of the duration of a to clear performance indicators. In the event of TGA beyond the initial period should be based on external funding, the funding agreement should have 13 clear objectives based on a complete institutional assessment and business plan and should include Box 4. Restoring depositor confidence through a well-communicated strategy performance-based indicators. and tangible measures Occasionally, MFIs have taken measures to rebuild When the MFI is in a severe situation due to late client trust during a TGA. In Cameroon, for example, decision-making, given how complex and costly liquidity levels allowed the MFIs under TGA to give small savers full access to their deposits from the recovery can be, liquidation may be preferable. beginning of the temporary administration, which Regulators in WAEMU and CEMAC have generally calmed the rush on deposits. been reluctant to liquidate MFIs, as they anticipate The case of the MFI PAPILLON in Togo is an pressure to reimburse depositors if the MFI does interesting example. Another MFI and an industry not have sufficient liquidity.20 However, if the MFI leader, FUCEC, was appointed its administrator and made concerted and successful efforts to lacks sufficient liquidity to return deposits, then reassure depositors. FUCEC took advantage of withdrawing a license (which is the current trend in the opportunity to demonstrate its professionalism some WAEMU countries for small MFIs) essentially by “saving” the savers whose deposits were means that savers will not get their deposits back, compromised, using its own resources and assuming the risk alone. It implemented a which is particularly problematic when depositors are proactive communication strategy during the poor and uninformed about their rights. TGA to mitigate the reputational risk. It organized regular General Assembly meetings with members Investing in a communication plan would be helpful— to explain PAPILLON’s situation and the recovery plan. It opted not to change the MFI’s name, for MFI staff as well as clients—as it could contribute simply adding “under TGA by FUCEC” to restore to restoring confidence. MFIs rarely communicate customer confidence. Finally, FUCEC carefully with clients at any time during the TGA, and very analyzed the MFI’s situation net of deposits. A plan was developed to clear all liabilities and gradually few depositors have even been informed of their reimburse FCFA 180 million (approximately US$ rights. In the rare cases where measures have been 360,000) in deposits over five years. taken to inform and protect depositors, the effect has been positive: increased client confidence and savings deposits. (See Box 4.) reactions by supervisors to ailing MFIs have led to a deterioration in their situations, which in turn has 6. Conclusion made it more difficult for the institutions to recover. What have we learned from the WAEMU and CEMAC When supervisory authorities have used TGA to manage experiences about the challenges that supervisors in failing MFIs, success has been limited. Only in a handful low-income countries may face when deposit-taking of cases—when the TGA was undertaken professionally MFIs fail? and with adequate resources—was it possible to turn around the failing institutions. In such cases, TGA has Governments in the two regions studied have proved to be a useful tool to address fraud and theft promoted financial inclusion by allowing a large and to take adequate measures to turn around the MFI number of small deposit-taking institutions to deliver or close it if a turnaround is not possible. financial services to low-income people. The lack of entry barriers, extensive licensing, and quick growth In most cases, depositors and creditors have lost have resulted in many weak MFIs. Supervision has money outright from closed institutions, or the been moderate at best and has not prevented perpetuation of the TGA status has prevented them poor performance of MFIs. Inadequate and slow from recovering their funds. Many small depositors 20 Since 2010, BCEAO and COBAC have both been working on the implementation of guarantee funds for deposits. In WAEMU, the revised microfinance law provides for the establishment of such a fund. In CEMAC, there are discussions of building on the banking sector’s experience of the Deposit Protection Fund in Central Africa (FOGADAC). 14 have lost their money. This situation has seriously References undermined consumers’ trust in the microfinance sector in some markets, with few examples of efforts to restore depositors’ confidence. BCEAO (Banque Centrale des Etats de l’Afrique de l’Ouest). 2012. State of the Microfinance Sector in The WAEMU and CEMAC experience is thus a WAEMU: A Sector at the Crossroads. Dakar, Senegal: “cautionary tale” when it comes to licensing a lot of BCEAO, April. deposit-taking MFIs in contexts where regulatory and supervisory capacities are limited. Managing failing Cameroon. 2013. “Country-Diagnostic Report.” deposit-taking institutions is fraught with challenges Development of the Financial Inclusion National that are not easy to address in a resource constrained Strategy of Cameroon. context. The examples show just how critical it is for MFIs and regulatory authorities to protect small Center for Financial Inclusion. 2011. “Weathering the depositors and adopt and enforce appropriate and Storm: Hazards, Beacons, and Life Rafts. Lessons in effective prudential regulation. It is important to Microfinance Crisis Survival from Those Who Have emphasize that many crises could be avoided by (i) Been There.” Publication 11. Washington, D.C.: strengthening supervision with a proportionate (i.e., Center for Financial Inclusion. risk-based) approach and including early warning systems with adequate capacity to interpret and Chen, Greg, Stephen Rasmussen, and Xavier Reille. prioritize information, and (ii) setting appropriate 2010. “Growth and Vulnerabilities in Microfinance.” licensing requirements for deposit-taking institutions Focus Note 61. Washington, D.C.: CGAP, February. (e.g., minimum capital, tighter restrictions regarding savings). This also requires allocating adequate COBAC (Commission Bancaire de l’Afrique Centrale). resources to supervisory authorities, including staff, 2007 and 2008. “Survey on Microfinance Activities and enabling supervisors to make decisions free from Trends in CEMAC, Statistics as of 30 September 2007 political pressure. This is what is progressively being and 31 December 2008. done in WAEMU and CEMAC with new regulations or regulatory disclosures. Demirgüç-Kunt, Asli, Edward J. Kane, and Luc Laeven. 2007. “Determinants of Deposit-Insurance Adoption When deposit-taking institutions are failing, action and Design.” NBER Working Paper No. 12862. and sanctions should not be delayed—whether for Cambridge: National Bureau of Economic Research. political reasons or capacity constraints. While closing institutions is not desirable and is complicated, dragging Marulanda, Beatriz, Lizbeth Fajury, Mariana Paredes, on a problem that affects not only the institution and and Franz Gomez. 2010. “Taking the Good from the its clients but also hurts the financial sector and trust at Bad in Microfinance: Lessons Learned from Failed large can be more damaging in the long run. Experiences in Latin America.” San Jose, Costa Rica: CALMEADOW. As financial inclusion strategies globally are geared to expand access to savings services the challenges McKee, Kate. 2012. “Voting the Double Bottom Line: presented call for caution especially in resource Active Governance by Microfinance Equity Investors.” constrained environments. Focus Note 79. Washington, D.C.: CGAP, May. 15 Ministry of Economy and Finance of Burkina Faso. ———. 2012. “2011 Sub-Saharan Africa Regional 2012. “National Microfinance Strategy and Action Snapshot.” Washington, D.C.: MIX. Plan 2012–2016.” Burkina Faso: Ministry of Economy and Finance, January. ———. 2013. “2012 Sub-Saharan Africa Regional Snapshot.” Washington, D.C.: MIX. Ministry of Economy and Finance of Mali, CCS/SFD. 2010. “Study on the Inventory of SFD in Difficulties or Riquet, Corinne, Christine Poursat, Nathalie Those about to Be.” Mali: Ministry of Economy and Assouline, and Laurent Lhériau. 2012. “Study on MFIs Finance of Mali, August. under Temporary Administration in WAEMU and CEMAC.” Unpublished. Washington, D.C.: CGAP. MIX (Microfinance Information Exchange). 2011. “Sub-Saharan Africa Microfinance Analysis Rozas, Daniel. 2009. “Throwing in the Towel: Lessons Benchmarking Report 2010.” Washington, D.C.: MIX. from MFI Liquidations.” 20 September, self-published. No. 91 December 2013 Please share this Focus Note with your colleagues or request extra copies of this paper or others in this series. CGAP welcomes your comments on this paper. All CGAP publications are available on the CGAP Web site at www.cgap.org. CGAP 1818 H Street, NW MSN P3-300 Washington, DC 20433 USA Tel: 202-473-9594 Fax: 202-522-3744 Email: cgap@worldbank.org © CGAP, 2013 The authors of this Focus Note are Corinne Riquet, CGAP regional representative for West and Central Africa, and Christine Poursat, consultant. The authors are grateful to the Central Banks of WAEMU and CEMAC and the Ministries of Finance of WAEMU countries and Cameroon for their valuable contributions. They would also like to thank MFIs, networks, and key resource persons who have contributed data and time through interviews in support of the research and publication. Special thanks go to Nathalie Assouline and Laurent Lhériau, who have greatly contributed to the research and to Kate Lauer who masterfully helped translate the research findings into key messages of the Focus Note. The authors would also like to thank CGAP colleagues Antonique Koning, Alexia Latortue, and Tim Lyman for their valuable guidance in conceptualizing the research and reviews throughout the process as well as Greg Chen, Sarah Rotman, and Michael Tarazi for their insightful comments. The suggested citation for this Focus Note is as follows: Riquet, Corinne, and Christine Poursat. 2013. “Managing Failing Deposit-Taking Institutions: Regulatory Experience from Africa.” Focus Note 91. Washington, D.C.: CGAP. Print: ISBN 978-1-62696-032-9 epub: ISBN 978-1-62696-034-3 pdf: ISBN 978-1-62696-033-6 mobi: ISBN 978-1-62696-035-0 UKa from the British people