Bubble Bubble Banex Trouble

Two very different events hit the microfinance world this summer.  In India, the SKS IPO sparked debates about the lines between profit-making and social responsibility when investors profess a “double bottom line.”  In Nicaragua, the failure of Banex is an event that may have even wider reverberations. This is the first of two guest posts by Barbara Magnoni, President of EA Consultants, on what we can learn from Banex and its demise.

I have been working with the microfinance sector in Nicaragua since the end of 2004, arguably the beginning of the “bubble.”  At the time, Nicaragua was strangely popular among investment funds, due to its relatively mature microfinance market, which had received support from various donors over 15 years.  This aid ensured a certain level of efficiency, transparency and best practice that helped convince investors to keep pouring money in, as more and more money was coming to investment funds from donors, socially responsible and commercial investors. 

Since then, MFI performance has plunged, with a 15 percent decline in the portfolios of unregulated MFIs from 2008-2009 and a corresponding increase in delinquencies from 3.9 percent at the end of 2008 to 7.9 percent at the end of 2009.  One MFI, Banex, which recently transformed into a bank, has tanked, losing 35 percent of its loan portfolio since 2008 and showing 45 percent delinquencies in mid-June of this year.  It has since begun the process of liquidation. Would we have needed the magical brew of the three witches in Macbeth to predict what was to come, or was, as I argued in December 2009’s Microcapital Monitor, the writing on the wall?

Early warning signs
At the IDB’s annual FOROMIC conference in El Salvador in 2007, I knew there was a bubble as I watched investment funds competing to get face time with a number of Nicaraguan MFIs. Already, the market had grown substantially since 2004, Findesa (now Banex) had a loan portfolio of US$125 million, up from US$33 million at the end of 2004.  I wondered why it made sense to lend to so many small MFIs in one country with 5 million people, 600,000 informal sector workers and 300,000 credit clients. How much growth would be reasonably expected and would these MFIs not be better off merging at some point? One MFI Manager at the conference said to me: “Now I have access to credit, so why should I merge with someone else. I should focus on growing and increasing the value of my MFI, when I am big, I will be able to negotiate better terms if I get bought out.” 

I visited Findesa later that year in Managua and asked the CFO what the institutions’ main competitive advantage was. His answer reinforced my fears. He said, “we are very good at raising money from foreign investors.”   Debt financing was clearly flowing to Nicaragua, with high profile, fast growing institutions like Findesa bringing in the bulk of the money; yet how would these MFIs’ loan portfolios grow? Mostly, by trying to compete for each others’ clients, ultimately adding to the clients’ debt burdens.  Implicit in this strategy is a loosening of credit methodology. 

The worst case scenario comes to pass
Today, Banex (formerly Findesa), which boasted the largest micro and SME loan portfolio in the country in 2008, has now buckled under the strain of high delinquencies, stricter provisioning, and a saturated market for loans.  Just last month, the shareholders of Banex declined to continue recapitalizing the bank and Banex was ordered by the Superintendency to be liquidated. 

What led to Banex’s demise? Banex and its former investors and staff often blame the No Payment (No Pago) movement that started with government support in 2008 and has since gotten out of hand.  While this has affected the sector, and other MFIs, not all are in such dire conditions. There must be other factors at work.

According to the Bank Superintendency, Banex’s delinquent portfolio reached 40 percent in December 2009, compared to 9.0 percent in the formal financial sector (which I calculated excluding Banex), and 7.9 percent in the unregulated MFI sector (according to ASOMIF, the local MFI network).  This deterioration has been dramatic since the early signs of problems in mid-2008, when Banex and the rest of the system had about 6.4 percent delinquencies ASOMIF’s MFIs were near 4 percent.  In my next post, I’ll take a closer look at possible reasons behind this rapid downfall.