FINANCIAL SECTOR ASSESSMENT PROGRAM – DEVELOPMENT MODULE MALI THE MICROFINANCE SECTOR TECHNICAL NOTE DECEMBER 2015 This Technical Note was prepared in the context of a Financial Sector Assessment Program mission in Mali during March 2015 led by Mehnaz Safavian, World Bank, and overseen by Finance & Markets Global Practice, World Bank. The note contains technical analysis and detailed information underpinning the FSAP assessment’s findings and recommendations. Further information on the FSAP program can be found at www.worldbank.org/fsap. THE WORLD BANK FINANCE & MARKETS GLOBAL PRACTICE -2- Contents Acronyms ........................................................................................................................................ 3 Executive Summary ........................................................................................................................ 4 Background and Context................................................................................................................. 5 Structure of the microfinance sector ............................................................................................... 6 The microfinance crisis: a typology................................................................................................ 7 The role of the legal framework in the crisis ................................................................................ 10 Strategies and action plans to the recovery of the sector .............................................................. 14 Remaining Challenges .................................................................................................................. 17 Recommendations ......................................................................................................................... 19 Annex 1: Financial inclusion in Mali............................................................................................ 20 Annex 2: The role of donors in the microfinance sector .............................................................. 22 Tables Table 1: Breakdown of MFIs by legal status .............................................................................7 Table 2: Statistics on the 33 active MFI (as of 2013, adjusted) .................................................8 Table 3: Evolution of outstanding deposits and loans (2010/2013) ..........................................8 Table 4: Evolution of the main financial indicators for active MFIs .........................................9 Table 5: Supervisory measures required for the active MFI....................................................10 Table 6: Main change in the WAEMU microfinance law .......................................................12 Table 7: Prudential ratio with the new regional law ................................................................13 Table 8: Number of supervision missions by CCS and/or Banking Commission ...................14 Table 9: Emergency plan for the microfinance sector in Mali ................................................15 Table 10: CCS/SFD budget .....................................................................................................18 Table 11: Financial Inclusion Indicators-% of Malians> 15 yrs. ............................................20 Table 12: Financial Inclusion Indicators- in % of adults > 15.................................................21 -3- Acronyms AFD Agence Française de Développement (French cooperation agency) AP/SFD Association Professionnelle des SFD (Professional association of the MFIs) BCEAO Banque Centrale des États de l'Afrique de l'Ouest (Central Bank of West African States) CB – UMOA Banking Commission of UMOA CFA franc Franc CFA (exchange rate : 1 euro = 655.96 FCFA) BNDA Banque Nationale de Développement Agricole (National Agricultural Development Bank) CAEC Caisse Associative d’Épargne et de Crédit des Entrepreneurs et Commerçants (savings and credit financial cooperative for entrepreneurs and merchants) CCS/SFD Cellule de Contrôle et de Suivi des SFD (Control and monitoring unit of the MFIs) CFBM Centre de Formation Bancaire et de Microfinance (banking and microfinance training centre) CIDA Canadian International Development Agency CPA/SFD Centre de Promotion et d'Appui des SFD (centre to promote and support the MFIs) CVECA Caisse Villageoise d'Epargne et de Crédit Autogérée (self-managed village savings and credit financial cooperative) FARM Financement Agricole et Rural au Mali (agricultural and rural financing in Mali) GCNM Groupe Consultatif National de la Microfinance (national advisory group on microfinance) IFAD International Fund for Agricultural Development MFI Microfinance institution MIS Management Information System NGO Non-Governmental Organization OHADA Organisation pour l'Harmonisation en Afrique du Droit des Affaires (Organization for the Harmonization of Business Law in Africa) PAR Portfolio at Risk PTF Technical and Financial Partner PMR Programme de Microfinance Rurale RMCR Réseau de Micro-institutions de Croissance et de Revenu SFD Système Financier Décentralisé SMS Structure Ministérielle de Surveillance SNDMF Stratégie Nationale de Développement de la Microfinance (national strategy for developing the microfinance sector) WAEMU West African Economic and Monetary Union -4- Executive Summary While the microfinance sector is extensively used in Mali (about 1 million members often based in rural areas), the sector has experienced a major crisis for over six years. Two of the country's biggest Microfinance Institutions (MFIs) have ceased operations and a number of other MFIs are technically bankrupt and must be liquidated or broken up. An untold number of low income depositors have lost their savings. Refinancing from the banking sector has dried up. There is a complete loss of confidence in the sector, which has spilled over even into the handful of remaining and viable institutions (that concentrate from 80 percent to 90 percent of the sector). None of the active MFIs have been able to expand their scale of lending (with the exception of one greenfield). The weaknesses in the former regulatory and supervisory framework have been the main cause of the crisis. Until 2010, a lax licensing policy, coupled with low capacity of the national supervisory body, resulted in the presence of too many MFIs with often weak capacity and governance standards, but who were permitted to mobilize deposits from their members. The new regional legal framework, effective since 2010, is an essential measure to shape a sound and inclusive microfinance sector henceforward, but its implementation has been slow and mixed. The clean-up of the microfinance remains the most pressing priority for the Malian authorities and the adoption of the Emergency Plan for the microfinance sector is a key milestone to cleaning up the sector. While the plan addresses the main issues (restructuring or liquidation not viable MFIs; depositors indemnization mechanism; consolidation of active MFIs; reform and strengthening of the national supervisory body), but the implementation remains very challenging in a context of fiscal tightening and donor’s reluctance to intervene. It is only the Government of Mali that can restore confidence in the sector, and only by undertaking the recommendations highlighted in the Emergency Plan. One of the most sensitive issues will be to manage the liquidation of a few important distressed institutions together with the indemnization of their depositors. -5- Background and Context Mali is a vast, land-locked country in West Africa with a population of approximately 14.9 million, and a GDP per capita of USD480. The economy is largely rural, with over two-thirds of the population living off agriculture, notably cotton. Gold is the country’s largest export, though production has been declining and the industry faces an uncertain future as proven reserves are limited. The service sector, which represents 40 percent of GDP, is dominated by trade and commerce. Mali’s dependence on crops and gold makes it vulnerable to terms of trade shocks. Industry, which employs just 3 percent of the active population, consists largely of small-scale food processing and textile plants. The overwhelming majority of the population (over 90 percent) works in the informal sector. In 2012, Mali suffered a serious political and security crisis from which it is still recovering . In early 2012, insurgents took control of northern Mali, displacing over half a million people. A military coup a few months later further de-stabilized the country and its economy, and resulted in the withdrawal of donor support. A French-led military intervention allowed the government to regain control over the north by mid-2013, and new presidential and parliamentary elections were held later that year to re-establish democracy. Economic growth has resumed and inflation is low. GDP registered zero growth in 2012 due to the political crisis, and just 1.7 percent in 2013 due to poor agricultural output. Mali’s economy returned to strong growth in 2014, with an estimated increase in GDP of 7.2 percent, and a projected growth of 5 percent in 2015. This year’s projected growth represents a return to Mali’s normal growth path, which averaged just over 5 percent for nearly a decade before the crisis of 2012. Inflation is low (1 percent in 2014), and projected to remain well within the BCEAO’s target of under 3 percent. While the financial sector in Mali remains highly bank-centric in terms of assets, the microfinance sector is used extensively by the population. In 2015, there are 14 banks that account for about 97 percent of financial sector assets. While not systemically important, the microfinance sector accounts for more than 1 million deposit accounts (on par with banking deposit accounts). The total deposit of the microfinance sector accounts for less than 3 percent of the total deposits in the banking sector. Mobile money is growing rapidly, and holds promise for reaching rural areas which cannot be sustainably served by traditional branch banking. While the banking sector is generally sound and profitable, the microfinance sector has experienced a major crisis for over 6 years. Two of the country's biggest Microfinance Institutions (MFIs) have ceased operations and a number of other MFIs are technically bankrupt and must be liquidated or broken up. In the meantime, many active MFIs need to be strengthened. The political crisis in 2012 exacerbated the microfinance crisis. For households, micro-entrepreneurs, and poor farmers, access to savings, credit, and insurance products is seriously affected by the difficulty faced by the microfinance sector, which used to play an important role in expanding access to producers and small agro-processing, -6- trading enterprises. On the products side, they offer a range of short term products for inputs, field preparation and planting as well as marketing and post harvest loans, including small scale, typically village or next level up, inventory credit. They also offer loans and leasing for small equipment purchases. In a country where financial inclusion is so low (see Annex 1), the complete loss of confidence in all saving and lending institutions geared towards the poor represents a fundamental obstacle to financial access to households, individuals, and micro-enterprises, affecting a major portion of Mali’s population at the bottom of the pyramid. Structure of the microfinance sector The microfinance sector in Mali plays in important role in providing financial services to underserved households, microenterprises, and farmers, and reaches approximately the same number of individuals as the banking sector. While not systemically important, there are close to 1 million microfinance clients and about 1.4 million beneficiaries1 . Microfinance services are equally important for both urban and rural borrowers, and for women as well as men. While data on the rural/urban breakdown of clients is not available, estimates suggest that approximately half of all microfinance loans are extended to rural borrowers. Data (from a sample that accounts for 85 percent of the sector) show that almost 50 percent of MFIs’ credit portfolio has been strictly for agricultural purposes (inputs, small equipment, warehouse credit). In 2013, one third of users were women, without taking into account the members of women's groups which constitute the majority of groups classed as Legal Persons. Therefore, the percentage of women served by the sector is likely to be much higher than 30%. Microfinance institutions in Mali provide both savings and credit services, and are licensed to mobilize deposits from their members. In WAEMU, there are three types of legal status for MFIs, referred to as ‘’Systèmes Financiers Décentralisés’’ (SFD) in the WAEMU area: mutuals, associations and limited liabilities companies. Cooperatives and their networks/federations have historically been the dominant institutional type. Today there are 126 licensed MFIs. 1 Clients and beneficiaries numbers differ because mutual group are considered as one client that serve a group comprised of 8-15 persons. -7- Table 1: Breakdown of MFIs by legal status 2 Mutuals 70 Of which: Network*: 18 Stand-alone structure (caisse unitaire): 52 Association 44 Limited Liabilities Companies 12 Total 126 * The 18 networks encompass 247 affiliated structures The microfinance crisis: a typology The microfinance sector in Mali has experienced a major crisis for over 6 years. The beginning of the crisis started in 2009 with few large MFIs that became distressed: Union Kondo Jigima and Union Jéméni, third and fifth MFIs at this time, have left outstanding deposits of about CFA 8.9 billion of deposits. Since then, the situation has deteriorated significantly with the peak of the crisis in the aftermath of the 2012 political crisis. Indicators show negative growth in the sector between 2010 and 2013. An untold number of low income depositors have lost their savings, and lost faith in the integrity of the system. Today, there is a loss of confidence in the sector. Refinancing from the banking sector has completely dried up, unresolved institutions remain, depositors await indemnification. The crisis has spilled over even into the handful of remaining and viable institutions (potentially 90 percent of the sector if a few of the MFIs are consolidated). The viable institutions have not been able to expand their scale of lending (with the exception of one greenfield MFI). To assess the microfinance crisis in Mali, it is useful split the sector in three categories: i) active MFIs; ii) major bankrupted MFIs; iii) rest of the sector consisting in bankrupted or active small MFIs with structural weaknesses. The lack and quality of data is a strong constraint for the microfinance sector assessment. For many distressed MFIs, there is no recent information. The reliability of data provided by the active sector is relatively low. i) The crisis for the microfinance sector in operation (33 MFI) Structure While there are 126 licensed structures, there are only 33 MFIs that are regularly reporting and in operation. Over 45.5% of these active MFIs are classified as mutual organizations, and account for 62.5% of users. There are numerous solidarity credit associations (10 MFIs), but they only account for 14.7% of users. Following consolidations in recent years, there are currently only five 2 Institutions Mutualistes ou Coopératives d’Épargne et de Crédit . -8- village and savings associations3, but they account for 21.7% of users. Finally, limited companies only account for 1.1% of users4. For the MFIs for which information is available, financial services are accessible at 702 access points. For the group of active MFI total loans exceed total deposit (see table 3). The six largest MFIs5 account for 80.9% of deposits in the sector and 81.8% of outstanding loans. Table 2: Statistics on the 33 active MFI (as of 2013, adjusted) No. of No. of structures No. of % access % % in clients* points operation Mutuals 15 45.5% 357 50,9% 585 949 62,5% Associations 15 45.4% 337 48% 341 169 36,4% Of wich : Solidarity credit 10 30.3% 53 7,5% 137 941 14,7% associations CVECA associations 5 15.2% 284 40,5% 203 228 21,7% Limited companies 3 9.1% 8 1,1% 10 697 1,1% Total 2013, adjusted 33 100,0% 702 100,0% 937 815 100,0% Source: CCS/SFD *Clients here are defined as individuals or groups who are either using credit or savings services. The number of clients will be smaller than the number of people served, as mutual group clients include groups of 10-15 individual borrowers. Table 3: Evolution of outstanding deposits and loans (2010/2013) In '000 CFA francs 2010 2013 Variation Outstanding deposits 54,875,777 47,863,030 -12.8% Outstanding credit 71,376,819 66,219,314 -7.2% Source: CCS/SFD Financial indicators The political turmoil in 2012 led to a deterioration of the financial health of the active microfinance sector. Non-performing loan (NPL) peaked in 2012, with a portfolio at risk (PAR) of 90 days of 11.8%. In 2013, the PAR 90 days was lower (9.2%) but still higher than the limit of 5%. Since 2010, the total amount of assets have declined significantly between 2010 and 2013 (- 24.7%) due to losses, and a decrease in both deposits and refinancing from banks and other financial institutions. The decreasing trend of total assets have been partly offset by Microcred 3 CVECA: Caisse Villageoise d’Épargne et de Crédit Autogérée (self -managed village savings and credit financial cooperative). 4 Microcred is the only limited liability company and is the most recent entrant into the market. It is also an IFC investment, and does not mobilize deposits. 5 These are the Union Kafo Jiginew, Union Nyèsigiso and Union CAECE mutuals; the Soro Yriwaso and RMCR savings and credit associations and the limited firm Microcred-Mali. -9- (the greenfield entrant) that starts its operation in 2014, and is an IFC investment, but still cannot access any refinancing facility. Refinancing by banks and other financial institutions fell by 38.2% during this period. Not surprisingly, the profitability of the sector has deteriorated during this period, going from a profit surplus of 1.9 billion CFA francs in 2010 to a loss/deficit of 3 billion CFA francs in 2013. In 2013, only 14 MFIs (43.8%) posted positive results, excluding subsidies. In addition, only two of the six largest MFIs are profitable. This decline in profitability is explained by a decrease in revenues linked to a lower volume of credit and the need for provisions related to increasing NPL. Table 4: Evolution of the main financial indicators for active MFIs Evolution Microcred Total with 2010 2011 2012 2013 from 2010 to 2014 Microcred 2013 Net results before subsidy 1 869 093 -759 103 -3 143 762 -2 996 391 -260,3% -2 134 545 -5 130 936 ('000) % of DFSs with positive results 57,8% 48,6% 47,1% 43,8% -24,3% 0,0% 42,4% Return on equity 8,9% -3,7% -17,8% -11,7% -230,5% -55,2% -17,3% PAR 90 days 7,6% 7,7% 11,8% 9,2% 20,8% 0,8% 8,2% Assets 118 705 965 110 839 350 103 789 407 89 435 962 -24,7% 17 289 950 106 725 912 Equity 20 933 767 20 552 019 17 685 400 25 708 441 22,8% 3 865 275 29 573 716 Capitalization rate 17,6% 18,5% 17,0% 28,7% 63,0% 22,4% 27,7% Refinancing by banks* 45,3% 42,9% 38,3% 28,0% -38,2% 70,6% 33,1% * debt/outstanding credit. Sources: CCS/SFD Clean-up part of the active microfinance sector While the active MFIs are dominated by few big institutions not requiring immediate supervisory measures, other active MFIs need to be closely monitored or liquidated. Based on Alia 2014 report and discussion with the national supervisory body (CCS/SFD), only 10 of the 33 active MFIs would not require supervisory measures. Special supervisory measures are not planned for the 6 largest MFIs. For the rest of the active sector (23 MFIs) specific supervisory measures are needed. Audits need to be carried out to assess the real situation for these 23 MFI, notwithstanding, it could be estimated that 8 MFIs would require close monitoring and 7 MFIs should be placed under provisional administration. In addition, according to the national supervisory body (CCS/SFD), 8 MFIs should be liquidated. It is expected that some of the access points of MFIs to be liquidated will be consolidated into existing networks. - 10 - Table 5: Supervisory measures required for the active MFI MFI requiring no supervisory measures 10 MFI requiring supervisory measures 23 Close monitoring 8 Provisional administration 7 Revocation and liquidation 8 Estimate: CCS/SFD ii) The crisis of two majors MFIs The closing down of two majors MFIs (Union Kondo Jigima and Union Jéméni) catalyzed the crisis in the country, and have strongly affected the overall confidence in the microfinance sector since 2009. The total deposits for these two MFIs is estimated approximately to 8.9 billion CFA francs. Most of the deposits lost in distressed MFI are located in these two MFIs6. The different measures (provisional administration issued in 2009-2010 that was left for Jéméni in January 2015 and replaced by a dedicated committee) would not able to avoid the liquidation. The absence of funds to compensate depositors have prevented the authorities from proceeding with liquidations so far. The situation of these two MFIs (and few others as CANEF) are worrisome because it has impacted negatively the overall microfinance sector in terms of banks refinancing, client deposits and overall confidence in the sector. iii) The crisis of the rest of the microfinance sector The rest of the licensed microfinance sector consists essentially in small retail structures (78 licensed MFI7). For these MFIs, it’s critical to underline that there is no reliable data and audits need to be carried out (about thirty audits are supposed to be launch soon). For 24 MFIs that never started their activities, the Ministry of Finances should sign the decree for license revocation. It is estimated this measure should be considered for twenty or so additional MFI. MFI. For about thirty MFIs, the situation is not sufficiently clear and audits also need to carry out (some of these may be still active). The role of the legal framework in the crisis Weakness of the previous framework as the main cause of the crisis The main cause of the microfinance crisis in Mali was due to weaknesses of the previous regulatory and supervisory framework (dated of 1993) that was not able to prevent the too rapid expansion of the sector. Under the previous law effective until 2010, the licensing requirement and its application were too lax. From 2002 to 2010, over 300 licenses or temporary agreements were issued, including to institutions that did not present the minimal conditions for 6 It could be estimated that about 85 percent of deposits frozen in MFI are located at Kondo Jigima and Jéméni. 7 Total number of MFIs (33 active MFI + 2 failed MFI + 78 small MFI = 115) does not correspond to the 126 registered in 2012 with the CCS/SFD, because there have been 13 consolidations since that time, particularly in the village savings and cooperatives sectors. It should be noted that licensing of consolidated MFIs has still not been granted. - 11 - ensuring the security of savings deposits. The number of users in the sector increased by one and a half times over 10 years (2003 to 2013). During the same period, the volume of deposits and outstanding loans more than doubled with an average growth of 12.4% and 13.5% per year respectively. The ready availability of external funds for refinancing, offered by national and international financial institutions, contributed to the proliferation of new institutions and the rapid expansion of existing programs. Most beneficiary MFIs were not able to modernize their management systems to deal with growth, qualified staff were not hired, and capacity building for existing staff was insufficient, in particular with regard to managing credit risk. The microfinance crisis was exacerbated by the absence of adequate prudential framework (no solvency ratio), the low requirements for reporting and low capacity of the supervision carried out exclusively at the national level until 2010. The national supervisory body (CCS/SFD8) did not have the budget or staff to assume its supervisory mandate, and when anomalies were detected, it was often too late to intervene. In addition, the quality of governance was deficient on the part of both technical staff and elected officers. Strengthening of the legal framework from 2010 The former WAEMU legal framework was changed in 2007 with a new law that reinforced the role of the regional institutions (BCEAO and Banking Commission) respect to the national supervisory body (CCS/SFD). The law has significantly strengthen the regulatory (licensing, prudential requirement, reporting) and supervisory framework (see table 6). With the tightening of the legal framework it is expected there will be a consolidation of the sector and a reduction in the number of MFIs over time. In Mali, the new law came into effect in July 2010. 8 Cellule de Contrôle et de Suivi des SFD. The CCS/SFD is located at the Ministry of Finances (the service is directly tied to the General Secretariat of the Ministry of Finance). The CCS/SFD has four units: 1) licensing, recognition and agreements, 2) financial analysis, surveillance and control, 3) studies and statistics, 4) administration and accounting. The CCS/SFD currently has 25 agents, of whom 16 are professionals. - 12 - Table 6: Main change in the WAEMU microfinance law Source: CGAP (2013) Under the new law, the BCEAO has to approve any new licenses issuance. Since 2010, the CCS has issued only one new license (Microcred). BCEAO is also responsible for recommending the revocation of licenses. The law imposes prudential requirements (see table 7) and more frequent reporting requirements. MFIs compliance with the new requirement was expected to be met by July 2012 but delays have been observed in the process so far. For many MFIs, it’s challenging to adopt such requirement, including the obligation for MFI to create their own deposit guarantee fund (fonds de sécurité). To date, 54 MFIs submitted a formal request for the compliance with the new requirement (mise en conformité). - 13 - Table 7: Prudential ratio with the new regional law Norm Risk exposure ratio (% of liabilities) Max = 200% Transformation ratio (% of medium/long term Min = 100% liabilities) Related party lending (% of capital) Max = 10% Single party exposure level (% of capital) Max = 10% Liquidity ratio (Liquid assets to short-term liabilities) Min = 100% Limit for non-traditional operations (% of risk) Max = 5% General reserve Min = 15% Capitalization ratio ( capital /net assets) Min = 15% Limit for equity finance (% of capital) Max = 25% Source: BCEAO Henceforth, the WAMU Banking Commission is responsible of the supervision for large MFIs (with total savings or outstanding loans exceeding CFA franc 2 billion) while the Malian supervisory body (CCS/SFD) remains responsible for smaller MFIs. The CCS has to provide regular supervision reports to the BCEAO. Supervision of the MFIs involves on-site and off-site inspections. The supervision of MFIs is still challenging due to insufficient resources, too few inspections, and limited follow-up or monitoring. From 2010 to 2014, the CCS carried out some twenty supervision missions each year. The Banking Commission accompanies the CCS/SFD on one or two control missions each year to support the CCS teams. Following on-site supervision, a report is transmitted to the MFIs with recommendations. The CCS carries out very few follow-up missions to verify if these recommendations have been implemented. In 2013-2014, the Banking Commission carried out 2 on-site supervision missions for large MFIs. More risk-based approaches to on-site supervision have recently been introduced in order to better target risk during supervision missions (choice of MFIs to supervise and specific aspects to examine). In the past, strategies did not target risks which explains the difficulty in early detection of problems. In addition, some auditors were apparently complacent with respect to MFIs that are currently in difficulty, and were not penalized for failing to detect problems. Going forward, accounting firms will have to be approved by the Ministry of Finance and the BCEAO; and the firms at fault will no longer be eligible. - 14 - Table 8: Number of supervision missions by CCS and/or Banking Commission 2010 2011 2012 2013 2014 CCS inspection 22 21 18 20 21 CCS/BC join inspection 1 2 1 2 2 BC inspection 2 2 Source: CCS/SFD Off-site supervision remains weak. The annual statistical and financial reports of the MFIs must be sent six months after the end of the financial year. In 2014, only 22 MFIs submitted their annual report for 2013 on time and in compliance with the requirement. Additionally, there is no standardized software for entering statistical data and the financial reports that would produce ratios per MFIs and for the sector. Following recommended guidelines, financial penalties were decided for the MFIs that did not respect the submission deadline, but the decision to apply them was not taken by the Ministry. In 2009, new accounting standards were adopted for the MFIs in the WAEMU zone. The introduction of these accounting standards was supported by the BCEAO and by a sub-regional project of Lux Development (project AF/017). According to the CCS, the MFIs in Mali have complied with these new standards, at least concerning the transmission of reports. The actual situation regarding application of the new standards varies. Some MFIs have not been able to update their information systems and are obliged to process data manually for the reports. Strategies and action plans to the recovery of the sector The National Emergency Plan for Microfinance A major development for the sector was the adoption by the Council of Ministers of the Emergency Plan for the Microfinance Sector in March of 2015. The Plan underwent widespread stakeholder consultations (including CPA/SFD9 and AP/SFD10), and envisions undertaking the following steps in order to clean up the sector. The Emergency Plan for the microfinance sector calls for the following measures: i) restructuring of the sector (including depositors compensation mechanism), ii) implementation of the legal framework, iii) capacity building for supervisory body (CCS-SFD) and promoting body (AP/SFD), iv) support for viable MFIs, v) improved support to develop the infrastructure of the 9 Promoting and Support for MFI (Centre de Promotion et d’Appui des SFD). The CPA is an organization dedicated to promoting and supporting the microfinance sector, and is housed under the Ministry of Commerce and Industry. 10 Professional association of MFIs. AP/SFD is the organization that represents and advocates for the sector. It is responsible for representing and educating its members, and all licensed MFIs are required to be members of the AP/SFD. - 15 - sector, and vi) expansion of microfinance services. This Emergency Plan is under the responsibility of the CCS/SFD, but other actors have responsibilities for its execution, in particular regarding support to the MFIs for recovery measures. The Emergency Plan includes all the required measures to undertake the microfinance sector restructuring. Specifically, it is planned 1) audits of distressed institutions, 2) provisional administration or 3) close supervision, 4) revocation of licenses and 5) liquidations. Technical assistance is planned for MFIs that are potentially viable. Table 9: Emergency plan for the microfinance sector in Mali Objective and main activities Cost estimate (million CFA) Microfinance sector restructuring 2,119 Of which: - Audit 545 - Depositors indemnization mechanism 1,449 - Supervisory measures 125 Legal framework implementation 130 Capacity building for supervisory and promotional structures 1362 Of which: - Transform the CCS/SFD in Agency + capacity 1,200 Supporting viable MFIs 755 Of which: - Procedures manual for MFIs 350 - Monitoring Information System for MFI 300 Supporting microfinance infrastructure 1,234 Of which: - Creation of a National Fund for Microfinance 1,000 Supporting microfinance services recovery (including in North of the 165 country) TOTAL 5,775 Of which: - Donors 4,240 (73.5%) - Ministry of Finances 1,525 (26.5%) Sources: Ministry of Finances. Importantly, the plan includes a depositor’s indemnization mechanism (1.5 billion CFA), that provide a key signal on the willingness of the State to clean-up the sector. The exact mechanism needs to be defined and any concrete implementation will be very challenging. Rather than expecting a full funding by the donors for the mechanism, it is highly recommended for the Malian government to contribute to such mechanism to improve the overall credibility of the emergency plan and attract funding from donors. Without previous audits, it’s difficult to estimate if the current costing for indemnization (1.5 billion CFA) would be sufficient. While no reliable figures are available before auditing distressed - 16 - MFIs, preliminary estimates suggest that close to 100,000 depositors will need to be indemnified, with an estimated gross cost of US$ 20 million. Nevertheless, according to some actors in the sector, the net indemnization (i.e. deposits minus default on loan payment) could much less and would be manageable. The second most important activity of the Emergency Plan in terms of financing (1 billion CFA) is the transformation of the CCS-SFD into an independent Agency (inspection agency). Right now, the CCS is under the Ministry of Finance. This arrangement limits it’s independence, makes it difficult to take autonomous decisions, relies on year to year budget allocations making it difficult to retain staff, among other challenges. This reform is key because the CCS/SFD needs to be more independent to carry out its mandate effectively. This measure is in line with international best practice and this type of agency already exists in Niger and recently the Ministry of Finance of Benin opted for this type of structure. Financing of the agency would be provided by the government, the minimum estimated cost would be 500 million CFA francs per year. The total budget for the Emergency Plan is 5.8 billion CFA francs, however it is possibly and likely that the costs of provisional administration and liquidations underestimate the full costs of their implementation by 2.8 billion CFA francs. The financing of the emergency plan remain very challenging. AFD is expected to contribute through a contribution of about one billion CFA francs, in terms of technical assistance to the CCS/SFD. Importantly, a component of the Programme de Microfinance Rurale (PMR) will fund audits for 32 MFIs. For restructuring measures, other sources of financing have been identified. There are already development partners involved in consolidating rural MFIs (Canadian cooperation program, Terrafina). The action plan for the preservation and consolidation of the viability of the microfinance sector for WAEMU11 In 2012, the WAEMU Council of Ministries adopted a regional action to address the challenges faced by microfinance sector in the region. The Malian national direction of the BCEAO is responsible for the implementation of the plan in Mali. The regional plan for Mali is in line with the National Emergency plan and it will be key to keep close cooperation between BCEAO national direction and Malian authorities (MoF, CCS/SFD) in the implementation of the emergency plan. The plan covers various aspects of concerns in the sector including: 1) consolidation of the implementation of the new legal framework, 2) monitoring of MFIs in difficulty, 3) improved governance, 4) updating the MIS of MFIs, 5) consolidating surveillance measures (institutional organization, off-site supervision, on-site examinations), 6) strengthening financial viability. For 11 Plan d’actions pour la préservation et la consolidation de la viabilité du secteur de la microfinance dans l’UEMOA . - 17 - each of these aspects a series of actions is defined (there are 90 actions in the plan). Each action specifies the organization responsible, a timetable, indicators and sub-actions. The regional plan includes the creation of regional guarantee fund that was created in 2014 for both banking and microfinance sectors in the WAEMU area. It should be note that this guarantee fund will unlikely cover events prior to the creation of the fund. In others words, the indemnization of depositors of microfinance institutions in Mali remain mostly a task to manage at the national level with the emergency plan. The National Strategy for Microfinance There is a newly adopted National Strategy for Microfinance (2016-2020)12. The document was prepared by the Microfinance Promoting Structure (CPA/SFD) under the guidance of the Ministry for the Promotion of Investment. The CPA consulted a broad range of stakeholders in the sector. The new strategy covers four themes:  Restructuring of the sector  Protecting clients and promoting access to financial services for a widespread and diverse clientele  Capacity building of MFIs  Strengthening promotion and supervision of the microfinance sector (legal framework). The action plan contains a series of activities related to these themes, specifying responsibility and timeline. The implementation budget is evaluated at 35.5 billion CFA francs with donors funding expected at 20 billion CFA. Remaining Challenges Emergency plan It is a step in the right direction that the Government has adopted the Emergency Plan, but it still needs to be fully funded, leaves depositors without compensation, and implementation is proceeding slowly. There is an overwhelming consensus in the microfinance and broader financial sector community that the sector will remain stagnant until the Emergency Plan is implemented, yet few resources have been made available by either the Government or Development Partners for implementation, and little progress has been made in carrying out the actions of the plan to date Provisional administration is difficult to implement successfully in practice in the region. While provisional administration is common measure to address distressed MFIs, its implementation remain challenging without any clear path towards being resolved or revived. This demonstrates the problem with provisional administration, as it has been practiced in the region. On the one hand, the intervention is decided too late (without the possibility of a recovery) and on the other hand the provisional administration has usually lasted for a too long period before a decision is taken regarding the possibility of a recovery or the need to liquidate. 12 Politique nationale de développement de la microfinance et plans d ’actions (PNDMF/PA) 2016-2020. - 18 - Close monitoring – contains specific issue for its implementation. Close monitoring supervision is not delegated to a third party and requires much effort for the CSS which is already stretched. In its sub-regional action plan, the BCEAO intends to produce an implementation guide for provisional administration. The budget and staffing of the CCS/SFD remain insufficient. In 2014, the CCS/SFD budget was 250.8 million CFA francs with important part staff salaries. The contribution of donors has dropped significantly accounting for 13.3% of the total budget in 2014. Data are not available to compare budget with other WAEMU countries, but it is likely lower than for countries as Benin, or Senegal, especially regarding the needs in Mali. The main difficulties encountered by the CCS/SFD are: i) insufficient staffing especially for the implementation of the emergency plan, ii) insufficient budget for onsite and offsite supervision; iii) high staff turnover. Table 10: CCS/SFD budget ('000) 2010 2011 2012 2013 2014 Government 198 158 198 173 167 280 279 939 250 760 Other donors 73 420 109 223 8 037 37 307 38 384 Total 271 578 307 396 175 318 317 246 289 144 % from donors 27,0% 35,5% 4,6% 11,8% 13,3% Source: CCS/SFD Financial issues Lack of refinancing remains a constraint. MFIs in Mali have traditionally turned to national and international financial institutions to finance their lending activities, but those opportunities have greatly diminished given the unresolved state of the sector. In 2010, refinancing of MFIs by national and international financial institutions accounted for 45.3% of outstanding loans (32.3 billion CFA francs). By 2013, only 28% of outstanding loans were financed by these institutions (21.9 billion CFA francs). Local banks, and to a lesser degree international institutions, have cut back completely on refinancing for MFIs because of the political crisis in the north and because of problems in the sector (bankruptcy of two large MFIs). The interest rate cap policy needs be managed carefully. The usurious rate for microfinance sector in WAEMU countries was recently decreased from 27% to 24%13. While this might be well motivated, in actual fact interest rate limits may hurt rather than protect the most vulnerable as they arguably limit their access to financial services. Sometimes, such ceilings make it difficult for MFI to recover their costs. Poorer clients such as small farmers are therefore often either left with no access to financial services or must revert to informal credit markets such as local moneylenders, which are often expensive. 13 The usurious rate for loans decreased from 18% to 15% for banks. - 19 - Recommendations Clean-up of the sector The emergency plan need to be implemented as soon as possible. Regarding the difficulty to manage such plan the following sub-recommendations are: - Coordination. The emergency plan needs to be implemented in close coordination with the regional action plan for Mali. - Audits. The CCS/SFD should launch as soon as possible the required audits for distressed MFIs. - Major distressed MFIs. The emergency plan needs to prioritize the larger MFIs and, in particular the two major distressed MFIs that have jeopardized the overall recovery of the sector for years. - Government contribution. The Malian government should have to contribute to the financing of the depositors indemnization mechanism in order to improve the credibility of the government commitment and to attract donors financing. - Transparency: A transparent communications strategy should be adopted and implemented throughout the restructuring and consolidation period, in order to reestablish public confidence. CCS/SFD Strengthening The transformation of the CCS-SFD in a supervisory agency should be implemented to get more independence. Control methods should be strengthened and capacity building provided for personnel. Specific operating budgets for the CCS/SFD should be adopted for the recovery period. Consolidation of the viable sector Technical assistance should be provided to the few MFIs potentially viable to consolidate them in order to preserve the gains made so far. - 20 - Annex 1: Financial inclusion in Mali Mali’s high poverty levels and large landmass make financial inclusion a challenge . It has been improving in recent years, but remains low, with just 12.4 percent of the population over 15 having a bank account (up from 7.4 percent in 2009, and slightly above the WAEMU average of 12.2%). When other types of financial institutions and services are included, however, the picture appears brighter. As shown in table 8 below, if microfinance institutions, digital financial services, postal savings and others are included, the figure reaches nearly 50 percent at end 2013. However, these Central Bank figures do not account for individuals with accounts at more than one type of institution, so the broader financial inclusion numbers--derived by merely adding account holders of different types—are no doubt overstated. Table 11: Financial Inclusion Indicators-% of Malians> 15 yrs. 2009 2010 2011 2012 2013 Accounts with Commercial banks 7.3 9.3 11 13 12.4 Microfinance Institutions 12.7 15.7 14.5 13.5 20.4 Broader FI14 20 25 25.5 26.5 32.8 Broader+electronic money providers 20 27.4 31.4 35.9 47.9 Source: BCEAO The latest Findex demand survey (2014) indicates that Mali lags behind peer group comparators on most key measures of financial inclusion. In some areas (credit, savings) numbers have deteriorated since the last survey conducted in 2011. These factors can be at least partly attributed to Mali’s geographic characteristics and the conflict that occurred between the two surveys, and potentially attributed to the microfinance crisis. Select Indicators for Mali, sub- Saharan Africa, and all low-income countries are given in Table 12 below. 14 Broader financial inclusion includes postal accounts and national savings accounts. - 21 - Table 12: Financial Inclusion Indicators- in % of adults > 15 Mali SSA LIC Financial Institution Account-2014 13.3 28.9 22.3 Financial Institution Account-2011 8.2 23.9 21.1 Mobile Account 11.6 11.5 10.0 Has debit card 4.0 17.9 6.6 Has debit card (2011) 1.8 15.0 6.3 Saved at a FI in past year 2.9 15.9 9.9 Saved at a FI in past year (2011) 4.5 14.3 11.5 Borrowed from a FI 2.7 6.3 0.6 Borrowed from a FI-2011 3.7 4.8 11.7 Source Findex 2014 - 22 - Annex 2: The role of donors in the microfinance sector Few donors are still active in support of the microfinance sector, and there is only marginal financing for the implementation of the emergency plan by the development partners. The AFD recently financed a study of the sector15 and it intends to provide financial support to the CCS for implementation of the Emergency Plan for the microfinance sector. The contribution of the AFD is expected to be €1.6 million (approximately 1 billion CFA francs), of which 40% is intended to underwrite the cost of technical assistance. A refinancing facility has been set up by the Rural Microfinance Program (RMP), financed by IFAD, which is supporting financing gaps at the CVECAs16. However, major gaps in refinance are expected to continue until the sector can be adequately resolved. This program is intended to facilitate access to financial services and support the viability of the MFIs. The loan provided by IFAD for this program is US $25 million. So far the RMP has provided support to four MFIs in its effort to consolidate and increase rural credit. The RMP also supports supervisory organizations in the sector such as the CCS, the CPA and the AP. IFAD has just signed an agreement with the Canadian cooperation program in order to expand RMP activities. The budget provided by this agreement is US $10.2 million. These additional funds will enable the RMP to work with 15 other rural MFIs, accounting for 80% of the microfinance sector. The Canadian cooperation program also has an agricultural and rural finance project in Mali (FARM). This US $15.3 million project targets capacity building and professionnalization for financial institutions involved in agricultural financing. It will include awareness of the risks related to agriculture and mechanisms for crop insurance and crop loan insurance. The NGO Terrafina supports the CVECA via the technical support service association. It also promotes the introduction of warehouse credit with the CVECA and with certain MFIs. 15 États des lieux du secteur de la microfinance au Mali, Alia développement, May 2014. 16 CVECA: Caisse Villageoise d’Épargne et de Crédit Autogérée (self -managed village savings and credit financial cooperative)