Research & Analysis

Managing Failing Deposit-Taking Institutions

Access to finance in the West African Economic Monetary Union (WAEMU) and Economic and Monetary Community of Central Africa (CEMAC) grew significantly from 2001 to 2011. However, the number of ailing and failing microfinance institutions (MFIs), including market leaders, increased during the same period, raising serious concerns about the status and financial health of institutions serving low-income populations and, in particular, the safety of the deposits held by such institutions. To address the situation of failing deposit-taking MFIs, supervisory authorities have relied on temporary government administration (TGA), one of several supervisory tools.

The experiences in the two regions suggest that implementing TGA presents significant challenges, especially if the decision to place an institution in 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, the MFIs should not have been licensed in the first place and/or are too small to be sustainable. In other cases, the problems are due to MFI fraud, poor governance, or poor management. Most MFIs remain in TGA limbo much longer than the initially specified timeframe of 6–12 months, often due to an under estimation of the time needed to deal with the problems or to the desire to avoid unnecessary (but often unavoidable) liquidation. These experiences are relevant for other countries seeking to license depositary MFIs. They show how critical it is for MFIs and regulatory authorities to take the necessary steps to protect small depositors, including appropriate and effective prudential regulation and supervision.

To better understand the regulatory experience of managing failing deposit-taking MFIs, CGAP—in close consultation with supervisory authorities—conducted an in-depth study of TGAs and liquidations in WAEMU and CEMAC in 2011 and 2012. The study included a review of all 29 TGA cases during 2001–2011 (as well as two liquidation cases) and a detailed analysis of 17 of the TGA cases, including a subsequent liquidation. Due to the support of the regional supervisory authorities, the research team was given access to detailed data on the MFIs under TGA—including sensitive and confidential information.

This Focus Note discusses the events leading to the crises in these MFIs and the challenges of successfully turning around ailing or failing deposit-taking MFIs through TGA. The Focus Note is organized into six sections. The first section provides an overview of the microfinance sector and the regulatory framework in WAEMU and CEMAC. The second section presents the evolution of the sector and the main characteristics of the 17 MFIs studied, including the key weaknesses that led them to be placed under TGA. Section three outlines how TGA is intended to work. Section four discusses the challenges and outcomes of the TGAs implemented with the 17 MFIs. The final sections include lessons learned on managing TGAs.

Topic: Policy